<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1997
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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 (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
</TABLE>
2361 ROSECRANS AVENUE, SUITE 180
EL SEGUNDO, CALIFORNIA 90245
(310) 725-9123
(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.
2361 ROSECRANS AVENUE, SUITE 180
EL SEGUNDO, CALIFORNIA 90245
(310) 725-9123
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service
--------------------------
COPIES TO:
STEPHEN A. SILVERMAN, ESQ. PETER P. WALLACE, ESQ.
SPOLIN & SILVERMAN MORGAN, LEWIS & BOCKIUS LLP
100 Wilshire Boulevard, Suite 940 300 South Grand Avenue, 22nd Floor
Santa Monica, California 90401 Los Angeles, California 90071
(310) 576-1221 (213) 612-2500
--------------------------
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 AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, Par Value, $0.01....... 2,500,000 Shares $18.25 $52,468,750.00 $15,478.36
</TABLE>
(1) Includes 375,000 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.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8, MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION,
DATED MARCH 6, 1998
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>
[LOGO]
2,500,000 SHARES
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
---------
Of the 2,500,000 shares of Common Stock of DeCrane Aircraft Holdings, Inc.
("Common Stock") offered hereby, 1,918,000 shares are being sold by the Company
and 582,000 shares are being sold by Selling Stockholders. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. The
proceeds of this offering received by the Company will be used to repay
indebtedness. Following this offering, affiliates and certain principal
stockholders of the Company will beneficially own approximately 24.6% of the
Common Stock.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DAHX." On March 4, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $18.25 per share.
--------------
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
SECURITIES AND EXCHANGE 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>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(3)............................ $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 375,000 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and the aggregate Proceeds to
Company and Proceeds to the Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as, and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares will be made at the offices of BT Alex.
Brown Incorporated, Baltimore, Maryland, on or about 1998.
BT ALEX. BROWN
FURMAN SELZ
SBC WARBURG DILLON READ INC.
THE DATE OF THIS PROSPECTUS IS MARCH ,1998
<PAGE>
[PHOTOGRAPH OF SILHOUETTE OF AN AIRPLANE FLYING]
[PHOTOGRAPH OF AN AIRPLANE FLIGHT DECK]
[COMPANY LOGO]
The Company manufactures avionics
interconnect components and sub-systems,
as well as a full systems integrator and
the leading provider of cabin management
systems for the corporate jet market.
Many of its products and services
interface between the aircraft and its
flight deck avionics systems, such as
those pictured here.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE COMMON
STOCK OFFERING AND PURCHASE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR
A DESCRIPTION OF THE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS
OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M OF THE SECURITIES AND
EXCHANGE COMMISSION. SEE "UNDERWRITING."
[PHOTOGRAPH OF CONTACTS]
[PHOTOGRAPH OF BINS OF CONTACTS]
The variety of contacts manufactured by the Company conduct electronic signals
or electricity within an aircraft and must be precision machined to conform to
strict design tolerances. The Company believes that it holds more qualified
parts list positions for its contact product line than any other manufacturer.
[PHOTOGRAPH OF HARNESS ASSEMBLIES]
The Company's multi-product presence in the in-flight entertainment market is
depicted above in a purser's station. This station utilizes the Company's
harnesses, contacts and connectors.
[PHOTOGRAPH OF CONNECTORS]
The Company's line of specialty connectors are targeted for select niche
markets, particularly in-flight entertainment and connectors used to interface
avionics control units to aircraft. Many of these connectors utilize the
Company's contacts.
[PHOTOGRAPH OF INSTALLATION KITS]
The Company manufactures avionics support structures which are used to connect
the avionics control units to the aircraft. These structures, as shown above
when combined with the Company's harness, contact and connector products, are
the foundation of the installation kits assembled by the Company.
[PHOTOGRAPH OF MAN AT A CAD STATION]
The Company's engineering capability is a vital component of the Company's
systems integration services. Depicted above is an engineer designing the
interface on the new smoke detection and fire suppression system for Northwest
Airlines on a state-of-the-art Pro E CAD station.
[PHOTOGRAPH OF MEN INSTALLING A
SYSTEM ONTO AN AIRCRAFT]
Pictured above is the installation of a video on demand system in a SwissAir
MD-11 widebody aircraft. As a full systems integrator and a certified FAA repair
station, the Company performs complex installations on air transport aircraft.
[PHOTOGRAPH OF AUDIO
INTERNATIONAL PRODUCTS]
The Company provides total cabin management products and services to the
corporate jet market, including integrated switch panels, audio systems and
video systems, as depicted above.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO THE "COMPANY" MEAN DECRANE AIRCRAFT HOLDINGS, INC., A
DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES, AND WITH RESPECT TO
AVIATION REGULATORY ISSUES, ONE OR MORE, BUT NOT NECESSARILY ALL, OF THESE
ENTITIES. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION.
THE COMPANY
The Company manufactures avionics components and provides avionics systems
integration services in certain niche markets of the commercial and high-end
corporate jet aircraft industries. The Company believes it is the largest and
leading provider of components within the niche markets it serves. The Company
utilizes its strong market positions to compete more effectively, as well as to
capitalize on the expected growth and consolidating trends in the aerospace
industry. Since its formation in 1989, the Company has completed nine
acquisitions of businesses or assets, the most recent of which, Audio
International Inc. ("Audio"), was completed in November 1997. The Company
targets for acquisition those aircraft component manufacturers and system
integration providers that are complementary to its existing businesses and have
a leading market share in their respective niche markets. 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 revenues have grown at a 47.4%
compounded annual rate from 1995, the year of the most recent low in commercial
aircraft production, through 1997, pro forma for the acquisition of Audio.
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 (the Company believes it is the largest supplier of bulk
contacts to the commercial aircraft original equipment manufacturers ("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). The
Company also manufactures dichroic liquid crystal display ("LCD") devices, which
are used with flight deck avionics, and believes it is the largest supplier of
such devices to the commercial aircraft OEMs. In addition, the Company provides
stereo systems, video monitors and passenger switch and cabin lighting and
climate controls for the high-end corporate jet market. The systems integration
services provided by the Company include design and engineering, supplemental
type certifications on behalf of the Federal Aviation Administration ("FAA"),
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's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industry, with a focus on the manufacture of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading positions while maintaining a balance of revenues among the OEM
market, the retrofit market and the aftermarket. The Company believes that such
a strategy will position it for growth over an entire aircraft industry economic
cycle. Additionally, 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, because such systems typically are
installed on a retrofit basis by purchasers and operators of aircraft and not by
aircraft OEMs. The Company also 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-
3
<PAGE>
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.
According to Boeing's 1997 CURRENT MARKET OUTLOOK (the "Boeing Report")
published by the Boeing Commercial Airplane Group, expenditures for new
commercial jet aircraft production are expected to total approximately $490
billion for the period from 1996 through 2006. Due to the high level of
fragmentation within certain segments of the aircraft industry and efforts by
OEMs to minimize purchasing costs, manufacturers of components and providers of
aircraft retrofit, overhaul and repair services have been undergoing
consolidation.
The Company believes that there are a number of significant trends affecting
the demand for its products and services. These trends include the continuing
increase in new aircraft production, the increase in demand for cabin and flight
deck avionics systems and the increase in airlines' purchase of products and
services provided by third parties. According to OEM aircraft delivery schedules
revised in January 1998, combined annual deliveries from Boeing (including the
former McDonnell Douglas) and Airbus Industries are projected to increase from
397 aircraft in 1996 and 557 in 1997 to an estimated 785 in 1998. Airlines have
increased purchases of certain components from third parties and have outsourced
certain repair, overhaul and retrofit functions, creating increased demand for
low cost high-quality component manufacturers and systems integrators.
In November 1997, the Company began serving the high-end corporate jet
market with its acquisition of Audio, which the Company believes is the nation's
largest and leading independent provider of premium, customized aircraft
entertainment and cabin management products and systems for corporate jets.
According to the ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new
corporate jet aircraft are expected to be delivered from 1997 through 2001, a
61% increase over the previous five year period. The Company believes that the
increase in new corporate jet production is being driven by numerous factors,
including: (i) the introduction of new, larger and more efficient aircraft; (ii)
the growing popularity of fractional aircraft ownership; (iii) the minimal
availability of used aircraft; (iv) the need for long range flights to expanding
international markets; (v) the increased demand for more expedient travel.
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial and high-end corporate jet
aircraft industry as the result of the following strengths: (i) leading
positions in niche markets; (ii) a record of successful acquisitions; (iii)
alignment with leading avionics and aircraft OEMs and suppliers; (iv) low-cost,
high quality operations; (v) engineering and related technical capacity
including industry and regulatory certifications; and (vi) management depth and
experience.
GROWTH STRATEGY
The Company intends to grow its aerospace businesses through the following
initiatives:
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage
its core competencies in existing and additional markets, and add new expertise
in the avionics and systems integration fields, by identifying and pursuing
complementary acquisitions that offer strategic value, such as economies of
scale, product line extensions, new customer relationships or increased
manufacturing capacity. 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 GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AVIONICS. The Company believes its strong market positions and alignment with
many of the leading commercial
4
<PAGE>
aircraft industry participants will enable it to capitalize on the projected
increases in the production of commercial and high-end corporate aircraft. For
example, the Company believes that every aircraft currently produced by Boeing
(including McDonnell Douglas) and Airbus includes components manufactured by the
Company. The Company also believes that its products are on each model of
high-end corporate jet aircraft sold today. The Company works closely with OEMs
and modification centers to meet their delivery and scheduling requirements, and
in some cases, to provide total, turnkey solutions to new aircraft.
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, 1997, the
Company had contracted to provide systems integration services for global
positioning systems ("GPS"), smoke detection/fire suppression safety systems,
and in-flight entertainment systems. In the Company's area of systems
integration, it believes that it is the only company which has in-house
capabilities in each of the four elements of systems integration (design and
engineering, certification, installation kit manufacturing and system
installation).
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 in
order to create higher value-added products, and develop further market
opportunities through cross-selling and vertical integration of its products. 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.
* * * *
The Company's corporate office is located at 2361 Rosecrans Avenue, Suite
180, El Segundo, California 90245. The Company's telephone number is (310)
725-9123.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company....................... 1,918,000 shares(1)
Common Stock Offered by the Selling Stockholders.......... 582,000 shares(1)
Total Common Stock Offered............................ 2,500,000 shares(1)
Common Stock to be Outstanding after the Offering......... 7,236,563 shares(1),(2)
Use of Proceeds........................................... To repay certain indebtedness.
See "Use of Proceeds."
Nasdaq National Market Symbol............................. DAHX
</TABLE>
- ------------------------
(1) Does not include up to 375,000 shares which may be sold by the Company and
certain Selling Stockholders pursuant to the Underwriters' over-allotment
option. See "Principal and Selling Stockholders" and "Underwriting."
(2) Does not include: 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") (see "Management--Executive Compensation--Share
Incentive Plan").
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996(1) 1997(2)
--------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................................... $ 55,839 $ 65,099 $ 108,903
Gross Profit....................................................................... 12,376 15,707 28,656
Operating income................................................................... 1,835 4,251 11,995
Income (loss) before extraordinary item............................................ (3,446) (817) 5,254
Net income (loss).................................................................. (3,446) (817) 3,176
Net income (loss) applicable to common stockholders................................ (3,307) (6,357) 531
Income (loss) per common share
Basic
Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .69
--------- ----------- ---------
Extraordinary loss(3).......................................................... -- -- (.55)
--------- ----------- ---------
Net income (loss).............................................................. $ (38.45) $ (73.92) $ .14
--------- ----------- ---------
--------- ----------- ---------
Diluted
Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .62
Extraordinary loss(3).......................................................... -- -- (.42)
--------- ----------- ---------
Net income (loss).............................................................. $ (38.45) $ (73.92) $ .20
--------- ----------- ---------
--------- ----------- ---------
Pro forma income, before extraordinary item(4)
Basic.................................................................................................. $ 1.16
Diluted................................................................................................ $ 1.10
OTHER FINANCIAL DATA:
Depreciation and amortization...................................................... $ 4,542 $ 4,343 $ 5,372
Bookings (5)....................................................................... 50,785 81,914 112,082
Backlog at end of period (6)....................................................... 19,761 44,433 48,179
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(7)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 24,772 $ 24,772
Total assets........................................................................... 99,137 99,137
Total debt............................................................................. 38,838 6,422
Stockholders' equity................................................................... 39,527 71,943
</TABLE>
- ------------------------------
(1) Includes the effect of the acquisition of the remaining 25% minority
interest in Cory Components, Inc. 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) Includes the effect of the results of the Audio acquisition beginning
November 14, 1997, the date on which it was acquired.
(3) Represents the write off of deferred financing costs, unamortized original
issue discounts, a prepayment penalty and other related expenses incurred as
a result of the repayment of debt by the Company with the net proceeds from
its IPO.
(4) Pro forma for the Recapitalization, IPO and the application of the net
proceeds therefrom.
(5) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(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. See "Business--Backlog."
(7) Reflects the sale by the Company of 1,918,000 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
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
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 767 aircraft in 1991 to approximately 380 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."
HIGH-END CORPORATE JET AIRCRAFT INDUSTRY RISKS
Among the Company's customers are the world's high-end corporate jet
aircraft OEMs. The principal markets for such OEMs are large corporations and
wealthy individuals. The corporate jet market is cyclical and has been adversely
affected by a number of factors, including, but not limited to, general state of
the U.S. economy, corporate profits, interest rates and commercial airline
fares. An industry downturn could adversely affect the Company's business.
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS
In 1997, the Company reported its first net profit since its inception.
Contributing to the profit was the repayment of a significant portion of its
outstanding indebtedness with the net proceeds of the initial public offering
("IPO") of common stock completed on April 16, 1997. Prior to the IPO, the
Company operated with substantial leverage and debt service requirements since
its inception. As a result, the Company experienced net losses in each year from
1990 through 1996, despite positive operating income. In addition, until 1996
the Company at times was not in compliance with certain financial covenants
contained in its debt agreements. 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 debt agreements. There can be no assurance
as to the future profitability of the Company nor can there be assurance that
the Company will remain in compliance with the covenants contained in its debt
agreements. The Company's senior revolving line of credit (the "Credit
Facility") is guaranteed by each of the Company's subsidiaries and is secured by
substantially all the assets of the Company and its subsidiaries. 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,
7
<PAGE>
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 two largest customers for the fiscal year ended December 31,
1997, were Boeing and Matsushita Avionics Systems ("Matsushita"), which
accounted for approximately 19.0% and 11.2%, respectively, of the Company's
consolidated revenues. For the year ended December 31, 1997, revenues from
Boeing would have been 20.9% had its acquisition of McDonnell Douglas been
consummated on January 1, 1997. 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 five year contract under
which the Company supplies a substantial majority of the bulk contact
requirements for Boeing ends in September 1998. There can be no assurances that
the Company will be awarded the subsequent contract by Boeing for its bulk
contact requirements. During October 1997, Boeing announced that parts shortages
caused by its supplier network and production chain disrupted its production
schedules and adversely affected its production and delivery rates. Boeing shut
down its 737 and 747 production lines for approximately a month and did not
resume normal production rates until late November 1997. There can be no
assurances that Boeing will not suffer further production schedule disruptions.
The Company generally sells components and services to Matsushita pursuant to
purchase orders, but does not have any supply contracts with Matsushita.
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 Designated Alteration
Station ("DAS") approvals, which give the holder the right to certify certain
aircraft design modifications on behalf of the FAA. The ability of the Company
to arrange for rapid government certification of its systems integration
services is important 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 changes to the
standards for the use of such private repair stations or DASs, or their
elimination, either of which could have a material adverse effect on the
Company. The FAA curtailed the Company's use of a DAS for several months during
1997 until certain of its facilities were brought into compliance with the FAA's
regulations governing DAS status. See "Business Industry Regulation and
Approvals." 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."
8
<PAGE>
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 caused the Company to incur net losses in each year since its
inception, until 1997, despite positive operating income. There can be no
assurance that the Company will be able to identify suitable acquisition
candidates, obtain the capital necessary to pursue its acquisition strategy,
consummate acquisitions on satisfactory terms or, if any acquisitions are
consummated, satisfactorily integrate such acquired businesses into the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--General" and "Business--Growth Strategy."
COMPETITION
The Company operates in a highly competitive industry and competes against a
number of companies, some of which have significantly greater financial,
technological and marketing resources than the Company. The Company believes
that its ability to compete depends on high product performance, short lead-time
and timely delivery, competitive pricing, superior customer service and support
and continued certification under customer quality requirements and assurance
programs. There can be no assurance that the Company will be able to compete
successfully with respect to these or other factors. See
"Business--Competition."
ASIAN FINANCIAL MARKETS
The Asian markets are important markets for commercial aircraft and avionics
OEMs. There can be no assurance that the current crisis in the Asian financial
markets will not result in cancellation of orders for new aircraft or deferral
of deliveries, and negatively impact the OEMs, which could have a material
adverse effect on the Company.
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. From 1996
through 1998, solely in an effort to mitigate the effects of currency
fluctuations, the Company has entered 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."
9
<PAGE>
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, Nassau Capital Partners, L.P. and
NAS Partners I L.L.C. (collectively, "Nassau") and Brantley Venture Partners II,
L.P. ("Brantley") will beneficially own 10.7% and 6.8%, respectively, of the
issued and outstanding Common Stock. See "Principal and Selling Stockholders."
Nassau, Brantley, DSV, among others, are parties to a shareholders agreement
with the Company which requires the Company to include on the Company's slate of
nominees for director a person designated by each of Nassau, Brantley and DSV,
for so long as each such stockholder owns at least 5% of the Common Stock. See
"Certain Transactions--Shareholders Agreement." The terms of the present Board
members nominated by Nassau, Brantley and DSV do not expire until 2000, 1999 and
1999, respectively, notwithstanding any decreases to such beneficial owners'
ownership of Common Stock. See "Management--Executive Officers and Directors."
EXCESS LOSS RISKS
The Company currently has in force aviation products insurance. 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. There can be no
assurance that the Company will not incur significant costs in the future to
address contamination.
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 "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. An
earthquake or other natural disaster could have a material adverse effect on the
Company's business and operating results. See "Business--Facilities."
10
<PAGE>
YEAR 2000 COMPLIANT
Due to numerous acquisitions made over the past several years, the Company
operates several stand-alone systems using different, and in some cases
internally customized, software purchased prior to the Company's acquisition of
the relevant operating units. The Company concluded that essentially all
existing software should be upgraded to newer, off-the-shelf, integrated
manufacturing and business application software. In 1997, the Company commenced
the implementation of this strategy. One of the criteria to be used in selecting
the software is that it be Year 2000 compliant. Failure to complete the
migration to such software by the Year 2000 could have a material adverse effect
on the Company.
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 7,236,563
shares of Common Stock to be outstanding after the Offering, 5,297,423 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 90-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 90-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 unregistered 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
11
<PAGE>
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."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,918,000 shares of Common Stock being offered hereby by the Company are
estimated to be $32.4 million after deducting underwriting discounts and
commissions and estimated expenses of the Offering. The Company plans to use
such net proceeds to repay amounts due under the Company's Credit Facility. The
Company will not receive any of the proceeds from shares sold by the Selling
Stockholders.
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.
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 Credit Facility prohibits payment of dividends, and the
Company expects that any future debt arrangements may also include such a
prohibition.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under
the symbol "DAHX." As of March 4, 1998, the last reported sales price of the
Common Stock on Nasdaq was $18.25 per share. The following table shows, for the
periods indicated, the range of high and low sale prices per share for the
Common Stock as reported on Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
----- ---------
<S> <C> <C>
FISCAL 1997
Second Quarter (from 4/16/97).................................................................. $ 147/8 $ 93/4
Third Quarter.................................................................................. 191/4 145/8
Fourth Quarter................................................................................. 21 151/4
FISCAL 1998
First Quarter (through 3/4/98)................................................................. $ 19 $ 163/4
</TABLE>
As of December 31, 1997, there were 5,318,563 shares of Common Stock
outstanding, which were held by 31 shareholders of record.
12
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1997: (i) the consolidated
capitalization of the Company; and (ii) the consolidated capitalization of the
Company as adjusted for the sale by the Company of 1,918,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom as
described in "Use of Proceeds." 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>
ACTUAL AS ADJUSTED
---------- ------------
<S> <C> <C>
Long-term debt (including current portion)............................................. $ 38,270 $ 5,854
---------- ------------
---------- ------------
Stockholders' equity:
Common Stock, $.01 par value, 5,318,563 shares issued and outstanding, 7,236,563
shares as Adjusted................................................................. $ 53 $ 72
Additional paid-in capital........................................................... 51,057 83,454
Accumulated deficit.................................................................. (11,444) (11,444)
Foreign currency translation adjustment.............................................. (139) (139)
---------- ------------
Total stockholders' equity......................................................... 39,527 71,943
---------- ------------
Total capitalization(1)................................................................ $ 77,797 $ 77,797
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Total capitalization consists of long-term debt and stockholders' equity.
13
<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, 1993,
1994, 1995, 1996 and 1997 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,
-------------------------------------------------------
1993 1994 1995 1996(1) 1997(2)
--------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 48,197 $ 47,092 $ 55,839 $ 65,099 $ 108,903
Cost of sales.................................................. 36,258 36,407 43,463 49,392 80,247
--------- --------- --------- ----------- ---------
Gross profit................................................... 11,939 10,685 12,376 15,707 28,656
Selling, general and administrative expenses................... 7,953 7,716 9,426 10,747 15,756
Amortization of intangible assets.............................. 1,210 1,209 1,115 709 905
--------- --------- --------- ----------- ---------
Operating income............................................... 2,776 1,760 1,835 4,251 11,995
Interest expense............................................... 2,940 3,244 3,821 4,248 3,154
Other (income) expense, net.................................... (148) 332 382 108 243
--------- --------- --------- ----------- ---------
Income (loss) before provision for income taxes, cumulative
effect of accounting change and extraordinary item........... (16) (1,816) (2,368) (105) 8,598
Provision for income taxes (3)................................. (620) (613) (1,078) (712) (3,344)
--------- --------- --------- ----------- ---------
Income (loss) before cumulative effect of accounting change and
extraordinary item........................................... (636) (2,429) (3,446) (817) 5,254
Cumulative effect of accounting change (4)..................... (121) -- -- -- --
Extraordinary loss from debt refinancing (5)................... -- (264) -- -- (2,078)
--------- --------- --------- ----------- ---------
Net income (loss).............................................. $ (757) $ (2,693) $ (3,446) $ (817) $ 3,176
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income (loss) applicable to common stockholders............ $ (972) $ (2,891) $ (3,307) $ (6,357) $ 531
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Income (loss) per common share
Basic
Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .69
Cumulative effect of accounting change..................... (1.46) -- -- -- --
Extraordinary loss......................................... -- (3.15) -- -- (.55)
--------- --------- --------- ----------- ---------
Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .14
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Diluted
Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .62
Cumulative effect of accounting change..................... (1.46) -- -- -- --
Extraordinary loss......................................... -- (3.15) -- -- (.42)
--------- --------- --------- ----------- ---------
Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .20
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Pro forma before extraordinary item (6)
Basic.................................................................................................... $ 1.16
Diluted.................................................................................................. $ 1.10
OTHER FINANCIAL DATA:
Depreciation and amortization.................................. $ 3,553 $ 3,868 $ 4,542 $ 4,343 $ 5,372
Bookings (7)................................................... 46,830 47,896 50,785 81,914 112,082
Backlog at end of period (8)................................... 23,933 24,493 19,761 44,433 48,179
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................ $ (637) $ 11,459 $ 12,583 $ 10,486 $ 24,772
Total assets................................................... 34,653 37,685 36,329 69,266 99,137
Total debt..................................................... 19,653 23,874 24,672 42,250 38,838
Mandatorily redeemable preferred stock and common stock
warrants..................................................... 5,818 2,329 1,633 6,879 --
Stockholders' equity (deficit)................................. (2,618) 766 (1,697) 1,236 39,527
</TABLE>
See accompanying notes to the Selected Consolidated Financial Data.
14
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes the effect of the acquisition of the remaining 25% minority
interest in Cory Components, Inc. 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) Includes the effect of the acquisition of Audio beginning November 14, 1997,
the date on which it was acquired.
(3) Prior to the acquisition of the remaining 25% minority interest in Cory
Components, Inc. 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 1993 up to the date of the Minority Interest
Acquisition in 1996 which primarily relates to Cory Components.
(4) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting for
Income Taxes."
(5) Represents the write-off of unamortized deferred financing costs,
unamortized original issue discounts and a prepayment penalty incurred as
result of the refinancing by the Company of a substantial portion of its
debt in November 1994 and the write off of deferred financing costs,
unamortized original issue discounts, a prepayment penalty and other related
expenses incurred as a result of the repayment of debt by the Company
concurrent with its IPO in 1997. These charges are net of an income tax
benefit.
(6) Pro forma for the Recapitalization, IPO and the application of the net
proceeds therefrom.
(7) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(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. See "Business--Backlog."
15
<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, 1997: (i) the Recapitalization (see "Description of
Capital Stock--the Recapitalization"), the IPO, and the application of the net
proceeds therefrom; (ii) the acquisition of Audio; and (iii) the sale by the
Company of 1,918,000 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 for the year ended December 31,
1997 reflects the unaudited financial statements of Audio for the period from
January 1 through November 14, 1997, 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.
16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECRANE RECAPITALIZATION PRO FORMA FOR AUDIO
AIRCRAFT AND IPO RECAPITALIZATION INTERNATIONAL, ACQUISITION
HOLDINGS, INC. ADJUSTMENTS AND IPO INC. ADJUSTMENTS
-------------- ----------------- ---------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 108,903 $ -- $ 108,903 $ 12,431 $ --
Cost of sales............................. 80,247 -- 80,247 7,345 63(6)
-------------- ------- ---------------- -------------- -------------
Gross profit (loss)....................... 28,656 -- 28,656 5,086 (63)
Selling, general and administrative
expenses................................ 15,756 100(2) 15,856 3,983 (89)(7)
Amortization of intangible assets......... 905 -- 905 -- 587(8)
-------------- ------- ---------------- -------------- -------------
Operating income (loss)................... 11,995 (100) 11,895 1,103 (561)
Interest expense.......................... 3,154 (1,528)(3) 1,626 8 1,583(9)
Other expenses............................ 243 -- 243 5 --
-------------- ------- ---------------- -------------- -------------
Income (loss) before provision (benefit)
for income taxes(1)..................... 8,598 1,428 10,026 1,090 (2,144)
Provision (benefit) for income taxes...... 3,344 528(4) 3,872 365 (517)(10)
-------------- ------- ---------------- -------------- -------------
Income (loss)(1).......................... $ 5,254 $ 900 $ 6,154 $ 725 $ (1,627)
-------------- ------- ---------------- -------------- -------------
-------------- ------- ---------------- -------------- -------------
Income (loss) applicable to common
stockholders(1)......................... $ 2,609 $ 3,545(5) $ 6,154 $ 725 $ (1,627)
-------------- ------- ---------------- -------------- -------------
-------------- ------- ---------------- -------------- -------------
Income (loss) per common share(1)
As reported
Basic................................. $ 0.69
Diluted............................... 0.62
Pro forma
Basic................................. $ 1.16
Diluted............................... 1.10
Weighted average number of common shares
outstanding
As reported
Basic................................. 3,803
Diluted............................... 4,892
Pro forma
Basic................................. 5,304
Diluted............................... 5,606
<CAPTION>
PRO FORMA FOR OFFERING PRO FORMA
ACQUISITION ADJUSTMENTS AS ADJUSTED
-------------- ------------- -----------
<S> <C> <C> <C>
Revenues.................................. $ 121,334 $ -- $ 121,334
Cost of sales............................. 87,655 -- 87,655
-------------- ------------- -----------
Gross profit (loss)....................... 33,679 -- 33,679
Selling, general and administrative
expenses................................ 19,750 -- 19,750
Amortization of intangible assets......... 1,492 -- 1,492
-------------- ------------- -----------
Operating income (loss)................... 12,437 -- 12,437
Interest expense.......................... 3,217 (2,192)( 1) 1,025
Other expenses............................ 248 -- 248
-------------- ------------- -----------
Income (loss) before provision (benefit)
for income taxes(1)..................... 8,972 2,192 11,164
Provision (benefit) for income taxes...... 3,720 880 (12 4,600
-------------- ------------- -----------
Income (loss)(1).......................... $ 5,252 $ 1,312 $ 6,564
-------------- ------------- -----------
-------------- ------------- -----------
Income (loss) applicable to common
stockholders(1)......................... $ 5,252 $ 1,312 $ 6,564
-------------- ------------- -----------
-------------- ------------- -----------
Income (loss) per common share(1)
As reported
Basic.................................
Diluted...............................
Pro forma
Basic................................. $ .99 $ .91
Diluted............................... .94 .87
Weighted average number of common shares
outstanding
As reported
Basic.................................
Diluted...............................
Pro forma
Basic................................. 5,304 7,222
Diluted............................... 5,606 7,524
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma
Consolidated Financial Data.
17
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects income (loss) before the effect of a $2,078,000 extraordinary loss
incurred as a result of the Company's debt refinancing. See the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus.
(2) Represents incremental selling, 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 director and officers' liability insurance premiums.
(3) Represents a reduction in interest expense to reflect the IPO and
application of the net proceeds therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) Represents an increase in the provision for income taxes resulting from an
increase in pro forma taxable income.
(5) Reflects the elimination of preferred stock dividends and adjustment to the
redemption value of mandatorily redeemable common stock warrants as a result
of the Recapitalization and IPO.
(6) Represents an increase in depreciation expense to reflect a $486,000
increase in the fair value of assets acquired.
(7) Represents: (i) a $21,000 increase in depreciation expense to reflect a
$486,000 increase in the fair value of assets acquired; and (ii) a $110,000
net decrease in compensation expense attributable to the resignation of one
former stockholder of Audio as of the acquisition date, offset by an
increase in compensation for the two remaining former stockholders of Audio
pursuant to employment agreements entered into with the Company.
(8) Represents an increase in amortization expense resulting from the
amortization of $20,110,000 of goodwill related to the acquisition on a
straight-line basis over 30 years.
(9) Represents an increase in interest expense resulting from Credit Facility
borrowings to finance the acquisition.
(10) Represents a decrease in the provision for income taxes as a result of a
decrease in pro forma taxable income.
(11) Reflects a decrease in interest expense to reflect the sale by the Company
of 1,918,000 shares of Common Stock in the offering and the application of
the net proceeds therefrom as set forth under "Use of Proceeds."
(12) Represents an increase in the provision for income taxes resulting from an
increase in pro forma taxable income.
18
<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. Since its formation in 1989, the Company has completed nine
acquisitions of businesses or assets, the most recent of which, Audio, was
closed in November 1997. The Company's revenues have grown at a 47.3% compounded
annual rate from 1995, the year of the most recent low in commercial aircraft
production, through 1997, pro forma for the acquisition of Audio. During this
same period, operating income as a percentage of revenues increased to 11.0%
from 3.3%, primarily as a result of increased sales volume without a
corresponding increase in fixed costs, a shift in the sales mix toward more
profitable products, variable cost reductions and price increases.
The Company's principal strategy is to establish and expand leading market
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industries, with a focus on the manufacturing of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading market positions while maintaining a balance of revenues among the
OEM market, the retrofit market and the aftermarket. The Company believes that
such a strategy will position it for growth over an entire aircraft industry
economic cycle. For example, the Company's revenues grew 31% without
acquisitions from 1992 through 1995, a period in which new aircraft deliveries
by Boeing and Airbus declined from 603 to 330.
All of the Company's acquisitions have been accounted for under the purchase
method of accounting which resulted in approximately $40.3 million of goodwill
reflected on the balance sheet as of December 31, 1997. The annual amortization
of goodwill will result in non-cash charges to future operations of
approximately $1.6 million per year (of which approximately 40% of such
amortization is deductible for tax purposes).
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, such as the one-time
growth created by the 1996 contract to provide systems integration services for
in-flight entertainment system developed by Interactive Flight Technologies Inc.
("IFT") on 19 wide-body aircraft for Swiss Air Transport Co. Ltd. ("Swissair").
That program has been substantially completed (in 16 of the 19 aircraft) as of
December 31, 1997, and no follow-on contracts have been booked with IFT.
However, the Company believes that it has lessened its exposure to such
fluctuations by developing capabilities in multiple major systems integration
areas: in-flight entertainment systems, safety systems, and GPS and other
navigation systems.
In April 1997, the Company used the net proceeds from the IPO, together with
borrowings under the Credit Facility, to repay outstanding (i) senior revolving
line of credit borrowings; (ii) senior term notes; (iii) senior subordinated
notes; and (iv) convertible subordinated notes payable. In conjunction with the
debt repayment, the Company incurred a $2.1 million extraordinary charge, net of
an estimated $1.4 million income tax benefit, which is comprised of: (i) a $1.9
million write-off of deferred financing costs; (ii) a $1.2 million write-off of
unamortized original issued discounts; (iii) a $0.3 million charge for a
prepayment penalty and expenses; and (iv) a $0.1 million write-off of the
unamortized portion of an interest rate cap agreement.
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. In 1996, 1997 and 1998,
solely in an effort to mitigate the effects of currency fluctuations between the
U.S. Dollar and the Swiss Franc, the Company entered into forward exchange
contracts at fixed rates and plans to continue this forward exchange program in
the future. The Company does not engage in any currency exchange transactions
for trading or speculative purposes. Gains and losses on
19
<PAGE>
foreign exchange contracts are recognized currently in the consolidated
statements of operations. In the fourth quarter of 1997, the Company recorded a
$0.5 million unrealized market value loss on the open 1998 contracts. In 1996,
the Company did not experience any material changes in the cost of contact
blanks resulting from currency fluctuations.
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,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................................. 100.0% 100.0% 100.0%
Cost of sales............................................................. 77.8 75.9 73.7
---------- ---------- ----------
Gross profit.............................................................. 22.2 24.1 26.3
Selling, general and administrative expenses.............................. 16.9 16.5 14.5
Amortization of intangible assets......................................... 2.0 1.1 0.8
---------- ---------- ----------
Operating income.......................................................... 3.3 6.5 11.0
Interest expense.......................................................... 6.8 6.5 2.9
Other expense, net........................................................ 0.7 0.2 0.2
---------- ---------- ----------
Income (loss) before provision for income taxes, and extraordinary item... (4.2) (0.2) 7.9
Provision for income taxes................................................ (2.0) (1.1) (3.1)
---------- ---------- ----------
Income (loss) before extraordinary item................................... (6.2) (1.3) 4.8
Extraordinary loss from debt refinancing.................................. -- -- (1.9)
---------- ---------- ----------
Net income (loss)......................................................... (6.2)% (1.3)% 2.9%
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) applicable to common stockholders....................... (5.9)% (9.8)% 0.5%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for
1997 from $65.1 million for 1996. Revenues increased primarily due to the
following: (i) the inclusion of $10.7 million of revenues from ADS which was
acquired on September 18, 1996; (ii) growth in the Company's private labeling
programs of $6.4 million; (iii) growth in contact sales of $6.3 million driven
by new aircraft production rate increases; (iv) an increase in sales of harness
assemblies for in-flight entertainment systems of $5.1 million; (v) an increase
in sales of specialty connectors for cabin management and in-flight
entertainment systems principally on Boeing's 777 aircraft of $4.9 million; (vi)
an increase of sales to IFT of $3.3 million relating to a major systems
integration program for Swissair; (vii) the inclusion of $3.0 million of revenue
from Elsinore which was acquired on December 5, 1996; (viii) new systems
integration programs for navigational systems of $1.5 million; (ix) the
inclusion of $1.3 million of revenue from Audio which was acquired on November
14, 1997; (x) a new systems integration program for United Parcel Service of
$0.9 million; and (xi) the overall growth in the commercial aircraft market.
Partially offsetting this increase was a decline in sales to AT&T Wireless
Services, Inc. ("AT&T Wireless") of $3.8 million, reflecting the completion in
late 1995 and early 1996 of a major systems integration program.
GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7
million for 1997 from $15.7 million for 1996. Gross profit as a percentage of
revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in
profit margin was attributable to an increased sales volume, favorable mix,
20
<PAGE>
savings from the rationalization of the newly purchased AMP Facility with the
Company's existing facilities in El Segundo, California and Lugano, Switzerland,
sustained price increases and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $5.0 million, or 46.6%, to $15.8
million for 1997 from $10.7 million for 1996. SG&A expenses as a percentage of
revenues decreased to 14.5% for 1997 from 16.5% for 1996. SG&A expenses
increased primarily due to 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;
(ii) the inclusion of SG&A expenses from (a) Aerospace Display Systems ("ADS"),
a manufacturer of dichroic LCD devices acquired from Allard Industries, Inc.,
(b) certain manufacturing assets (collectively, the "AMP Facility") from AMP,
Inc. ("AMP") and (c) Elsinore Aerospace Services, Inc. and the Elsinore
Engineering Services division (collectively, "Elsinore") of Elsinore. L.P. which
were acquired in late 1996; and (iii) the inclusion of SG&A expenses from Audio
which was acquired in 1997.
OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to
$12.0 million for 1997 from $4.3 million for 1996. Operating income as a
percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The
increase in operating income resulted from the factors described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to
$3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the
completion of the IPO on April 16, 1997 and the repayment of a substantial
portion of the Company's debt with the proceeds.
PROVISION FOR INCOME TAXES. During 1997, the Company reduced its deferred
tax asset valuation allowance by $0.5 million to reflect the book benefit of
federal and state net operating loss carry forwards not previously recognized.
The Company has approximately $2.5 million of net operating loss carry forwards
available at December 31, 1997 for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, the Company incurred
a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax
benefit, as a result of refinancing the Company's debt with the proceeds from
the IPO.
NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for
1997 from a net loss of $0.8 million for 1996. The increase is a result of the
factors described above.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable
to common stockholders increased $6.9 million to a net income of $0.5 million
for 1997 from a net loss applicable to common stockholders of $6.4 million for
1996. The increase resulted from the factors described above, plus a $2.1
million decrease in the redemption value adjustment of mandatorily redeemable
common stock warrants between the two periods. Current warrants were
subsequently redeemed. In addition, the increase was also influenced by a $0.8
million decrease in cumulative preferred stock dividends attributable to the
preferred stock that was converted into common stock as part of the
Recapitalization. See "Description of Capital Stock-the Recapitalization".
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for
1996 from $55.8 million for 1995. Revenues increased primarily due to the
following: (i) growth in contact sales driven by new aircraft production rate
increases and growth in the Company's private labeling programs of $6.4 million;
(ii) an increase of sales to IFT of $3.0 million in 1996 relating to a major
systems integration program for Swissair; (iii) the inclusion of $2.8 million of
revenues from ADS which was acquired on September 18, 1996; (iv) an increase in
sales of specialty connectors for cabin management and in-flight
21
<PAGE>
entertainment systems on Boeing's 777 aircraft of $2.4 million; and (v) an
increase in sales of harness assemblies for in-flight entertainment systems of
$2.4 million. Partially offsetting this increase was a decline in sales to AT&T
of $9.2 million, reflecting the completion in 1995 of a major systems
integration program primarily for American Airlines.
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 percentage 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 percentage 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. 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 percentage 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 $0.7 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 $0.4 million
in amortization of intangible assets as a result of the termination of certain
non-compete agreements.
INTEREST EXPENSE. Interest expense increased $0.4 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 $0.8 million for
1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted
from the factors described above and a lower tax provision resulting from the
Minority Interest Acquisition in February 1996.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $3.1 million, or 92.2%, to $6.4 million for 1996 from a
net loss applicable to common stockholders of $3.3 million for 1995. The
increase resulted from the change in redemption value of mandatorily redeemable
common stock warrants of $5.0 million (resulting from an increase in the value
of the warrants due to the Company's improved results from operations and the
anticipated price of the Common Stock as a result of the Offering) and the
increase in cumulative convertible preferred stock dividends of $0.7 million
(resulting from new issuances of preferred stock), which were offset in part by
the decrease in net loss of $2.6 million. As a result of the Recapitalization,
substantially all warrants were exchanged for Common Stock and all preferred
stock was converted into Common Stock. See "Description of Common Stock--The
Recapitalization."
LIQUIDITY AND CAPITAL RESOURCES
The Company has required cash primarily to fund acquisitions and, to a
lesser extent, to fund capital expenditures and for working capital.
In 1997 and 1996, the Company generated cash from operating activities of
$4.6 million and $3.0 million, respectively. Cash from operating activities is
net of interest payments of $2.8 million and $3.0 million for 1997 and 1996,
respectively. With the net proceeds of the Offering to be received by the
22
<PAGE>
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 1997 and 1996, the Company used $5.2 million and $0.9 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 $3.0 million and $2.7 million in 1997 and 1996, respectively, due to
higher sales. Unbilled receivables increased $0.2 million in 1997 as a result of
the systems integration program for Swissair (through IFT) that began in
mid-1996. Inventories increased by $5.0 million and $2.7 million in 1997 and
1996, respectively, in support of sales growth. Accounts payable decreased by
$0.4 million in 1997 and increased by $1.9 million in 1996. The foregoing
amounts for accounts receivable, inventories and accounts payable are consistent
with the amounts set forth in the Consolidated Statements of Cash Flow contained
herein.
Net cash used in investing activities was $27.8 million for 1997 and $24.0
million for 1996. Of the $27.8 million used in 1997, $23.6 million related to
the acquisition of Audio in November 1997. (The total purchase price for the
Audio acquisition also included contingent consideration with a maximum of $6.0
million payable in 1999 and 2000.) 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 $3.8
million and $1.5 million were made in 1997 and 1996, respectively. Capital
expenditures were incurred in 1997 to: (i) increase manufacturing capacity in
support of revenue growth; (ii) improve plating controls and capacity; and (iii)
construct three additional selective plating machines. The Company anticipates
capital expenditures of approximately $4.5 million in 1998.
Net cash provided by financing activities in 1997 was $23.0 million. The
Company raised $28.9 million in net proceeds from the sale of approximately 2.7
million shares of Common Stock in the IPO in April, 1997. The net proceeds from
the Offering were applied to repay amounts due under the Company's prior senior
revolving line of credit (the "Prior Credit Facility"). Subsequently, in April
1997, concurrent with the IPO, the Company replaced the Prior Credit Facility
with the present Credit Facility, and in November 1997 financed the Audio
Acquisition (including the related fees and expenses) through a drawdown under
the 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 for $6.5 million, the
acquisition of ADS (including the related fees and expenses) in September 1996
for $11.4 million, and the acquisition of Elsinore and the initial cash portion
of the AMP Facility acquisition in December 1996 for an aggregate of $8.0
million. The foregoing acquisitions were financed by various combinations of
convertible preferred stock (all of which was subsequently converted to Common
Stock during the Recapitalization), warrants for Common Stock, convertible
notes, debt notes, and a total of $2.1 million in drawdowns under the Prior
Credit Facility.
Cash decreased $0.1 million in 1997 and remained unchanged in 1996 due to
the factors described above. The Company entered into the Credit Facility in
April, 1997 which initially provided for a $40.0 million senior revolving credit
facility which expires in 2002. The Credit Facility was amended to increase the
permitted maximum borrowings by $20.0 million to $60.0 million in November 1997,
concurrent with the closing of the acquisition of Audio. Availability under the
Credit Facility was $24.0 million and working capital aggregated $24.8 million
as of December 31, 1997. The interest rate under the Credit Facility was
initially, at the option of the Company, either the prime rate or 1% above a
certain floating interbank offered rate ("IBOR"). The interest rate is to be
reset quarterly based upon a ratio of debt to the Company's earnings before
interest, taxes, depreciation and amortization, pro forma (for acquisitions) for
the 12 month period ending on such date; the maximum rate is either 0.75% above
the prime rate or 2.0% above IBOR. The Credit Facility contains restrictive and
financial covenants,
23
<PAGE>
including a restriction on acquisitions having a purchase price in excess of $10
million. The Credit Facility was amended to increase the permitted maximum
borrowings by $15 million to $75.0 million in February 1998 and is subject to an
automatic reduction by $0.5 million on the last day of each month commencing
January 31, 1999.
The Company believes that the current levels of working capital and amounts
available under the Credit Facility will enable it to meet its liquidity
requirements through the end of 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first quarter
of 1998, and does not anticipate a significant impact on the financial
statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required beginning with the statement made
as of December 31, 1998.
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.
24
<PAGE>
BUSINESS
GENERAL
The Company manufactures avionics components and provides avionics systems
integration services in certain niche markets of the commercial and high-end
corporate jet aircraft industries. The products and services offered by the
Company are utilized primarily in commercial and corporate 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, the commercial aircraft aftermarket and high-end corporate jet market.
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). The Company also
manufactures dichroic LCD devices, which are used with flight deck avionics, and
believes it is the largest supplier of such devices to the commercial aircraft
OEMs. In addition, the Company provides stereo systems, video monitors,
amplifiers, chimes and paging devices, headphone systems and passenger switch
and cabin lighting and climate controls for the high-end corporate jet market.
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 nine acquisitions of businesses or assets. A summary of these
transactions follows:
<TABLE>
<CAPTION>
YEAR OF
TRANSACTION TARGET PRINCIPAL PRODUCTS AND SERVICES(1)
- ------------ ------------------------------- ---------------------------------- APPROXIMATE
PURCHASE PRICE(2)
-----------------
(IN MILLIONS)
<S> <C> <C> <C>
1990 Hollingsead International, Inc. Avionics support structures $ 9.1
1991 Tri-Star Electronics
International, Inc. Contacts and connectors *(3)
1991 Tri-Star Europe, S.A. Contact blanks *(3)
1991 Tri-Star Technologies, Inc. Wire marking equipment *(3)
1991 Cory Components Connectors & 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
1997 Audio Cabin management &
entertainment products 24.7(5)
</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 Electronics International, Inc., ("Tri-Star"),
Tri-Star Europe S.A. ("Tri-Star Europe") and Tri-Star Technologies, Inc.
("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.
(5) Subject to contingent consideration of up to $6,000,000 depending on certain
performance criteria for Audio.
25
<PAGE>
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 Tri-Star, Tri-Star Europe and TST and Cory
Components, Inc. (the "Tri-Star Companies"). The Company's management has
refocused and expanded the businesses which were acquired in the Hollingsead and
Tri-Star 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 these companies.
During the last two years, the Company completed: (i) the acquisitions of
ADS and Elsinore; (ii) the purchase of the AMP Facility; (iii) the acquisition
of the remaining 25% interest in Cory Components which it did not already own;
and (iv) the acquisition of Audio. The acquisition of ADS, a manufacturer of
dichroic LCD devices, which the Company believes is the largest supplier of such
products to commercial aircraft OEMs, expanded the Company's offering of
components used in flight deck avionics systems. The acquisition of ADS has
allowed the Company to capitalize on the upturn in aircraft OEM production by
increasing its revenue content per aircraft. 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 services 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 Airbus GmbH, and the opportunity to
obtain additional customers. The Company's purchase of the AMP Facility added
contact capability and capacity which enables 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 screw machine
operations. As a result of the purchase of the AMP Facility, the Company has
significantly increased its sales of contacts and the number of distributors to
which it sells. The Company believes Audio, which it acquired in November 1997,
is the nation's largest and leading independent provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. The acquisition of Audio expanded the Company's
offering of products and systems for the corporate jet market.
INDUSTRY OVERVIEW AND TRENDS
The Company participates in the commercial, high-end corporate jet and
military segments of the aircraft industry. Within those segments, the Company
sells to commercial and high-end corporate jet OEMs, major avionics equipment
OEMs and military aircraft OEMs as well as to the aircraft retrofit market,
aircraft component aftermarket and corporate jet modification centers. According
to the Boeing Report, expenditures for new commercial jet aircraft production
are expected to total approximately $490 billion for the period from 1996
through 2006; and worldwide air travel will average 4.9% annual growth over the
next two decades. The aircraft component retrofit market (the integration of new
systems into existing aircraft) and the aircraft component aftermarket (the
manufacture and sale of replacement products for existing aircraft) are served
by a highly fragmented group of companies, including many of the OEMs. The
aviation industry has been consolidating at an increasing pace in recent years,
and it is expected that such consolidation will continue for the foreseeable
future.
26
<PAGE>
The market for commercial aircraft designed to carry 100 or more passengers
is served principally by Boeing and Airbus. 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 Allied Signal, Rockwell Collins, General Electric, Honeywell,
Raytheon and Sextant Avionique. Components and sub-systems for new aircraft are
provided by a much more fragmented group of smaller, specialized companies such
as the Company. The Company markets its commercial aircraft products directly to
the aircraft OEMs as well as to the major systems OEMs. In some cases, the
Company sells its products under private label agreements with certain component
manufacturers.
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 and
corporate aircraft industry:
INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The Boeing Report cites that
over the next decade, the world jetliner fleet is projected to grow from 11,500
aircraft at the end of 1996 to nearly 17,000 aircraft in 2006 and to 23,600 by
2016; and the report estimates that, over the next 20 years, the industry will
require 16,160 new aircraft both to support the projected world fleet expansion
and to replace capacity lost as aircraft are removed from commercial airline
service. According to aircraft delivery schedules revised in January 1998,
combined annual deliveries from Boeing (including the former McDonnell Douglas)
and Airbus Industries are projected to increase from 397 aircraft in 1996 and
557 in 1997 to an estimated 785 in 1998. The Company believes that every
commercial aircraft currently produced by Boeing and Airbus contains components
manufactured by it. The Boeing report notes that the pent-up demand for
replacement aircraft, and upcoming deadlines for noise abatement, which may take
some older aircraft out of service, will require carriers to add capacity in
order to keep pace with traffic growth.
INCREASED DEMAND FOR NEW CORPORATE JET AIRCRAFT. According to the
ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new corporate jet aircraft
are expected to be delivered from 1997 through 2001, a 61% increase over the
previous five year period. The Company believes that the increase in new
corporate jet aircraft production is being driven by a number of factors,
including: (i) the introduction of new, larger and more efficient aircraft; (ii)
the growing popularity of fractional aircraft ownership; (iii) the minimal
availability of used aircraft; (iv) the need for long range flights to expanding
international markets; and (v) the increased demand for more expedient travel.
INDUSTRY CONSOLIDATION - REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND
VENDORS. In order to reduce purchasing costs and have greater control over
quality, OEMs and aircraft operators have been reducing the number of vendors
and suppliers from whom they purchase. Suppliers and vendors must now possess
the critical mass and production and distribution capabilities required to
provide a broader range of products and services to airlines and OEMs on a
just-in-time basis. These requirements, coupled with the high level of
fragmentation within the aerospace industry, have led many companies to realize
significant internal synergies and external marketing benefits from merging.
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INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has
been an increase in demand for cabin avionics systems, including in-flight
passenger telecommunications systems and in-flight entertainment systems, such
as video, video-on-demand and other interactive systems. The Company believes
that the increase in new corporate jet production is being driven by numerous
factors, including: (i) the introduction of new, larger and more efficient
aircraft; (ii) the growing popularity of fractional aircraft ownership; (iii)
the minimal availability of used aircraft; (iv) the need for long range flights
to expanding international markets; (v) the increased demand for more expedient
travel.
PROLIFERATION OF NEW SAFETY REQUIREMENTS. The advent of new technologies
and FAA mandates are driving a proliferation of new safety systems for
airplanes. The world's airlines, aircraft and avionics OEMs and regulatory
agencies have coordinated to develop 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. As
overall navigation system accuracy is improved, new navigation systems, such as
GPS, will be required. Other new technologies which have already been mandated
include the traffic collision avoidance system ("TCAS"), cargo hold fire
detection and suppression systems and windshear detection systems. In
anticipation of new FAA recommendations and mandates, many airlines have already
begun to install enhanced ground proximity warning systems, a predictive
windshear detection system and enhanced digital flight data recorders. Each of
these systems presents aircraft avionics retrofit opportunities to the Company.
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.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial and high-end corporate jet
aircraft industry as a result of the following competitive strengths:
LEADING POSITIONS IN NICHE MARKETS. The Company successfully has
established strong positions in several specialized niches within the commercial
aircraft industry. The Company believes that it is the largest supplier of bulk
contacts to the commercial aircraft OEMs. The Company also believes it is the
largest supplier of dichroic LCD devices for use by commercial aircraft OEMs and
a major supplier of harness assemblies for use in in-flight entertainment
systems. The Company believes it is the largest provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. 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 nine acquisitions of businesses or assets, including, in 1997, the
acquisition of Audio and, in 1996, the 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 acquisitions of
identified targets; (iii) retain key management; and (iv) increase revenues of
an acquired company, often while refocusing that company's business strategy.
The Company believes that its acquisition success has resulted from its ability
to identify and screen acquisition candidates, implement an effective cost
reduction program and expand and diversify the products and services provided by
an acquired company. In the past, acquisitions by the Company have resulted in
increased indebtedness and interest expense which has caused
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the Company to incur net losses in each year since its inception despite
positive operating income. 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. 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 preferred supplier of
harness assemblies to Matsushita for its in-flight entertainment systems; (ii) a
preferred systems integrator for the fire suppression and smoke detection
systems of Securaplane and Kidde Safety; (iii) a preferred systems integrator
for Canadian Marconi Co. and Smiths Industries plc in navigation systems; and
(iv) a preferred systems integrator for Honeywell's GPS systems.
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, and two of the Company's facilities are currently
ISO-9001 or ISO-9002 certified.
ENGINEERING AND RELATED TECHNICAL CAPACITY INCLUDING INDUSTRY AND REGULATORY
CERTIFICATIONS. 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). The Company
employs FAA-certified airframe and power-plant mechanics who are authorized to
perform certain aircraft modification functions, and approximately 12% of the
Company's employees are engineering professionals. 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 its industry. The Company's subsidiaries hold numerous PMA authorizations
from the FAA, permitting them to manufacture and sell various parts in many
different aircraft; three FAA domestic repair station certificates, authorizing
them to perform certain aircraft modifications; and one of only 26 DASs
worldwide which are authorized by the FAA to provide approval of certain
aircraft modifications as the FAA's designee certificates (all as of December
31, 1997). The FAA approvals obtained by the Company's subsidiaries are owned,
and may only be used by, the subsidiary obtaining such approval.
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"), BE Aerospace, Inc., COMSAT Corp.,
Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc.,
Matsushita and McDonnell Douglas, providing the Company with broad commercial
aircraft industry expertise. On average, the Company's executive management has
approximately 18 years of related industry experience.
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GROWTH STRATEGY
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industry, with a focus on the manufacture of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading positions while maintaining a balance of revenues among the OEM
market, the retrofit market and the aftermarket. The Company believes that such
a strategy will position it for growth over an entire aircraft industry economic
cycle. Specifically, the Company seeks to:
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage
its core competencies in existing and additional markets, and add new expertise
in the avionics and systems integration fields, by identifying and pursuing
complementary acquisitions that offer strategic value, such as economies of
scale, product line extensions, new customer relationships or increased
manufacturing capacity. 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 GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AVIONICS. 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 increases in the production of commercial and
high-end corporate aircraft. For example, the Company believes that every
aircraft currently produced by Boeing (including McDonnell Douglas) and Airbus
includes components manufactured by the Company. The Company also believes that
its products are on each model of high-end corporate jet aircraft sold today.
The Company works closely with OEMs and modification centers to meet their
delivery and scheduling requirements, and, in some cases, to provide total,
turnkey solutions to new aircraft. Additionally, 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; (ii) longer
flights; and (iii) increased passenger demand for more sophisticated forms of
in-flight services. The Company believes that this increased demand represents a
significant retrofit and aftermarket opportunity for cabin avionics systems, as
well as the components (such as contacts, connectors and harness assemblies) and
systems integration and installation services necessary to 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, 1997, the
Company had contracted to provide systems integration services for GPS
(Continental Airlines through Honeywell and KLM Royal Dutch Airlines through
Canadian Marconi and Smiths Industries plc), smoke detection/fire suppression
safety systems (Southwest Airlines through Securaplane and Northwest Airlines
through Kidde Safety) and in-flight entertainment systems (Swissair through
IFT). In the Company's area of systems integration, it believes that it is the
only company which has in-house capabilities in each of the four elements of
systems integration (design and engineering, certification, installation kit
manufacturing and system installation).
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 in
order to create higher value-added products, and develop further market
opportunities through cross-selling and vertical integration of its products.
For example, the contacts manufactured by the Company often are utilized as an
integral component of the Company's connectors. In turn, the connectors
manufactured by the Company often are utilized as primary components of the
Company's harness assemblies. Additionally, in support of the systems
integration services provided by the Company, the
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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;
entertainment and cabin management products; 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 (including McDonnell Douglas models) and
Airbus, the two largest commercial aircraft OEMs. In 1997, sales of five classes
of product or service accounted for the bulk of the Company's revenues (pro
forma for the acquisition of Audio): contacts (approximately 30%), connectors
(approximately 22%), systems integration (approximately 15%), dichroic LCD
devices (approximately 11%), and entertainment and cabin management products
(approximately 11%). No other product or service accounted for more than 10% of
the Company's pro forma revenues in 1997.
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:
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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 is an application specific product
designed by the Company for use with in-flight entertainment and cabin
management systems on Boeing's 777 aircraft.
INDUSTRY STANDARD. The Company sells standard connectors, built to U. S.
military specification ("mil-spec") standards, which can be used in many
applications without further testing or certification.
HARNESS ASSEMBLIES.
The Company produces harness assemblies for use in cabin avionics systems,
primarily in-flight entertainment systems. A harness assembly is made from wire,
which the Company buys from its vendors, and connectors, contacts and hardware,
which the Company manufactures. The Company sells its harness assemblies to
avionics OEMs. In addition, the Company uses harness assemblies in its systems
integration activities. The Company is currently a primary supplier of harness
assemblies to Matsushita, one of the largest manufacturers of in-flight
entertainment systems.
AVIONICS SUPPORT STRUCTURES.
The Company has designed, patented and produced a wide range of avionics
support structures for use on commercial aircraft. Avionics support structures
are typically comprised of trays, shelving, racks, mounts, and insertion and
extraction devices which are combined with other components to form the
installation kit that securely holds and connects avionics equipment to the
aircraft and other systems or devices such as antennae, flight instruments and
power supplies. Avionics support structures are used to support and
environmentally cool (using fans and air chambers) the avionics equipment,
including navigation, communication and flight control equipment. Avionics
support structures are generally located in the avionics bay of an aircraft and
are secured to the frame of the aircraft. The Company's avionics support
structures are recognized by its customers under the Box-Mount-TM- name which
the Company believes is highly respected in the marketplace. The Company sells
its avionics support structures to aircraft and avionics OEMs, airlines and
major modification centers. In addition, these products are essential components
included in the installation kits which are used in the Company's systems
integration operations.
DICHROIC LCD DEVICES.
Through the 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
believes it is the primary 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 customers' requirements which are subsequently incorporated into new or
modified flight decks.
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The Company also manufactures electronic clocks which utilize its dichroic
LCD devices. 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.
ENTERTAINMENT AND CABIN MANAGEMENT.
Through its recent acquisition of Audio, the Company became a leading
supplier of aircraft entertainment and cabin management product and systems to
the high-end corporate jet market. Audio brings to the Company additional
expertise in: (i) cabin management systems including switching and control
modules; (ii) audio and video components; and (iii) systems engineering and the
integration of cabin management electronics. The Company provides stereo
systems, video monitors, amplifiers chimes and paging devices, headphone systems
and passenger switch and cabin lighting and climate controls. The Company sells
its entertainment and cabin management products and systems to corporate jet
OEMs and major modification centers.
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,
or replace an existing system with an updated one. As a full-service systems
integrator, the Company provides design and engineering, FAA certification,
installation kit manufacturing and systems installation services required to
retrofit an aircraft with a new system. A summary of these functions follows:
DESIGN AND ENGINEERING. The Company provides a full range of systems,
electrical and mechanical engineering services to its customers through its
staff of qualified and experienced engineers and program management
personnel. The Company's engineers work proactively with its customers in
all phases of the systems integration effort to achieve an engineering
design data package. This engineering design data package provides
information to: (i) certify product compliance with applicable industry and
FAA standards and regulations; (ii) define the manufacturing requirements
for kit implementation; and (iii) provide installation definition for actual
installation of the system onto aircraft.
FAA CERTIFICATION. The Company employs on a full-time basis or contracts for
FAA-certified Designated Engineering Representatives ("DERs") to evaluate
the engineering design data package, coordinate compliance testing to
applicable FAA regulations and obtain formal FAA approval of the engineering
design data package. These DERs facilitate FAA approval of the Company's
products and services. In general, DERs evaluate the design of an aircraft
modification, part or system, ensure compliance with the applicable Federal
Aviation Regulations and oversee product testing to ensure the airworthiness
of the aircraft as modified. DERs also either issue, on behalf of the FAA,
certain approvals, or work with the FAA to obtain certain approvals directly
from the FAA. Significant aircraft modifications by anyone other than the
aircraft manufacturer require the issuance of an STC, which constitutes an
FAA determination that the design of the modification meets all pertinent
FAA requirements. STCs may be issued directly by the FAA or on behalf of the
FAA by an approved DAS. The acquisition of Elsinore and its DAS approval
enables the Company to issue STCs for certain modifications without applying
directly to the FAA for such certifications.
INSTALLATION KIT MANUFACTURING. 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
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Company's DAS through Elsinore, the Company applies to the FAA for a PMA or
a supplement to an existing PMA, which allows the Company to manufacture the
installation kit in accordance with the approved design and data package.
SYSTEMS INSTALLATION. The Company employs a dedicated team of FAA-certified
mechanics and repairmen to ensure proper installation of the installation
kits and associated avionics systems. These mechanics and repairmen, who
have extensive installation experience over a broad range of commercial
aircraft models, operate within the provisions and limitations of the FAA
repair station certificates which cover the Company's three repair stations.
The Company believes that its staff of kit installation personnel is
sufficiently large and diverse in talent to complete multiple installation
projects simultaneously at different locations.
During 1997 and currently, the Company has focused its systems integration
efforts on the following three general categories of systems: (i) in-flight
entertainment systems; (ii) safety systems; and (iii) GPS and navigation
systems. The Company has targeted these three 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 entertainment); (ii) satisfy increased
safety and regulatory requirements; and (iii) reduce operating expenses
(navigation). A summary of recent Company activity in each of these categories
follows:
IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is a preferred components
supplier to Cathay Pacific Airlines (through Matsushita), as well as a
supplier of kits to United Airlines (through BE Aerospace, Inc.). Each of
these companies have designed digital interactive passenger entertainment
systems which provide video-on-demand, video games and other electronic
gaming.
SAFETY SYSTEMS. The Company is an integrator of safety systems which are
required by the FAA, or voluntarily adopted by airlines. The Company was
recently selected to integrate smoke detection and suppression systems for
Kidde Safety and Securaplane on aircraft for Northwest Airlines and
Southwest Airlines, respectively. The Company believes significant
opportunity exists for the integration of these types of safety systems onto
aircraft worldwide, and will continue to grow as additional safety
requirements and industry practices are mandated, such as enhanced digital
flight data recorders and ground proximity warning systems.
GPS AND NAVIGATION SYSTEMS. The Company has entered into agreements to
provide systems integration services for GPS on thirteen 747-200/300
aircraft and one MD-82 aircraft. The Company believes that GPS and similar
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. In
December 1997, the Company signed a memorandum of understanding with
Honeywell whereby it will become Honeywell's preferred systems integrator
for GPS.
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 approval, which
gives 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
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regulations, the FAA would have available to it a wide-range of enforcement
options. Such enforcement options include: (i) issuance of a warning letter or a
letter of correction to the Company; (ii) initiation of a civil penalty action
against the Company; (iii) suspension or emergency suspension of a Company
certificate or approval; or (iv) the revocation or emergency revocation of a
Company certificate or approval.
In July of 1997, the FAA notified the Company that its facilities did not
fully comply with certain regulations governing its DAS status, granted the
Company until September 10, 1997 to bring the facilities into full compliance,
and curtailed the operations of the relevant facilities as a DAS until they
achieved full compliance. On August 28, 1997 the FAA inspected the Company's
facilities and determined they were in full compliance. The Company's DAS
approval status was fully restored on September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief in support of its
enforcement powers. In the event the FAA were to suspend or revoke a Company
certificate or approval on an emergency basis, the Company would be obliged to
cease immediately the manufacture of products and the delivery of services which
require such certificate or approval. In the event the FAA were to suspend or
revoke a Company certificate or approval on other than an emergency basis, the
Company would be permitted to continue the manufacture of products and the
delivery of services which require such certificate or approval pending any
available appeals. However, if the FAA were to prevail in any such appeal, upon
the completion of the appeal process the Company would be obliged to cease the
manufacture of such products and the delivery of such services. In addition, in
the event the FAA were to determine that the Company's noncompliance with the
applicable FAA standards or regulations created a safety hazard, the FAA could
order that the pertinent component or aircraft immediately cease to be operated
until appropriate corrective action is taken. This could require the grounding
of aircraft and/or the removal of affected components from aircraft already
returned to service. The Company's FAA approvals are owned, and may only be used
by, the subsidiary obtaining such approval.
All aircraft operated by airlines in the United States must be of a type
which has received an FAA type certificate ("TC"). A TC is issued by the FAA
after the FAA determines that the aircraft type design meets the applicable FAA
airworthiness standards. After a type design has been approved through the
issuance of a TC by the FAA, a manufacturer with rights to the TC can apply for
FAA approval to produce the aircraft. This approval is a "production
certificate." Any major change in design of a type certificated aircraft which
is not significant enough to require a new application for a TC under the FAA's
rules must still be approved by the FAA. FAA approval of such a design change
developed by an entity other than the TC holder is issued under an STC. There
are two types of STCs: a "single-aircraft" STC, which may be applied to a single
aircraft, and a "multi-aircraft" STC, which may be applied to all aircraft of a
particular type design, for example, all Boeing 747-400s.
As of December 31, 1997, the Company had obtained 94 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.
35
<PAGE>
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 69 supplements to its PMAs (as of December 31, 1997). 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.
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 commercial aircraft 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 four 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 entertainment; (ii) safety systems;
and (iii) GPS and navigation. 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 1997, the Company sold its products and services to approximately 1,300
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 two largest customers for the fiscal
year ended December 31, 1997 were Boeing and Matsushita, which accounted for
approximately 19.0% and 11.1%, respectively, of the Company's consolidated
revenues. In addition, a
36
<PAGE>
significant portion of the Company's sales of components are sold to Boeing
indirectly through sales to suppliers of Boeing.
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, such as the one-time
growth created by the 1997 contract to provide systems integration services for
IFT's in-flight entertainment system on 19 wide-body aircraft for Swissair. That
program has been substantially completed (in 16 of the 19 aircraft) as of
December 31, 1997, and no follow-on contracts have been booked with IFT.
However, the Company believes that it has lessened its exposure to such
fluctuations by developing capabilities in multiple major systems integration
areas: in-flight entertainment systems, safety systems, and GPS and other
navigation systems. The Company has secured orders for integration services in
each of these targeted areas. The Company believes that in 1998 it will more
than significantly offset the reduction in revenues related to the IFT business
with system integration services for in-flight entertainment systems for United
Airlines (through BE Aerospace, Inc.) and fire suppression and detection
services for Southwest Airlines (through Securaplane), Northwest Airlines
(through Kidde Safety) and American Airlines (through B.F. Goodrich/Whitaker),
as well as a cabin pressurization system for Northwest Airlines and Air Canada
(through the Hamilton Standard division of United Technologies, Inc. ("Hamilton
Standard")). The Company believes that potential retrofit opportunities exist
for the cabin pressurization system with other operators of DC9-30 and DC9-50
series aircraft. The timing and magnitude of program awards for systems
integration services may make other customers significant sources of
nonrecurring income in a single year. However, the Company believes that it will
continue to be able to significantly offset such year-to-year fluctuations with
new contracts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation--General."
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 lead times of like quantity of comparable items to
customers other than Boeing, then the Company must sell on the same terms to
Boeing; and (ii) if other Boeing suppliers offer to sell to Boeing products
comparable to those of the Company at prices more than 5% lower than the prices
specified in such contract, the Company must either similarly reduce its prices
or permit Boeing to delete the affected products from the contract. Another
contract provides that Boeing is not obligated to order any products covered by
the agreement if: (i) Boeing's customers specify an alternate product; (ii) the
product in Boeing's judgement is not technologically competitive at the time;
(iii) Boeing changes the design of an aircraft such that the Company's products
are no longer required for such aircraft; or (iv) Boeing reasonably determines
that the Company cannot support Boeing's requirements for products in the
amounts and within the delivery schedules Boeing requires. The Company's
contracts with Boeing grant Boeing an irrevocable non-exclusive worldwide
license to use the Company's patents, designs, trade secrets, semiconductor mask
works and tooling related to the development, production and maintenance or
repair of products sold to Boeing upon the occurrence of certain events,
including: (i) the acquisition by or transfer to a third party of any of the
Company's rights to manufacture products for Boeing; (ii) upon various defaults
by the Company; and (iii) the bankruptcy of the Company. The Company generally
sells components and services to Matsushita 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
37
<PAGE>
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.
Certain of the Company's customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers, including the Company, to comply with such standards. As a
result, the Company has developed and implemented comprehensive quality system
policies and procedures which meet or exceed the requirements of its customers.
Many of the Company's customers have recognized formally the effectiveness of
the Company's quality programs by issuing quality approval letters and awarding
quality compliance certificates. In addition, certain customers have authorized
the Company's inspection personnel to act as the authorized quality
representative of the customer. This authorization enables the Company to ship
directly into the inventory stockrooms of these customers, eliminating the need
for receiving inspection activities by these customers.
The Company uses sophisticated equipment and procedures to ensure the
quality of its products and to comply with mil-specs and FAA certification
requirements. The Company performs a variety of testing procedures, including
environmental testing under different temperature, humidity and altitude levels,
shock and vibration testing and X-ray fluorescent measurement. These procedures,
together with other customer approved techniques for document, process and
quality control, are used throughout the Company's manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components which the Company manufactures require the use of various raw
materials including gold, aluminum, copper, rhodium, plating chemicals and
plastics, the availability and prices of which may fluctuate. The price of raw
materials represents a significant portion of the sales price of many of the
Company's products. Although some of the Company's contracts have prices tied to
the price of raw materials, increases in raw materials prices cannot always be
recovered in product sale prices. The Company also purchases a variety of
manufactured component parts from various suppliers. Raw materials and component
parts are generally available from multiple suppliers at competitive prices.
However, any delay in the Company's ability to obtain necessary raw materials
and component parts may affect its ability to meet customer production needs.
PATENTS AND PROPRIETARY INFORMATION
The Company has various trade secrets, proprietary information, trademarks,
trade names, patents, copyrights and other intellectual property rights which
the Company believes, in the aggregate (but not individually), are important to
its business.
COMPETITION
The Company competes with a number of established companies that have
significantly greater financial, technological and marketing resources than the
Company. The Company believes that its ability to compete depends on high
product performance, short lead-time and timely delivery, competitive price, and
superior customer service and support.
38
<PAGE>
The niche markets within the aircraft industry served by the Company are
relatively fragmented with several competitors for each of the products and
services provided by the Company. Due to the global nature of the commercial
airline industry, competition in these categories comes from both U.S. and
foreign companies. However, the Company knows of no single competitor that
provides the same range of products and services as those provided by the
Company.
The Company's principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. The Company's
principal competitor in the contact market is Deutch Engineered Connecting
Devices, a division of the Deutch Co. In the connector market, the Company's
principal competitors include ITT Canon (a division of ITT Corporation), AMP and
Radiall S.A. Several of these companies are also customers of the Company. The
Company's principal competitors for avionics support structures include smaller
companies such as Barry Controls, Inc., Electronic Cable Specialists ("ECS") and
Vibrachoc, a subsidiary of Compagnie Generale d'Electricite. The main competitor
for dichroic LCD devices is Cristalloid, Inc. The main competitors for
entertainment and cabin management products and systems for corporate jet
aircraft are Pacific Systems Corporation, Baker Electronics and DPI Labs.
Competitors which provide portions of systems integration services include ECS,
the engineering departments of certain airlines and numerous independent
airframe maintenance and modification companies.
BACKLOG
Bookings increased $30.1 million, or 36.7%, to $112.1 million for 1997
compared to $81.9 for 1996. The increase in bookings for 1997 includes a net
$12.3 million attributable to ADS, which was acquired in September 1996. As of
December 31, 1997, the Company had a sales order backlog of $48.2 million,
including $2.4 million for Audio, which was acquired on November 14, 1997
compared to $44.4 million as of December 31, 1996. Approximately 7.0% of the
purchase orders outstanding as of December 31, 1997 are scheduled for delivery
for 1999 and beyond.
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, 1997 is not necessarily indicative of actual shipments or sales for
any future period, and period-to-period comparisons may not be meaningful.
EMPLOYEES
As of December 31, 1997, the Company had 1,243 employees (including 144
temporary employees), of whom 146 were in engineering (including 17 temporary
employees), 39 were in sales, 933 were in manufacturing operations (including
118 temporary employees) and 125 were in finance and administration (including 9
temporary employees). None of the Company's employees are 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.
39
<PAGE>
FACILITIES
The Company leases most of its facilities, with lease 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
Garden Grove, CA Manufacturing and engineering facility 58,300 2004
Hatfield, PA Manufacturing and engineering facility 27,500 1999
Lugano, Switzerland Manufacturing facility 21,000 2001
Irvine, CA Manufacturing facility 16,400 1999
Wiltshire, United Kingdom Manufacturing facility 5,700 1998
El Segundo, CA Executive offices 5,000 2007
Santa Barbara, CA Engineering facility 3,500 2000
Seattle, WA Engineering facility 3,200 1999
Santa Ana, CA Engineering facility 1,300 1999
</TABLE>
Additionally, the Company owns an 18,000 square foot manufacturing and
engineering facility in North Little Rock, Arkansas. The Company believes its
properties are in good condition and are adequate to support its operations for
the foreseeable future.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local, and foreign
environmental requirements, including those relating to discharges to air,
water, and land, the handling and disposal of solid and hazardous waste, and the
cleanup of properties affected by hazardous substances. In addition, certain
environmental laws, such as CERCLA and similar state laws, impose strict,
retroactive, and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. The Company has sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. The Company has received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency as to the
Company's use of certain such sites. In addition, some of the Company's
operations are located on properties which are contaminated to varying degrees.
However, the Company has not incurred, nor does it expect to incur, significant
costs to address such contamination because entities other than the Company have
been held primarily responsible for such contamination, the levels of
contamination are sufficiently low so as not to require remediation or the
Company is indemnified against such costs. In most cases the Company does not
believe that its liability for past waste disposal is material. However, in a
limited number of cases the Company does not have sufficient information to
assess its potential liability, if any. It is possible, given the retroactive
nature of CERCLA liability, that the Company will from time to time receive
additional notices of potential liability, relating to current or former
activities.
The Company has been and is in substantial compliance with environmental
requirements and believes it has no liabilities under environmental
requirements, except those which would not be expected to have a material
adverse effect on the Company's business, results of operations, or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's business and the Company might in the future incur
material costs to meet current or more stringent compliance, cleanup, or other
obligations pursuant to environmental requirements. See "Risk Factors--
Environmental Regulation" and "Business--Legal Proceedings."
40
<PAGE>
LEGAL PROCEEDINGS
The Company's manufacturing facility in El Segundo, California, has received
several notices of violation 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 notices will result in any material sanctions. See "Risk
Factors-- Environmental Regulation" and "Business--Environmental Matters."
The Company is a party to a license agreement with McDonnell Douglas (now a
part of Boeing) 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. In 1996, McDonnell Douglas 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.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
41
<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, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ ----------- ----------------------------------------------------------
<S> <C> <C>
R. Jack DeCrane 51 Chairman of the Board and Chief Executive Officer
R. G. MacDonald 67 Vice Chairman of the Board
Robert A. Rankin 45 Chief Financial Officer, Secretary and Treasurer
Roger L. Keller 53 Group Vice President of Systems
Charles H. Becker 51 Group Vice President of Components
James R. Bergman (a) 55 Director
Paul H. Cascio (b) 36 Director
Jonathan A. Sweemer (a)(b) 42 Director
Mitchell I. Quain 46 Director
</TABLE>
- ------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The Company is currently evaluating other independent non-management
director candidates and anticipates that 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 and Mr. Quain serve as
class I directors 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.
Robert A. Rankin has been Chief Financial Officer, Secretary and Treasurer
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
42
<PAGE>
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 has also served as President of Hollingsead
since December 1995, 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, and President of Tri-Star since December 1994. Prior to
joining the Company, Mr. Becker 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. 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. (an
affiliate of Brantley). 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. 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. (which is, collectively with
NAS Partners I, L.L.C., referred to in this document as "Nassau") 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."
Mitchell I. Quain has been a member of the Board since May 1997. He is an
Executive Vice President of and has been a member of the board of Furman Selz
LLC since May 1997. From June 1975 to May 1997, he was a Managing Director of
and held other positions with Schroder & Co. Inc. Mr. Quain has more than 20
years of financial and operating experience. Certain stock options have been
granted to Mr. Quain, pursuant to a Board resolution providing for such options
for non-management directors who do not serve pursuant to the terms of the
Shareholder Agreement. See "Certain Transactions-- Independent Director."
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, 1997.
43
<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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS/SAR(2) PAYOUTS
--------- --------- --------- ------------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane 1997 $ 244,744 $ 220,000 $ -- 50,000
Chief Executive 1996 206,600 146,000 7,813 34,028
Officer and 1995 180,000 55,000 -- --
Chairman of the
Board
R.G. MacDonald 1997 184,859 102,000 10,536 4,000
Vice Chairman of 1996 177,437 82,000 13,200 --
the Board(4) 1995 173,607 35,000 8,292 --
Robert A. Rankin 1997 149,309 103,000 7,158 15,000
Chief Financial 1996 139,375 65,000 12,838 19,850
Officer and 1995 135,000 20,000 6,628 --
Secretary
Roger L. Keller 1997 163,866 -- 1,682 10,000
President of 1996 150,000 -- 2,083 19,850
Hollingsead and 1995 121,250 7,500 -- 14,179
Group Vice
President of
Systems(5)
Charles H. Becker 1997 174,492 102,000 6,168 15,000
President of 1996 148,750 65,000 9,103 19,850
Tri-Star and Group 1995 137,515 16,000 1,610 14,179
Vice President of
Components(6)
<CAPTION>
ALL OTHER
COMPENSATION(3)
-----------------
<S> <C>
R. Jack DeCrane $ 29,411
Chief Executive --
Officer and --
Chairman of the
Board
R.G. MacDonald --
Vice Chairman of --
the Board(4) --
Robert A. Rankin --
Chief Financial 80,357
Officer and
Secretary
Roger L. Keller --
President of --
Hollingsead and 17,405
Group Vice
President of
Systems(5)
Charles H. Becker 18,000
President of 30,586
Tri-Star and Group --
Vice President of
Components(6)
</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) Relocation costs.
(4) Mr. MacDonald served as President of the Company through December 1996. Mr.
MacDonald became Vice Chairman of the Board in December 1996.
(5) Mr. Keller served as President of Hollignsead through December 1996. Mr.
Keller became Group Vice President of Systems in December 1996.
(6) Mr. Becker served as President of Tri-Star through December 1996. Mr. Becker
became Group Vice President of Components in December 1996.
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, 1997.
44
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING % OF EXERCISE OR APPRECIATION(1)
OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION --------------------------
NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10%
- ------------------------------- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane................ 50,000 30.6% $ 16.75 2007 $ 526,699 $ 1,334,759
Robert A. Rankin............... 15,000 9.2% 16.75 2007 158,010 400,428
Roger L. Keller................ 10,000 6.1% 16.75 2007 105,340 266,952
Charles H. Becker.............. 15,000 9.2% 16.75 2007 158,010 400,428
Richard G. MacDonald........... 4,000 2.4% 16.75 2007 42,136 106,781
</TABLE>
- ------------------------
(1) The potential realizable value assumes a rate of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future prices of the Common Stock
STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF UNEXERCISED
OPTIONS
The following table sets forth information about the stock options exercised
by the Named Executive Officers of the Company during the fiscal year ended
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS/ SAR AT
OPTIONS/SAR FY-END(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ --------------- ------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
R. Jack DeCrane..................... -- -- 80,819/95,370 1,329,172/655,294
Robert A. Rankin.................... -- -- 16,448/32,581 269,315/247,930
Roger L. Keller..................... -- -- 13,047/30,982 210,897/305,098
Charles H. Becker -- -- 14,180/34,849 229,559/287,686
Richard G. MacDonald................ -- -- 45,372/15,342 747,324/187,814
</TABLE>
- ------------------------
(1) Based on the common stock share price of $16.75 per share as of December 31,
1997, the measuring date.
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 $0.53 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
45
<PAGE>
beneficiaries in the event of his death, disability, or termination without
cause. In the event of his death, Mr. DeCrane's beneficiaries would be entitled
to: (i) a payment equal to Mr. DeCrane's then current salary for one year plus
his remaining bonus through year-end; and (ii) continuation of certain insurance
benefits for one year. Upon termination due to disability, Mr. DeCrane would be
entitled to: (i) receive the sum of his then current base salary for one year
plus his bonus through year end; and (ii) continuation of certain health
benefits for one year. In the event of a termination without cause by the
Company or Mr. DeCrane's resignation due to a material breach of the agreement
by the Company or the Company's request that he resign or retire, Mr. DeCrane
would be entitled to: (i) his then current base salary for one year and his
remaining bonus through the end of the year of termination plus an amount equal
to the amount earned in the immediately preceding year; (ii) continuation of
certain health benefits for a one year period; and (iii) reimbursement of
certain relocation and outplacement expenses.
R. G. MacDonald and the Company entered into a letter agreement, dated June
28, 1993, pursuant to which Mr. MacDonald is to receive for an unspecified term:
(i) an annual base salary of $150,000; (ii) an annual bonus ranging from 20% to
50% of his annual base salary depending on the Company's level of achievement of
certain performance goals; and (iii) the Company's standard benefit package with
the addition of an executive term life insurance policy in the amount of
$200,000. Under the agreement, Mr. MacDonald received options to purchase 56,714
shares of the Company's Common Stock at an exercise price of $0.53 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 $0.53 per share.
SHARE INCENTIVE PLAN
Under the Share Incentive Plan adopted by the Company in 1993 (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. In
June 1997, with the approval of the Administrator, the Company extended the
Share Incentive Plan to Mitchell I. Quain, an independent non-management
director of the Company, and issued 6,000 Options to Mr. Quain under the terms
of the Share Incentive Plan. See "Certain Transactions-Independent Director".
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
46
<PAGE>
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.
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. The Company matched 25% of the
employee contribution for the fourth quarter of 1997 for up to 6% of the
employee's salary. In 1998, the Company intends to match 50% of the employee
contribution for up to 6% of the employee's salary. The full amount vested in a
participant's account will be distributed to a participant following termination
of employment, normal retirement or in the event of disability or death.
DIRECTORS' COMPENSATION
In June 1997 the Board adopted a policy of compensating any non-management
directors who do not serve pursuant to the terms of the Shareholder Agreement
(see "Certain Transactions--Shareholders Agreement") in an amount equal to
$6,000 per year plus $1,500 for each quarterly Board meeting attended. At
present, Mitchell I. Quain is the only director who qualifies for such
compensation. The other directors of the Company do not receive annual fees or
fees for attending meetings of the Board of Directors or committees thereof.
However, all directors are reimbursed for out-of-pocket expenses. In June 1997,
the Board also extended the Share Incentive Plan to such independent
non-management directors, and issued 6,000 Options to Mr. Quain under the terms
of the Share Incentive Plan. See "Certain Transactions--Independent Director".
47
<PAGE>
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.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, MANAGEMENT AND SELLING
STOCKHOLDERS
The following chart provides information as to the beneficial ownership of
Common Stock as of December 31, 1997, as adjusted to give effect to 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; (iii) each person known to the Company to be the beneficial owner of 5%
or more of Common Stock, and (iv) each stockholder selling shares of Common
Stock as part of the Offering (the "Selling Stockholders").
<TABLE>
<CAPTION>
OWNERSHIP OF COMMON STOCK PRIOR TO
OWNERSHIP OF COMMON STOCK AFTER
THE OFFERING NUMBER OF THE OFFERING
----------------------------------- SHARES -------------------------------
PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ----------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Nassau Capital Partners L.P..................... 874,633(1) 16.5% 100,000 774,633 10.7%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer............................. 874,633(2) 16.5% 100,000 774,633 10.7%
22 Chambers Street
Princeton, NJ 08542
Brantley Venture Partners II, L.P............... 490,928 9.2% -- 490,928 6.8%
20600 Chagrin Blvd., Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio.................................. 490,928(3) 9.2% -- 490,928 6.8%
20600 Chagrin Blvd., Suite 1150
Cleveland, OH 44122
Wellington Management Company, LLP.............. 485,000(4) 9.1% -- 485,000 6.7%
75 State Street
Boston, Massachusetts 02109
Mellon Bank Corporation ........................ 436,600(5) 8.2% -- 436,600 6.0%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Artisan Partners Limited Partnership 391,200 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Artisan Investment Corporation.................. 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Andrew A. Ziegler............................... 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Carlene Murphy Ziegler.......................... 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
The Dreyfus Corporation......................... 373,100(5) 7.0% -- 373,100 5.2%
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
The TCW Group, Inc. ............................ 304,100 5.7% -- 304,100 4.2%
865 South Figueroa Street
Los Angeles, California 90017
Robert Day...................................... 304,100(8) 5.7% -- 304,100 4.2%
200 Park Avenue, Suite 200
New York, New York 10166
DSV Partners, IV................................ 493,440 9.3% 216,180 277,260 3.8%
1920 Main St., Suite 820
Irvine, CA 92614
James R. Bergman................................ 493,440(7) 9.3% 216,180 277,260 3.8%
1920 Main St., Suite 820
Irvine, CA 92614
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
OWNERSHIP OF COMMON STOCK PRIOR TO
OWNERSHIP OF COMMON STOCK AFTER
THE OFFERING NUMBER OF THE OFFERING
----------------------------------- SHARES -------------------------------
PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ----------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Dreyfus Investment Advisors, Inc................ 273,100(9) 5.1% -- 273,100 3.8%
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennyslvania 15258
Mellon Bank N.A................................. 273,100(9) 5.1% -- 273,100 3.8%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Electra Investment Trust P.L.C.................. 471,639 8.9% 235,820 235,819 3.3%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane................................. 147,119(10) 2.8% 30,000 117,119 1.6%
2361 Rosecrans Avenue
El Segundo, California 90245
R. G. MacDonald................................. 53,879(11) 1.0% -- 53,879 *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Robert A. Rankin................................ 20,702(12) * -- 20,702 *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Charles H. Becker............................... 19,851(13) * -- 19,851 *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller................................. 13,047(14) * -- 13,047 *
12442 Knott Avenue
Garden Grove, California 92841
Mitchell I. Quain............................... 12,000(15) * -- 12,000 *
230 Park Avenue
New York, N.Y. 10169
All directors and executive officers as a group
(eight persons)............................... 2,125,599(16) 40.0% 346,180 1,779,419 24.6%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 5,473 shares held by NAS Partners I L.L.C., an affiliate of Nassau
Capital Partners, L.P.
(2) Represents 869,160 shares held by Nassau Capital Partners, L.P. and 5,473
shares held by NAS Partners I L.L.C., affiliates of Mr. Sweemer.
(3) Represents shares held by Brantley of which Mr. Cascio is a general partner
of the general partner.
(4) Represents shares held by clients of Wellington, which in its capacity as
investment adviser may be deemed to control such shares.
(5) Includes 273,000 shares beneficially owned jointly among Mellon Bank
Corporation, Mellon Bank N.A., The Dreyfus Corporation and Dreyfus
Investment Advisors, Inc.
(6) Represents shares held by Artisan Partners Limited Partnership and
beneficially owned jointly with Artisan Investment Corporation, A. A.
Ziegler and C.M. Ziegler.
(7) Represents shares held by DSV of which Mr. Bergman is a general partner.
(8) Represents shares held by The TCW Group of which Mr. Day may be a
controlling person.
(9) Represents shares beneficially owned jointly among Mellon Bank Corporation,
Mellon Bank, N.A., The Dreyfus Corporation and Dreyfus Investment Advisers,
Inc.
(10) Includes 80,819 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(11) Includes 45,372 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(12) Includes 16,448 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(13) Includes 14,180 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(14) Includes 13,047 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(15) Includes 2,000 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(16) Includes 171,866 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
50
<PAGE>
The Company and the Selling Shareholders have granted the underwriters a
30-day option to purchase up to 375,000 shares solely to cover over-allotments,
which additional shares are not included in the above table.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
James R. Bergman, a director of the Company, filed a Form 5 under Section
16(a) of the Exchange Act (a "Form 5") dated March 5, 1998, indicating a failure
to timely file a Form 3 under Section 16(a) of the Exchange Act (a "Form 3")
when required under Section 16(a), disclosing his indirect beneficial ownership
of a portion of the 493,439 shares of Common Stock directly owned by DSV (of
which he is a general partner) at the time of the IPO. The foregoing Form 5 was
required to have been filed by February 15, 1998.
Jonathan Sweemer, a director of the Company, filed a Form 5 dated February
25, 1998, indicating a failure to timely file: (i) a Form 3 with respect to
869,160 shares of Common Stock beneficially owned by Nassau Capital Partners
L.P., at the time of the IPO, and (ii) a Form 4 with respect to the acquisition
of 33,526 additional shares of Common Stock issued by the Company to Nassau
Capital Partners L.P. to correct a disputed calculation regarding the number of
shares that should have been issued as part of the Recapitalization. Mr. Sweemer
disclaims any beneficial interest in any of the foregoing shares. The foregoing
Form 5 was required to have been filed by February 15, 1998.
Nassau Capital Partners L.P., filed a Form 5 dated February 25, 1998,
indicating a failure to timely file: (i) a Form 3 disclosing its beneficial
ownership of 869,160 shares of Common Stock at the time of the IPO, and (ii) a
Form 4 with respect to the acquisition of 33,526 additional shares of Common
Stock issued by the Company to correct a disputed calculation regarding the
number of shares that should have been issued as part of the Recapitalization.
The foregoing Form 5 was required to have been filed by February 15, 1998.
Paul H. Cascio, a director of the Company, failed to file a Form 5 by
February 15, 1998, indicating a failure to timely file a Form 3, disclosing his
indirect beneficial ownership of the 490,928 shares of Common Stock directly
owned by Brantley Venture Partners, L.P. (of which he is a general partner of a
general partner), at the time of the IPO. On March 6, 1998, such Form 5 was sent
for filing.
51
<PAGE>
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENT
Pursuant to the Fifth Amended and Restated Shareholders Agreement dated
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). See
"Management--Executive Officers and Directors." Following completion of the
Offering, Nassau, Brantley and DSV will beneficially own 10.7%, 6.8% and 3.8%,
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.
RECAPITALIZATION; WAIVERS AND EXCHANGES OF SECURITIES
Effective immediately prior to the IPO, certain of the Company's
then-existing shareholders, including Nassau, Brantley, DSV and Electra
Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra"),
as well as the holders of the Lender Warrants, agreed to waive a number of
rights under the agreements by which such shareholders and warrant holders
acquired such rights from the Company, releasing the Company from certain
dividend payment requirements, voting requirements and certain other rights, as
well as eliminating certain negative and affirmative covenants contained
therein.
Upon consummation of the IPO and as part of the Recapitalization: (i) all of
the shares of preferred stock of the Company were exchanged for shares of Common
Stock; (ii) certain warrants were exchanged by Nassau and Electra for shares of
Common Stock; and (iii) certain convertible promissory notes and warrants to
purchase Common Stock held by Nassau and Electra were terminated. See
"Description of Common Stock--The Recapitalization". In December 1997, the
Company issued an additional 16,918 shares of Common Stock to Electra and 33,825
shares to Nassau to correct a disputed calculation regarding the number of
shares that should have been issued in the foregoing exchanges as part of the
Recapitalization.
Upon consummation of the IPO and as part of the Recapitalization, R.G.
MacDonald, Charles H. Becker, Robert A. Rankin and John Hinson, an officer of
the Company, exchanged an aggregate of 75,000 shares of preferred stock of the
Company for 21,268 shares of Common Stock. See "Description of Common Stock-The
Recapitalization".
Upon consummation of the IPO and as part of the Recapitalization, Electra,
DSV, Brantley and certain other parties exchanged all of the 6,847,705
outstanding shares of preferred stock of the Company for 1,941,804 shares of
Common Stock. See "Description of Common Stock--The Recapitalization".
INDEPENDENT DIRECTOR
In June 1997, the Company extended its Share Incentive Plan for employees to
independent non-management directors of the Company who are not appointed to the
Board pursuant to the Shareholders Agreement, and issued 6,000 Options to
Mitchell I. Quain, the only director presently qualifying for such plan.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share.
COMMON STOCK
As of December 31, 1997, there were 5,318,563 shares of Common Stock
outstanding and held of record. An additional 527,156 shares were reserved for
issuance upon exercise of all outstanding options under the Share Incentive
Plan. Each holder of Common Stock is entitled to one vote for each share held
and does not have cumulative voting rights.
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. The Common Stock is not convertible into any
other security. See "Certain Transactions--Shareholders Agreement."
Subject to the restrictions on payments of dividends imposed by the
Company's debt agreements, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any then
outstanding shares of preferred stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Undesignated
Preferred Stock, none of which was issued as of December 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 to certain lenders under the Prior Credit Facility, which
entitled the holders to purchase 70,893 shares of Common Stock for $14.11 per
share and conferred certain other rights on the holders thereof. As of December
31, 1997, all of the Lender Warrants were exercised, and no other warrants were
outstanding.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, certain stockholders may
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.
53
<PAGE>
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 nine 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, each holder which is
a party to the Registration Rights Agreement may cause the Company to use its
best efforts to include such holder's Common Stock in any of the Company's
registered offerings ("piggyback offerings") of its Common Stock (other than
under Forms S-4 and S-8 of the Securities Act, or under other forms not
available for registering sales to the public) (subject to reduction to the
extent that the managing underwriter, if any, is of the opinion that such
inclusion would adversely affect the marketing of the securities to be sold
therein). The Registration Rights Agreement provides that the Company is to bear
the expenses of registrations described above, other than expenses consisting of
underwriting discounts and commissions applicable to securities sold by holders.
The Registration Rights Agreement also restricts the transfer of certain
shares of Common Stock held by the stockholders party to such agreement prior to
the registration and sale (or other registered disposition) of such Common Stock
under the Securities Act.
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.
Concurrent with the IPO, all of the Company's existing stockholders agreed
to and consummated a recapitalization and simplification of the Company's
capital structure (the "Recapitalization"), which included (i) the conversion of
all then-outstanding shares of preferred stock into Common Stock, (ii) the
exercise or exchange of all warrants for Common Stock, other than the Lender
Warrants (see "Description of Capital Stock--Warrants") and those which were
cancelled pursuant to their terms by the Offering; and (iii) a 3.53-for-one
reverse stock split.
Immediately after the Recapitalization but before giving effect to the IPO,
the Company had 2,551,690 shares of Common Stock, no shares of preferred stock
outstanding, and the Lender Warrants to purchase 70,893 shares of Common Stock,
which were subsequently exercised. See "Description of Capital Stock--Warrants".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS AND DELAWARE GENERAL CORPORATION LAW
SECTION 203
The provisions of the Company's Certificate and the Bylaws and the
provisions of Delaware law summarized in the succeeding paragraphs may be deemed
to have anti-takeover effects and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
CLASSIFIED BOARD. The Certificate provides that the Board will be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board will be
54
<PAGE>
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.
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
55
<PAGE>
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
December 31, 1997, options to purchase an aggregate of 300,816 shares of Common
Stock were unvested and subject to vesting upon a Change of Control, including
options to purchase 95,370, 15,342, 32,581, 30,982 and 34,849 shares of Common
Stock, by Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
7,236,563 shares of Common Stock. Of these shares, all of the 2,500,000 shares
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) sold in this offering, and the 2,797,423 shares sold in the Company's IPO
are freely transferable without restriction if held by holders who are not
"affiliates" of the Company (as defined in the Securities Act).
The remaining 1,939,140 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. The holders
of 1,827,701 of such restricted shares are subject to a 90-day lock-up period
following the Offering pursuant to agreements with the Underwriters. Upon the
expiration of that lock-up period: (i) all such 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 90-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).
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.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, Furman Selz LLC, and SBC Warburg Dillon Read Inc.,
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
BT Alex. Brown Incorporated..........................................................................
Furman Selz LLC......................................................................................
SBC Warburg Dillon Read Inc..........................................................................
-----------
Total................................................................................................ 2,500,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Representatives of the
Underwriters.
The Company and certain of the Selling Shareholders have granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 375,000 additional shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 2,500,000,
and the Company and the Selling Shareholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 2,500,000 shares are
being offered.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying bids
on the Nasdaq National Market limited by the bid prices of independent market
makers and making purchases limited by such prices and effected in response in
order flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified period and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the pricee of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will
58
<PAGE>
not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with this offering.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company and the Selling Stockholders with
respect to certain civil liabilities, including liabilities under the Securities
Act.
Stockholders of the Company, holding in the aggregate 1,827,701 shares of
Common Stock, have agreed not to offer, sell or otherwise dispose of any of such
Common Stock for a period of 90 days after the date of this Prospectus without
the prior consent of the Representatives of the Underwriters. See "Shares
Eligible For Future Sale."
SBC Warburg Dillon Read Inc. is the successor firm to Dillon, Read & Co.
Inc.; Dillon, Read & Co. Inc. served as an underwriter of the Company's IPO
consummated in April 1997.
Furman Selz LLC is an affiliate of ING Baring (U.S.) Securities, Inc. and
ING (U.S.) Capital Corporation. ING Baring (U.S.) Securities, Inc. received a
fee of $23,498 from the representatives of the Company's IPO in April 1997. In
addition, ING (U.S.) Capital Corporation received approximately $24.7 million as
a result of: (i) being a prior lender under the Company's former senior
revolver; (ii) being a previous holder of the Company's senior notes; (iii) net
proceeds from the sales of the Company's common shares and warrants; and (iv)
receiving a success fee for the completion of the IPO. Additionally, Mitchell I.
Quain, an Executive Vice President of Furman Selz LLC, serves as a director of
the Company.
LEGAL MATTERS
The validity of the Common Stock offered by this Prospectus and certain
other legal matters will be passed upon for the Company by Spolin & Silverman,
Santa Monica, California. Certain legal matters will be passed upon for the
Underwriters by Morgan, Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of Audio International, Inc. and
subsidiary as of December 31, 1996 and 1995 and for each of the two years in the
period ended December 31, 1996 included in this Prospectus have been so included
in reliance on the report of Thomas & Thomas, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
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
59
<PAGE>
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the public reference facilities of the Commission's Regional
Offices: New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a site on the World Wide Web (http://
www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information also are available from the Commission's public reference facilities
and its website. So long as the Company is subject to periodic reporting
requirements of the Exchange Act, it will continue to furnish the reports, proxy
statements and other information required thereby to the Commission. The Company
furnishes its shareholders annual reports containing financial statements
audited by its independent auditors and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
------------------------
60
<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, 1996 and 1997............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and
1997................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............... F-6
Notes to Consolidated Financial Statements............................................................... F-7
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
Report of Independent Accountants........................................................................ F-31
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited).......... F-32
Consolidated Statements of Income for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 (Unaudited).......................................................... F-33
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997 (Unaudited)....................................................... F-34
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 (Unaudited).......................................................... F-35
Notes to Consolidated Financial Statements............................................................... F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1996 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
February 24, 1998
F-2
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................................ $ 320 $ 206
Accounts receivable, net................................................................. 13,185 18,152
Inventories.............................................................................. 19,573 25,976
Prepaid expenses and other current assets................................................ 812 782
--------- ---------
Total current assets................................................................... 33,890 45,116
Property and equipment, net................................................................ 12,187 14,054
Other assets, principally intangibles, net................................................. 23,189 39,967
--------- ---------
Total assets......................................................................... $ 69,266 $ 99,137
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................................................... $ 1,974 $ 568
Current portion of long-term obligations to unaffiliated lenders......................... 3,004 858
Convertible subordinated notes payable to related parties................................ 2,922 --
Accounts payable......................................................................... 7,420 8,032
Accrued expenses......................................................................... 7,241 6,911
Income taxes payable..................................................................... 843 3,975
--------- ---------
Total current liabilities.............................................................. 23,404 20,344
--------- ---------
Long-term liabilities
Long-term obligations
Unaffiliated lenders................................................................... 28,323 37,412
Related parties........................................................................ 6,027 --
Deferred income taxes.................................................................... 3,312 1,758
Minority interest........................................................................ 85 96
--------- ---------
Total long-term liabilities............................................................ 37,747 39,266
--------- ---------
Commitments and contingencies (Note 18)
Mandatorily redeemable common stock warrants............................................... 6,879 --
--------- ---------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value (no par value prior to February
19, 1997), 8,314,018 shares authorized; 6,847,705 shares issued and outstanding as of
December 31, 1996 (none as of December 31, 1997)....................................... 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, 4,253,550 shares authorized; 85,593 shares issued and
outstanding prior to February 19, 1997................................................. 216 --
Common stock, $.01 par value, 9,924,950 shares authorized as of February 19, 1997;
5,318,563 shares issued and outstanding as of December 31, 1997 (none as of December
31, 1996).............................................................................. -- 53
Additional paid-in capital............................................................... -- 51,057
Accumulated deficit...................................................................... (12,951) (11,444)
Foreign currency translation adjustment.................................................. 121 (139)
--------- ---------
Total stockholders' equity............................................................. 1,236 39,527
--------- ---------
Total liabilities and stockholders' equity........................................... $ 69,266 $ 99,137
--------- ---------
--------- ---------
</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,
---------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Revenues...................................................................... $ 55,839 $ 65,099 $ 108,903
Cost of sales................................................................. 43,463 49,392 80,247
--------- --------- -----------
Gross profit............................................................ 12,376 15,707 28,656
--------- --------- -----------
Operating expenses
Selling, general and administrative expenses................................ 9,426 10,747 15,756
Amortization of intangible assets........................................... 1,115 709 905
--------- --------- -----------
Total operating expenses.................................................. 10,541 11,456 16,661
--------- --------- -----------
Income from operations........................................................ 1,835 4,251 11,995
Other expenses (income)
Interest expense
Unaffiliated lenders...................................................... 2,628 2,807 2,520
Related parties........................................................... 1,193 1,441 634
Other (income) expenses..................................................... 297 (85) 131
Minority interests.......................................................... 85 193 112
--------- --------- -----------
Income (loss) before provision for income taxes and extraordinary item........ (2,368) (105) 8,598
Provision for income taxes.................................................... 1,078 712 3,344
--------- --------- -----------
Income (loss) before extraordinary item....................................... (3,446) (817) 5,254
Extraordinary loss from debt refinancing, net of income tax benefit........... -- -- 2,078
--------- --------- -----------
Net income (loss)............................................................. (3,446) (817) 3,176
Adjustment to redemption value of mandatorily redeemable common stock
warrants.................................................................... 696 (4,320) (2,203)
Cumulative convertible preferred stock dividends.............................. (557) (1,220) (442)
--------- --------- -----------
Net income (loss) applicable to common stockholders........................... $ (3,307) $ (6,357) $ 531
--------- --------- -----------
--------- --------- -----------
Income (loss) per common share
Basic
Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .69
Extraordinary loss from debt refinancing.................................. -- -- (.55)
--------- --------- -----------
Net income (loss)......................................................... $ (38.45) $ (73.92) $ .14
--------- --------- -----------
--------- --------- -----------
Diluted
Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .62
Extraordinary loss from debt refinancing.................................. -- -- (.42)
--------- --------- -----------
Net income (loss)......................................................... $ (38.45) $ (73.92) $ .20
--------- --------- -----------
--------- --------- -----------
Pro forma for the Recapitalization and initial public offering, before
extraordinary item (Unaudited)
Basic................................................................... -- -- $ 1.16
Diluted................................................................. -- -- $ 1.10
</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 FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
NO PAR VALUE $.01 PAR VALUE FOREIGN
CUMULATIVE ------------------------ ------------------------ CURRENCY
CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- TRANSLATION
PREFERRED OF OF PAID-IN ULATED ADJUST-
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT MENT
------------ ----------- ----------- --------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994..................... $ 5,549 85,593 $ 58 -- $ -- $ -- $ (5,057) $ 216
Net loss.................. -- -- -- -- -- -- (3,446) --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- 696 --
Translation adjustment.... -- -- -- -- -- -- -- 287
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1995..................... 5,549 85,593 58 -- -- -- (7,807) 503
Net loss.................. -- -- -- -- -- -- (817) --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- (4,320) --
Issuance of cumulative
convertible preferred
stock, net............... 8,301 -- -- -- -- -- -- --
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions...... -- -- -- -- -- -- (7) --
Stock option compensation
expense.................. -- -- 158 -- -- -- -- --
Translation adjustment.... -- -- -- -- -- -- -- (382)
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1996..................... 13,850 85,593 216 -- -- -- (12,951) 121
Delaware reorganization
and reverse stock
split.................... -- (85,593) (216) 85,593 1 215 -- --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- (2,203) --
Recapitalization
Conversion of preferred
stock into common
stock................. (13,850) -- -- 1,941,804 19 13,831 -- --
Cashless exercise and
conversion of
warrants.............. -- -- -- 524,293 6 6,097 -- --
Cancellation of
mandatorily redeemable
common stock
warrants.............. -- -- -- -- -- -- 1,143 --
Initial Public Offering
Proceeds from the
offering, net......... -- -- -- 2,700,000 27 28,229 -- --
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment
and reclassification
of warrants no longer
redeemable............ -- -- -- -- -- 1,836 -- --
Common shares issued
pursuant to anti-
dilution provisions... -- -- -- 50,743 -- 609 (609) --
Cashless exercise of
common stock warrants.... -- -- -- 16,130 -- -- -- --
Net income................ -- -- -- -- -- -- 3,176 --
Stock option compensation
expense.................. -- -- -- -- -- 240 -- --
Translation adjustment.... -- -- -- -- -- -- -- (260)
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1997..................... $ -- -- $ -- 5,318,563 $ 53 $ 51,057 $ (11,444) $ (139)
------------ ----------- ----------- --------- --- ----------- --------- ------
------------ ----------- ----------- --------- --- ----------- --------- ------
<CAPTION>
TOTAL
---------
<S> <C>
Balance, December 31,
1994..................... $ 766
Net loss.................. (3,446)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... 696
Translation adjustment.... 287
---------
Balance, December 31,
1995..................... (1,697)
Net loss.................. (817)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... (4,320)
Issuance of cumulative
convertible preferred
stock, net............... 8,301
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions...... (7)
Stock option compensation
expense.................. 158
Translation adjustment.... (382)
---------
Balance, December 31,
1996..................... 1,236
Delaware reorganization
and reverse stock
split.................... --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... (2,203)
Recapitalization
Conversion of preferred
stock into common
stock................. --
Cashless exercise and
conversion of
warrants.............. 6,103
Cancellation of
mandatorily redeemable
common stock
warrants.............. 1,143
Initial Public Offering
Proceeds from the
offering, net......... 28,256
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment
and reclassification
of warrants no longer
redeemable............ 1,836
Common shares issued
pursuant to anti-
dilution provisions... --
Cashless exercise of
common stock warrants.... --
Net income................ 3,176
Stock option compensation
expense.................. 240
Translation adjustment.... (260)
---------
Balance, December 31,
1997..................... $ 39,527
---------
---------
</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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................................................. $ (3,446) $ (817) $ 3,176
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
Depreciation and amortization............................................... 4,542 4,343 5,372
Extraordinary loss from debt refinancing.................................... -- -- 2,078
Unrealized loss on forward foreign exchange contracts....................... -- -- 469
Deferred income taxes....................................................... 867 88 (1,281)
Other, net.................................................................. 70 188 185
Changes in assets and liabilities
Accounts receivable....................................................... 2,256 (3,069) (3,159)
Inventories............................................................... (2,962) (2,665) (4,956)
Prepaid expenses and other assets......................................... 274 (3) (136)
Accounts payable.......................................................... (1,004) 1,891 (361)
Accrued expenses.......................................................... 682 2,477 (1,041)
Income taxes payable...................................................... 178 525 4,295
--------- --------- ---------
Net cash provided by operating activities............................... 1,457 2,958 4,641
--------- --------- ---------
Cash flows from investing activities
Purchase of stock of Audio International, Inc., net of cash acquired.......... -- -- (23,597)
Purchase of net assets of Aerospace Display Systems........................... -- (11,693) --
Purchase of minority stockholder's interest................................... -- (5,207) --
Purchase of net assets and stock of Elsinore Engineering Services and Elsinore
Aerospace Services, Inc..................................................... -- (1,300) --
Capital expenditures.......................................................... (1,203) (5,821) (3,842)
Other, net.................................................................... (259) 5 (370)
--------- --------- ---------
Net cash used for investing activities.................................. (1,462) (24,016) (27,809)
--------- --------- ---------
Cash flows from financing activities
Initial public offering and application of the net proceeds
Proceeds from sale of common stock in the offering, net of $3,467 for
underwriting discounts, commissions and expenses paid in 1997............. -- -- 28,933
Borrowings under new credit facility, net of deferred financing costs of
$463...................................................................... -- -- 12,312
Repayment of debt, including $273 in prepayment penalties and expenses...... -- -- (42,160)
Financing of acquisitions
Revolving line of credit borrowings......................................... -- 6,399 23,597
Proceeds from issuance of cumulative convertible preferred stock and
mandatorily redeemable common stock warrants, net......................... -- 8,805 --
Senior term loan borrowings................................................. -- 5,000 --
Convertible subordinated note borrowings from related parties............... -- 3,000 --
Promissory note principal payments.......................................... -- -- (1,095)
Net borrowings under revolving line of credit agreements...................... 1,972 1,191 2,906
Principal payments on capitalized lease and other long-term obligations....... (1,665) (2,001) (1,675)
Proceeds from issuance of cumulative convertible preferred stock, net......... -- 112 --
Payment of deferred financing costs........................................... -- (851) --
Other, net.................................................................... (266) (604) 139
--------- --------- ---------
Net cash provided by financing activities............................... 41 21,051 22,957
--------- --------- ---------
Effect of foreign currency translation on cash.................................. 33 22 97
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ 69 15 (114)
Cash and cash equivalents at beginning of period................................ 236 305 320
--------- --------- ---------
Cash and cash equivalents at end of period...................................... $ 305 $ 320 $ 206
--------- --------- ---------
--------- --------- ---------
</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 BUSINESS
DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company")
manufactures avionics components and provides avionics systems integration
services in certain niche markets of the commercial and high-end corporate jet
aircraft industries.
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. Certain reclassifications have been made to
prior years' financial statements to conform to the 1997 presentation.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from two to
twenty years. Building and building improvements are depreciated using the
straight-line method over their estimated useful lives of forty years. Leasehold
improvements are amortized using the straight-line method over their estimated
useful lives or remaining lease term, whichever is less. Expenditures for
maintenance and repairs are expensed as incurred. The costs for improvements are
capitalized. Upon retirement or disposal, the cost and accumulated depreciation
of property and equipment are reduced and any gain or loss is recorded in income
or expense.
F-7
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from
fifteen to thirty 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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts at December 31, 1996 and 1997. The estimated fair value
of foreign currency forward exchange contracts is based on quotes obtained from
various financial institutions that deal in this type of instrument.
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 $(314,000), $71,000
and $(72,000) for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-8
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Refer to Note 16 for information
concerning the pro forma effect on results of operations assuming 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 $465,000
and $654,000 at December 31, 1996 and 1997, respectively. Unbilled accounts
receivable are expected to be billed during the succeeding twelve-month period.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share are computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Note
17). As the Company's historical capital structure is not indicative of its
structure after the Company's recapitalization and initial public offering (Note
2), pro forma income per common share is presented for 1997 and reflects the
recapitalization, the initial public offering and the application of the
proceeds therefrom, as if both had occurred January 1, 1997 (Note 17).
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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company is required to adopt SFAS 130
for its fiscal year beginning January 1, 1998; to enhance comparability,
reclassification of financial statements for earlier periods is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosure about operating in segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The Company is
F-9
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
required to adopt SFAS 131 for its fiscal year ending December 31, 1998.
Comparative information for earlier years must be restated to conform to the
requirements of this standard.
NOTE 2 - RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company (the "Recapitalization").
Completion of the Recapitalization was a condition to the consummation of the
Company's initial public offering (the "IPO") and, was effective concurrent
therewith. The IPO was consummated on April 16, 1997.
The Recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock
("Preferred Stock") into 1,941,804 shares of common stock; (ii) the cashless
exercise and conversion of all 52,784 and 9,355 issued and outstanding Preferred
Stock warrants and common stock warrants, respectively, into a total of 16,585
shares of common stock; (iii) the cashless exercise of 508,497 mandatorily
redeemable common stock warrants (the "Redeemable Warrants") into a total of
507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable
Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the Recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the Recapitalization. Concurrent with the
consummation of the IPO, the mandatory redemption feature of these warrants was
terminated and, as a result, the value ascribed thereto was reclassified to
stockholders' equity as additional paid-in capital.
On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares
of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net
of $2,268,000 for underwriting discounts and commissions, together with
approximately $12,775,000 of proceeds from borrowings under a new credit
facility were used to repay amounts due under the Company's senior revolving
line of credit, senior term notes, senior subordinated notes and convertible
notes.
NOTE 3 - ACQUISITIONS
AUDIO INTERNATIONAL
On November 14, 1997, the Company purchased all of the outstanding stock of
Audio International, Inc. ("Audio International"). Audio International provides
premium, customized aircraft entertainment and cabin management products and
systems for the high-end corporate jet market.
The total purchase price was $24,726,000 in cash at closing, including
$726,000 in acquisition related costs, plus contingent consideration aggregating
a maximum of $6,000,000 payable over two years based on future attainment of
defined performance criteria. The acquisition was funded with borrowings under
the Company's revolving line of credit facility.
The acquisition was accounted for as a purchase and the $20,110,000
difference between the purchase price, excluding the contingent consideration,
and the fair value of the net assets acquired was recorded as goodwill and is
being amortized over 30 years. The amount of contingent consideration paid
F-10
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
in the future, if any, will increase goodwill and will be amortized
prospectively over the remaining period of the initial 30-year term.
The consolidated results of operations for the year ended December 31, 1997
include the operating results of Audio International subsequent to November 13,
1997.
MINORITY STOCKHOLDER'S 25% INTEREST
On February 20, 1996, the Company purchased the remaining 25% of a
subsidiary's stock it did not already own from the subsidiary's minority
stockholder (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. The cash portion of the purchase price was funded
with the proceeds from the sale of Preferred Stock and Redeemable Warrants.
The acquisition was accounted for as a purchase and the $5,498,000
difference between the purchase price and 25% of the fair value of the net
assets acquired was recorded as goodwill and is being amortized over 26 years,
representing the remaining useful life of the goodwill recorded upon the initial
75% acquisition in October 1991.
The consolidated results of operations for the year ended December 31, 1996
include 100% of the operating results of the subsidiary subsequent to February
20, 1996. For the periods prior to February 20, 1996, the consolidated results
of operations include a charge for the Minority Stockholder's 25% ownership
interest.
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. The employment agreement was cancelled as of February 20, 1996. For
the years ended December 31, 1995 and 1996, the Minority Stockholder earned
compensation of $851,000 and $22,000, respectively.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased for cash substantially all of
the assets, subject to certain liabilities assumed, of the Aerospace Display
Systems division ("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 Preferred
Stock, convertible subordinated notes and Redeemable Warrants, borrowings under
the Company's revolving line of credit and a $2,000,000 non-interest bearing
obligation payable to certain Allard stockholders.
The acquisition was accounted for as a purchase and the $7,425,000
difference between the purchase price and the fair value of the net assets
acquired was recorded as goodwill and is being amortized over 30 years.
The consolidated results of operations for the year ended December 31, 1996
include the operating results of ADS subsequent to September 18, 1996.
F-11
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division of Elsinore, L.P. (collectively,
"Elsinore"). Elsinore provides engineering services to the commercial aircraft
industry. The total purchase price was $2,443,000, including $300,000 of
acquisition related costs. The purchase price consisted of $1,000,000 paid in
cash at closing and a $1,250,000 15% promissory note payable to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION AND IPO
Unaudited pro forma consolidated results of operations are presented in the
table below for the two years ended December 31, 1997 and are pro forma for the
Recapitalization, the IPO and the application of the net proceeds therefrom
(Note 2). For 1996, the results are also pro forma as if the Audio
International, Minority Interest and ADS acquisitions were consummated on
January 1, 1996; the pro forma effect of the Elsinore acquisition is not
material and, accordingly, is not reflected. For 1997, the results are pro forma
as if the Audio International acquisition was consummated on January 1, 1997.
Amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Revenues.......................................................... $ 82,939 $ 121,334
Income before extraordinary item.................................. 2,284 5,252
Income applicable to common stockholders, before extraordinary
item............................................................ 2,284 5,252
Pro forma income per common share, before extraordinary item
Basic......................................................... $ .45 $ .99
Diluted....................................................... .44 .94
Pro forma weighted average number of common shares outstanding
Basic......................................................... 5,021 5,304
Diluted....................................................... 5,209 5,606
</TABLE>
The above information reflects adjustments for depreciation, amortization,
general and administrative expenses, minority interest and interest expense
based on the new cost basis and debt structure of the Company. In 1997, income
excludes the effect of a $2,078,000 extraordinary loss incurred in connection
with the Company's debt refinancing (Note 11).
F-12
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $379,000
and $487,000 at December 31, 1996 and 1997, respectively.
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
commercial and high-end corporate jet aircraft industries. Generally, the
Company does not require collateral or other security to support accounts
receivable subject to credit risk. Under certain circumstances, deposits or cash
on delivery terms are required. The Company maintains reserves for potential
credit losses and generally, such losses have been within management's
expectations.
SIGNIFICANT CUSTOMERS
Three customers each accounted for more than 10% of the Company's
consolidated revenues, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Customer A....................................................... 8.9% 15.8% 19.0%
Customer B....................................................... 25.4% 7.7% 1.1%
Customer C....................................................... 8.7% 7.2% 11.2%
</TABLE>
Complete loss of either Customer A or C could have a significant adverse
impact on the results of operations expected in future periods. During the year
ended December 31, 1997, Customer A acquired another customer of the Company.
The above amounts for Customer A include the Company's revenue from the acquired
customer after its acquisition. For the year ended December 31, 1997, revenue
from Customer A would have been 20.9% had the acquisition been consummated on
January 1, 1997.
NOTE 5 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Raw material........................................................... $ 12,350 $ 14,224
Work-in process........................................................ 2,717 4,655
Finished goods......................................................... 4,506 7,097
--------- ---------
Total inventories.................................................... $ 19,573 $ 25,976
--------- ---------
--------- ---------
</TABLE>
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $1,378,000 and $125,000 at December 31, 1996
and 1997, respectively.
F-13
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Machinery and equipment.................................................................. $ 16,637 $ 18,151
Tooling.................................................................................. 2,944 3,133
Computer equipment, furniture and fixtures............................................... 2,462 3,660
Land, buildings and leasehold improvements............................................... 1,676 3,580
---------- ----------
Total cost............................................................................. 23,719 28,524
Accumulated depreciation and amortization.............................................. (11,532) (14,470)
---------- ----------
Net property and equipment........................................................... $ 12,187 $ 14,054
---------- ----------
---------- ----------
</TABLE>
Property and equipment under capital leases included above consists of the
following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................................... $ 920 $ 1,160
Computer equipment, furniture and fixtures................................................. 306 455
--------- ---------
Total cost............................................................................... 1,226 1,615
Accumulated depreciation and amortization.................................................. (347) (523)
--------- ---------
Net property and equipment............................................................. $ 879 $ 1,092
--------- ---------
--------- ---------
</TABLE>
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
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 $2,213,000
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.
F-14
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - 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,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Goodwill (net of $808 and $1,682).......................................................... $ 19,756 $ 38,592
Deferred financing costs (net of $1,368 and $64) (Note 11)................................. 2,296 399
Other intangibles (net of $164 and $194)................................................... 274 596
Other non-amortizable assets............................................................... 863 380
--------- ---------
Other assets, net........................................................................ $ 23,189 $ 39,967
--------- ---------
--------- ---------
</TABLE>
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Salaries, wages, compensated absences and payroll related taxes.............................. $ 2,842 $ 3,410
Other accrued expenses....................................................................... 4,399 3,501
--------- ---------
Total accrued expenses..................................................................... $ 7,241 $ 6,911
--------- ---------
--------- ---------
</TABLE>
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings outstanding as of December 31, 1996 and 1997 includes
the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Promissory note, 15% interest and principal payable as described below.......................... $ 1,250 $ --
Short-term revolving line of credit............................................................. 724 568
--------- ---------
Total short-term borrowings................................................................... $ 1,974 $ 568
--------- ---------
--------- ---------
</TABLE>
The promissory note was issued on December 5, 1996 in conjunction with the
Elsinore acquisition and was payable to the former owners. The promissory note,
as adjusted (Note 3), was repaid during 1997.
The Company's Swiss subsidiary has a short-term revolving line of credit
with a Swiss bank under which Swiss franc denominated borrowings of $724,000 and
$568,000 were outstanding at December 31, 1996 and 1997, respectively. Interest
on the line accrues at the bank's prime rate (5.25% at December 31, 1997) plus
0.25%. The line of credit is guaranteed by the Company.
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
In conjunction with the ADS acquisition, the Company sold 15% convertible
subordinated notes ("Convertible Notes") and Redeemable Warrants to a group of
investors, who are also related parties
F-15
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
(Note 22). 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 was treated as debt discount and amortized as interest expense over the
life of the notes. The principal balance of the notes, plus accrued interest,
was paid with a portion of the IPO proceeds.
NOTE 11 - LONG-TERM OBLIGATIONS
Long-term obligations outstanding includes the following (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Senior revolving line of credit............................................................ $ -- $ 36,000
Note payable to Arkansas Development Finance Authority, principal and interest at rates
ranging from 5.25% to 6.0%, secured by land, building and equipment...................... -- 712
Capital lease obligations and equipment term financing, with interest at 4.34 % to 18.08%,
secured by equipment..................................................................... 662 547
Acquisition financing payable to sellers
Payable to Allard stockholders (for the ADS acquisition), due in monthly installments of
$56,000 through August 18, 1999........................................................ 1,531 1,011
Payable to Minority Stockholder (for the Minority Interest acquisition), due in monthly
installments of $33,000 through December 15, 1997...................................... 383 --
Debt repaid with IPO proceeds
Senior revolving line of credit.......................................................... 11,982 --
Senior term notes........................................................................ 16,769 --
Senior subordinated debt payable to related parties (Note 22)............................ 6,027 --
--------- ---------
Total long-term obligations............................................................ 37,354 38,270
Less current portion................................................................... (3,004) (858)
--------- ---------
Long-term obligations, less current portion.......................................... $ 34,350 $ 37,412
--------- ---------
--------- ---------
</TABLE>
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO (Note 2),
together with approximately $12,775,000 of proceeds from borrowings under a new
credit facility, to repay the following: (i) senior revolving line of credit
borrowings of $15,356,000; (ii) senior term notes aggregating $16,531,000; (iii)
senior subordinated notes payable to related parties aggregating $7,000,000; and
(iv) Convertible Notes payable to related parties aggregating $3,000,000. In
conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a
$1,149,000 write-off of unamortized original issued discounts; and (iii) a
$344,000 charge for a prepayment penalty and other related expenses.
F-16
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
SENIOR CREDIT FACILITY
Concurrent with the completion of the IPO, the Company obtained a new credit
agreement with a group of banks for a $40 million senior revolving line of
credit, expiring in April 2002 (the "Credit Facility"). The Credit Facility was
amended in November 1997 in conjunction with the Audio International acquisition
to provide a $60 million revolving line of credit. Borrowings under the Credit
Facility are secured by assets totaling $96,122,000 as of December 31, 1997. At
December 31, 1997, additional borrowings of $24,000,000 were available under the
Credit Facility. In February 1998, the Credit Facility was further amended to
provide for a $75 million revolving line of credit.
The Company, at its option, may elect to pay interest on Credit Facility
borrowings based on either the prime rate or Interbank Offered Rate (IBOR) plus
defined margins. The Company is required to pay a commitment fee, up to a
maximum 0.375%, on the unused portion of the Credit Facility. The weighted-
average interest rate on borrowings outstanding was 7.03% as of December 31,
1997. Interest rate margins and commitment fee rates are reset quarterly, based
upon a defined leverage ratio. The maximum interest rate margins are 0.75% above
the prime rate or 2.00% above the IBOR rate.
The Credit Facility contains certain restrictive covenants which require the
Company to: (i) maintain certain defined financial ratios such as interest
coverage, leverage and working capital, and minimum levels of net worth; and
(ii) limit capital expenditures, including capital lease obligations, and
additional indebtedness which may be incurred. The Credit Facility also
prohibits the Company from paying any cash dividends on its common stock.
ARKANSAS DEVELOPMENT FINANCE AUTHORITY
The note was assumed in conjunction with the Audio International acquisition
and is guaranteed by its former stockholders. The acquisition agreement provides
that the Company must obtain a release of the former stockholders' guarantees.
The Company is evaluating various alternatives including repayment of the note
by borrowing under the Credit Facility. The note is classified as a long-term
obligation as of December 31, 1997.
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 $264,000 and
$100,000 as of December 31, 1996 and December 31, 1997, respectively.
F-17
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1998................................................................................................. $ 942
1999................................................................................................. 633
2000................................................................................................. 46
2001................................................................................................. 17
2002................................................................................................. 36,728
Thereafter........................................................................................... 4
---------
Total aggregate maturities......................................................................... 38,370
Less unamortized debt discount..................................................................... (100)
---------
Total long-term obligations...................................................................... $ 38,270
---------
---------
</TABLE>
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic.......................................................................... $ (2,534) $ (855) $ 7,509
Foreign........................................................................... 166 750 1,089
--------- --------- ---------
Total........................................................................... $ (2,368) $ (105) $ 8,598
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provisions for income taxes are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current
U.S. federal...................................................................... $ 60 $ 269 $ 3,231
State and local................................................................... 24 194 968
Foreign........................................................................... 127 161 426
--------- --------- ---------
Total current................................................................... 211 624 4,625
--------- --------- ---------
Deferred
U.S. federal...................................................................... 751 70 (1,021)
State and local................................................................... 226 21 (279)
Foreign........................................................................... (110) (3) 19
--------- --------- ---------
Total deferred.................................................................. 867 88 (1,281)
--------- --------- ---------
Total provision
U.S. federal...................................................................... 811 339 2,210
State and local................................................................... 250 215 689
Foreign........................................................................... 17 158 445
--------- --------- ---------
Total provision................................................................. $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Gross deferred tax liabilities
Tax effect on earnings of subsidiary not consolidated for tax purposes........ $ 2,431 $ 2,688 $ 2,688
Depreciable and amortizable assets............................................ 781 991 996
Other......................................................................... 367 279 409
--------- --------- ---------
Gross deferred tax liabilities.............................................. 3,579 3,958 4,093
--------- --------- ---------
Gross deferred tax (assets)
Inventory..................................................................... (1,376) (1,798) (2,811)
Loss carryforwards............................................................ (1,391) (1,238) (865)
Accrued expenses.............................................................. (220) (605) (697)
State income taxes............................................................ -- -- (194)
Allowance for doubtful accounts............................................... (41) (68) (159)
Other......................................................................... (122) -- (184)
--------- --------- ---------
Gross deferred tax (assets)................................................. (3,150) (3,709) (4,910)
--------- --------- ---------
Deferred tax assets valuation allowance......................................... 2,681 3,063 2,575
--------- --------- ---------
Net deferred tax liability.................................................... $ 3,110 $ 3,312 $ 1,758
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax (benefit) at U.S. statutory rates......................................... $ (805) $ (36) $ 2,923
Increase (decrease) resulting from
Tax on earnings of subsidiary not consolidated for tax purposes.................... 977 92 --
Book benefit not provided (provided) for net operating loss carryforwards.......... 773 172 (488)
Amortization of assets and other expenses not deductible for income tax purposes... 68 137 441
State income taxes, net of federal benefit......................................... 16 157 482
Lower tax rates on earnings of foreign subsidiaries................................ (11) (65) (116)
Other, net......................................................................... 60 255 102
--------- --------- ---------
Income tax at effective rates.................................................... $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
</TABLE>
Approximately $2,543,000 of the Company's loss carryforwards remained at
December 31, 1997 for federal income tax purposes. The carryforwards expire in
varying amounts through 2012. 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 are subject to limitations
because of the occurrence of a change in control of the Company, as defined in
the Internal Revenue Code. A change in control occurred during 1996 as a result
of certain equity transactions and upon completion of the IPO. The amount of
loss carryforwards that may be used in the future is limited to approximately
$800,000 in each year for federal income tax purposes until fully utilized. The
deferred tax asset valuation allowance was reduced in 1997 by $488,000 to
reflect the amount of federal and state tax loss carryforwards that has been
utilized to reduce 1997 current income taxes.
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 13 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks.
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general economic hedge against foreign inventory
procurement and manufacturing costs. Market value gains and losses on forward
foreign exchange contracts are recognized in the consolidated statements of
operations and aggregated a realized net loss of $316,000 and $487,000 for the
years ended December 31, 1996 and 1997, respectively (none in the year ended
December 31, 1995).
At December 31, 1997, the Company has twelve open forward exchange contracts
with one of its senior lenders to purchase a total of CHF 9,836,000 for
$7,200,000 at rates ranging between 1.341 and 1.391 CHF per U.S. dollar.
Settlement of the contracts is to occur in twelve equal monthly amounts of
$600,000 from January 15, 1998 through December 15, 1998. As of December 31,
1997, the Company has recognized in cost of sales an unrealized market value
loss of $469,000 on the open contracts.
F-20
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
NOTE 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
1997, all Redeemable Warrants were either exercised or cancelled in conjunction
with the Recapitalization and IPO (Note 2). The table below summarizes the
transactions during the three-year period ended December 31, 1997 (amounts in
thousands, except share data).
<TABLE>
<CAPTION>
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
<S> <C> <C>
Balance, December 31, 1994................................................................ $ 2,329 446,296
Adjustment to estimated redemption value.................................................. (696) --
--------- -----------
Balance, December 31, 1995................................................................ 1,633 446,296
Issued in conjunction with sale of Preferred Stock to finance Minority Interest
acquisition............................................................................. 492 194,618
Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS
acquisition............................................................................. 248 98,158
Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock.............. 7 2,868
Issued in conjunction with debt agreement amendment....................................... 179 70,893
Adjustment to estimated redemption value.................................................. 4,320 --
--------- -----------
Balance, December 31, 1996................................................................ 6,879 812,833
Adjustment to redemption value to reflect the IPO per share price......................... 2,203 --
Cashless exercise and conversion pursuant to the Recapitalization......................... (6,103) (508,497)
Cancelled pursuant to the Recapitalization................................................ (1,143) (95,368)
Cancelled upon debt repayment with IPO proceeds........................................... (1,657) (138,075)
Reclassification of warrants no longer mandatorily redeemable to additional paid-in
capital................................................................................. (179) (70,893)
--------- -----------
Balance, December 31, 1997................................................................ $ -- --
--------- -----------
--------- -----------
</TABLE>
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which included, in part, an earnings multiple. During the years
ended December 31, 1995 and 1996, the Company increased (decreased) by
$(696,000) and $4,320,000, respectively, the amount ascribed to the Redeemable
Warrants to reflect estimated redemption value. Concurrent with the consummation
of the Recapitalization and IPO, the Company increased the redemption value by
$2,203,000 to reflect the $12.00 per share IPO price. The adjustments to
redemption value were charged (credited) to accumulated deficit.
F-21
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of December 31, 1996, the number of cumulative convertible preferred
shares authorized to be issued consisted of 8,314,018 shares in various series
("Preferred Stock"). All Preferred Stock was without par value. As of December
31, 1994, 1995 and 1996, there were 4,022,705, 4,022,705 and 6,847,705 shares
outstanding, respectively. At December 31, 1996, the Company also had Preferred
Stock warrants outstanding to purchase a total of 52,784 preferred shares at an
exercise price of $1.263 per share.
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its Preferred Stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the Recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of Preferred Stock
were converted into .28357 of a share of common stock. The Recapitalization also
provided for the cashless exercise and conversion of all Preferred Stock
warrants into 10,206 common shares. There were no shares of Preferred Stock or
warrants to purchase Preferred Stock outstanding as of December 31, 1997.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the
Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable
Warrants to purchase 194,618 common shares to a related party (Note 22).
Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable
Warrants to reflect their estimated fair market value on the issuance date. The
proceeds from the sale, net of issuance costs of $558,000, were used to fund the
Minority Interest Acquisition.
On September 18, 1996, the Company sold 750,000 preferred shares at $4.00
per share and issued Redeemable Warrants to purchase 49,079 common shares to
related parties (Note 22). Proceeds from the sale aggregating $124,000 were
ascribed to the Redeemable warrants to reflect their estimated fair market value
o the issuance date. The proceeds from the sale, net of issuance costs of
$137,000, were used to fund the ADS Acquisition.
NOTE 16 - COMMON STOCK
At December 31, 1996 the Company was authorized to issue 4,253,550 common
shares, without par value and, in addition to the Redeemable Warrants, had
issued non-redeemable warrants to purchase a total of 9,355 common shares at an
exercise price of $4.454 per share. On February 19, 1997, in conjunction with
reorganizing as a Delaware corporation, the Company established a $.01 par value
for its common stock and increased to 9,924,950 the number of common shares
authorized. As of December 31, 1997, a total of 527,156 common shares were
reserved for issuance upon exercise of stock options outstanding under the
Company's stock option plan.
As part of the Recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. As described in Note 2, Redeemable Warrants to purchase
70,893 common shares at an exercise price of $14.11 per share remained after the
Recapitalization. Concurrent with the consummation of the IPO, the mandatory
redemption feature of these warrants was terminated and, consequently, became
non-redeemable warrants. In December 1997, the holders of these warrants elected
to exercise all of the warrants on a cashless basis and convert the warrants
into 16,130 common shares. No non-redeemable warrants were outstanding as of
December 31, 1997.
F-22
<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 the status of the Company's stock option plan
at December 31, 1995, 1996, and 1997 and the activity for the three years ended
December 31, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year..................................... 185,029 $ 0.529 208,423 $ 0.529 355,001 $ 1.724
Granted................................... 37,573 0.529 147,031 3.413 163,662 15.574
Cancelled................................. (14,179) 0.529 (453) 0.529 (17,403) 6.228
--------- --------- ---------
Options outstanding at end of year........ 208,423 0.529 355,001 1.724 501,260 6.089
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year........ 85,581 0.529 141,845 0.633 200,444 0.921
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
and stock options exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ------------------- --------------- ----------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$0.529 - $1.234 303,998 7.0 years $ 0.724 194,556 $ 0.622
7.053 - 16.75 197,262 9.7 years 14.357 5,888 10.802
--------------- ---------------
501,260 8.1 years 6.089 200,444 0.921
--------------- ---------------
--------------- ---------------
</TABLE>
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 approximated the fair market value
of the underlying common stock on the grant date. The exercise price of certain
options granted from February 1996 to January 1997 were deemed to be below the
fair market value of the underlying common stock on the grant date and such
difference is being recognized as additional compensation expense in the
consolidated financial statements on a straight line basis over the vesting
period of the underlying options. Compensation expense recognized was $158,000
and $240,000 for the years ended December 31, 1996 and 1997, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent
F-23
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - COMMON STOCK (CONTINUED)
with the method of SFAS 123, the Company's net income (loss) and net income
(loss) per common share would have been as follows (amounts in thousands, except
per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss)
As reported.................................................................... $ (3,446) $ (817) $ 3,176
Pro forma...................................................................... (3,446) (822) 3,129
Net income (loss) per common share
Basic
As reported.................................................................. (38.45) (73.92) .14
Pro forma.................................................................... (38.45) (73.98) .13
Diluted
As reported.................................................................. (38.45) (73.92) .20
Pro forma.................................................................... (38.45) (73.98) .19
Weighted-average fair value of options granted
Compensatory stock options..................................................... -- 5.91 5.70
Non-compensatory stock options................................................. 0.10 0.10 5.08
</TABLE>
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%; expected life of 2.5 years; and expected stock price volatility of
39.9%. The fair value for options granted prior to the IPO was estimated on the
dates of grant using a minimum value method, assuming a risk-free interest rate
of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option
pricing models, the minimum value method excludes stock price volatility, which
could not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS 123 in providing the pro
forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED)
Income (loss) per common share ("EPS") have been computed pursuant to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which became effective after December 15, 1997; all periods prior
thereto have been restated to conform with the provisions of this statement.
F-24
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED) (CONTINUED)
The following table provides a reconciliation of both income (loss) before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilizes the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares (amounts in thousands, except per share
data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------------
PRO FORMA
AS FOR RE-
1995 1996 REPORTED CAPITALIZATION
--------- --------- ----------- AND IPO
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) applicable to common shares - Numerator
Before extraordinary item..................................... $ (3,446) $ (817) $ 5,254 $ 6,154
Adjustment to Redeemable Warrant redemption value............. 696 (4,320) (2,203) --
Preferred Stock dividends..................................... (557) (1,220) (442) --
--------- --------- ----------- -------------
Income (loss) applicable to common shares (basic)........... (3,307) (6,357) 2,609 6,154
Preferred Stock dividends..................................... -- -- 442 --
--------- --------- ----------- -------------
Income (loss) applicable to common shares (diluted)......... $ (3,307) $ (6,357) $ 3,051 $ 6,154
--------- --------- ----------- -------------
--------- --------- ----------- -------------
Shares - Denominator
Weighted average common shares outstanding (basic)............ 86 86 3,803 5,304
Add dilutive effect of
Preferred Stock outstanding prior to conversion............. 1,141 1,710 559 --
Common stock options........................................ -- 188 302 302
Warrants outstanding prior to cancellation, conversion or
exercise.................................................. 389 660 228 --
Less antidilutive effect of potential common shares......... (1,530) (2,558) -- --
--------- --------- ----------- -------------
Weighted average common shares outstanding (diluted)...... 86 86 4,892 5,606
--------- --------- ----------- -------------
--------- --------- ----------- -------------
EPS - Income (loss) before extraordinary item
Basic......................................................... $ (38.45) $ (73.92) $ .69 $ 1.16
Diluted....................................................... (38.45) (73.92) .62 1.10
</TABLE>
Pro forma for Recapitalization and IPO assumes each occurred on January 1,
1997 (Note 2). Therefore, pro forma income per common share, before
extraordinary item, is computed using pro forma income before adjustment to
redemption value of Redeemable Warrants and preferred stock dividends. Pro forma
income before extraordinary item also reflects the sale by the Company of
2,700,000 shares of common stock in the IPO and the application of the net
proceeds therefrom.
F-25
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to a license agreement with McDonnell Douglas
Corporation (now part of The Boeing Company) 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. In 1996, McDonnell Douglas 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.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of these matters, as well as the
matters discussed in the preceding paragraphs, will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
LEASE COMMITMENTS
The Company leases certain facilities and equipment under various capital
and operating leases. Certain leases require payment of property taxes and
include escalation clauses. Future minimum capital and operating lease
commitments under non-cancelable leases are as follows as of December 31, 1997
(amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
Year ending December 31,
1998.................................................................. $ 318 $ 2,909
1999.................................................................. 203 2,732
2000.................................................................. 50 2,274
2001.................................................................. 21 1,855
2002.................................................................. 17 1,771
2003 and thereafter................................................... 9 5,547
----- -----------
Total minimum payments required....................................... 618 17,088
-----------
-----------
Less amount representing future interest cost......................... (71)
-----
Recorded obligation under capital leases............................ 547
-----
-----
</TABLE>
F-26
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense charged to operations for the years ended December 31,
1995, 1996 and 1997 was $1,531,000, $1,614,000 and $2,065,000, respectively.
NOTE 19 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
During the three years ended December 31, 1997, the Company paid the
following amounts in cash (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest........................................................................... $ 3,275 $ 2,983 $ 2,842
Income taxes....................................................................... 33 132 300
</TABLE>
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred during the
three years ended December 31, 1997, as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Debt incurred for the acquisition of machinery and equipment....................... $ 33 $ 414 $ 182
Financing provided by sellers in connection with acquisitions...................... -- 3,492 --
Liabilities assumed in connection with acquisitions................................ -- 2,687 2,581
</TABLE>
The Recapitalization and IPO described in Note 2 included a series of
noncash transactions.
F-27
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - 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,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Gross revenues
United States.......................................................... $ 54,394 $ 64,383 $ 109,490
Western Europe......................................................... 9,388 10,882 12,240
----------- ----------- -----------
Total gross revenues................................................. 63,782 75,265 121,730
----------- ----------- -----------
Less interarea transfers
United States.......................................................... (814) (1,496) (2,448)
Western Europe......................................................... (7,129) (8,670) (10,379)
----------- ----------- -----------
Total interarea transfers............................................ (7,943) (10,166) (12,827)
Net revenues
United States.......................................................... 53,580 62,887 107,042
Western Europe......................................................... 2,259 2,212 1,861
----------- ----------- -----------
Total net revenues................................................... $ 55,839 $ 65,099 $ 108,903
----------- ----------- -----------
----------- ----------- -----------
Income from operations
United States............................................................ $ 1,354 $ 3,727 $ 10,833
Western Europe........................................................... 501 746 1,572
Interarea eliminations................................................... (20) (222) (410)
----------- ----------- -----------
Total income from operations........................................... $ 1,835 $ 4,251 $ 11,995
----------- ----------- -----------
----------- ----------- -----------
Consolidated assets
United States............................................................ $ 34,425 $ 67,889 $ 98,076
Western Europe........................................................... 6,490 6,015 6,421
Interarea eliminations................................................... (4,586) (4,638) (5,360)
----------- ----------- -----------
Total consolidated assets.............................................. $ 36,329 $ 69,266 $ 99,137
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Interarea sales are accounted for at prices that the Company believes would
be equivalent to unaffiliated customer sales. Interarea transfers and
eliminations reflect the shipment of raw component parts between areas.
Operating income excludes net interest expense, other income (expense) and
minority interests that are directly attributable to the related operations.
Corporate assets are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $5,161,000, $6,484,000 and
$12,430,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Export revenues are primarily derived from sales to customers located in Western
Europe, the Far East and Canada.
F-28
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - 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 $148,000, $151,000
and $157,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Substantially all of the Company's domestic employees are eligible to
participate in a 401(k) defined contribution plan (the "Plan"). Participation in
the Plan is at the discretion of each individual employee who is eligible to
participate. Each participating employee is permitted to contribute up to a
maximum amount defined in the Plan. The Company and its subsidiaries may make
periodic discretionary matching contributions to the Plan. The Company made
matching contributions of $41,000 during the year ended December 31, 1997. No
matching contributions were made to the plan during the years ended December 31,
1995 and 1996. The costs associated with administering the plan were not
significant for any period presented.
NOTE 22 - 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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period....................................................... $ 912 $ 983 $ 358
Accrued and payable as of year end............................................. -- 43 --
Purchase of Convertible Notes, Preferred Stock and Redeemable Warrants in
conjunction with ADS acquisition............................................... -- 2,000 --
Fees and expenses earned......................................................... -- 36 --
Debt repaid with IPO proceeds
Senior subordinated debt....................................................... -- -- 7,000
Convertible Notes.............................................................. -- -- 1,000
Investors
Purchases of debt and equity securities
Preferred Stock and Redeemable Warrants in conjunction with Minority Interest
acquisition.................................................................. -- 6,500 --
Convertible Notes, Preferred Stock and Redeemable Warrants in conjunction with
ADS acquisition.............................................................. -- 4,000 --
Fees and expenses earned......................................................... -- 74 --
Convertible Notes
Interest earned during the period.............................................. -- 86 98
Interest accrued and payable as of year end.................................... -- 86 --
Repaid with IPO proceeds....................................................... -- -- 2,000
</TABLE>
F-29
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 - RELATED PARTY TRANSACTIONS (CONTINUED)
Each related party is described below:
Senior Subordinated Lenders - Own 8.9% of the Company's issued and
outstanding common stock at December 31, 1997, were represented on the Company's
Board of Directors in 1995 and 1996, and provided a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 10, 11, 14, 15 and
16). The ownership percentage reflects the cashless exercise and conversion of
all Preferred Stock, Preferred Stock warrants, common stock warrants and
Redeemable Warrants into 451,370 common shares in conjunction with the
Recapitalization (Note 2).
Investors - Own 16.4% of the Company's issued and outstanding common stock
at December 31, 1997, are represented on the Company's Board of Directors, and
provided a portion of the Company's Convertible Notes and Preferred Stock
financing (Notes 10, 14, 15 and 16). The ownership percentage reflects the
cashless exercise and conversion of all Preferred Stock and Redeemable Warrants
into 840,808 common shares in conjunction with the Recapitalization (Note 2).
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Audio International, Inc.
North Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of Audio
International, Inc. and subsidiary as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits of the consolidated financial
statements referred to in the preceding paragraph provide a reasonable basis for
our opinion.
In our previously issued auditors' reports dated April 4, 1996, and February
21, 1997, we did not express an opinion on the consolidated statements of
income, stockholders' equity, or cash flows for the year ended December 31,
1995, since we had not audited such statements. In accordance with your
subsequent instructions, we have now audited the consolidated statement of
income, stockholders' equity, and cash flows for the year ended December 31,
1995, in accordance with generally accepted auditing standards. Accordingly, our
present opinion on these financial statements, as presented herein, is different
from that expressed in our previous reports.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 12, the Company prepared its financial statements for
years prior to 1995 on the income tax basis of accounting. Effective January 1,
1995, the Company adopted generally accepted accounting principles for the
preparation of its financial statements, and accordingly, appropriate
adjustments have been made to retained earnings as of January 1, 1995.
THOMAS & THOMAS
Little Rock, Arkansas
February 21, 1997
(Except for paragraph 3 above, as to
which the date is December 17, 1997)
F-31
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- SEPTEMBER 30,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash in financial institutions............................................. $ 3 $ 46 $ 311
Repurchase agreements...................................................... 471 1,543 467
Receivables
Trade, net............................................................... 633 1,207 2,526
Employees and other...................................................... 29 13 10
Inventories................................................................ 831 1,503 1,538
Prepaid income taxes....................................................... 55 -- --
Deferred income taxes...................................................... 30 38 350
--------- --------- -------
Total current assets..................................................... 2,052 4,350 5,202
Property and equipment, net.................................................. 1,243 1,299 1,538
Other assets
Other investments.......................................................... -- 100 100
Utility deposits........................................................... 1 1 1
--------- --------- -------
Total assets............................................................. $ 3,296 $ 5,750 $ 6,841
--------- --------- -------
--------- --------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Construction contract payable.............................................. $ 269 $ -- $ --
Accounts payable, trade.................................................... 438 426 272
Accrued expenses........................................................... 154 312 785
Income taxes payable....................................................... -- 817 471
Current portion of long-term debt.......................................... 39 44 45
--------- --------- -------
Total current liabilities................................................ 900 1,599 1,573
--------- --------- -------
Long-term debt, excluding current portion.................................... 579 724 702
Deferred income taxes........................................................ 31 23 36
--------- --------- -------
Total liabilities........................................................ 1,510 2,346 2,311
--------- --------- -------
Stockholders' equity
Common stock, $1 par value, 1,000 shares authorized, 129 shares issued and
outstanding.............................................................. -- -- --
Additional paid-in capital................................................. 601 601 601
Contributed capital........................................................ 90 90 90
Retained earnings.......................................................... 1,095 2,713 3,839
--------- --------- -------
Total stockholders' equity............................................... 1,786 3,404 4,530
--------- --------- -------
Total liabilities and stockholders' equity............................. $ 3,296 $ 5,750 $ 6,841
--------- --------- -------
--------- --------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales and service revenues, net....................................... $ 5,182 $ 10,134 $ 7,535 $ 11,162
Cost of sales and service............................................. 2,710 4,667 3,527 6,180
--------- --------- --------- ---------
Gross profit........................................................ 2,472 5,467 4,008 4,982
Selling, general and administrative expenses.......................... 2,174 2,926 1,959 3,230
--------- --------- --------- ---------
Operating income.................................................... 298 2,541 2,049 1,752
Other income (expense)
Investment income................................................... 15 32 18 31
Interest expense.................................................... (28) (45) (34) (31)
Gain (loss) on disposal of assets, net.............................. (38) 11 5 (2)
Other............................................................... -- 5 6 --
--------- --------- --------- ---------
Income before income taxes........................................ 247 2,544 2,044 1,750
Provision for income taxes............................................ 66 926 733 624
--------- --------- --------- ---------
Net income........................................................ $ 181 $ 1,618 $ 1,311 $ 1,126
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
NUMBER OF PAID-IN CONTRIBUTED RETAINED
SHARES AMOUNT CAPITAL CAPITAL EARNINGS TOTAL
----------- ----------- ------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.................. 100 -- $ 1 $ 90 $ 853 $ 944
Restatement of beginning balance............ -- -- -- -- 61 61
Issuance of common stock.................... 29 -- 600 -- -- 600
Net income.................................. -- -- -- -- 181 181
--- --- ----- --- ----------- ---------
Balance, December 31, 1995.................. 129 -- 601 90 1,095 1,786
Net income.................................. -- -- -- -- 1,618 1,618
--- --- ----- --- ----------- ---------
Balance, December 31, 1996.................. 129 -- 601 90 2,713 3,404
--- --- ----- --- ----------- ---------
Net income (Unaudited)...................... -- -- -- -- 1,126 1,126
--- --- ----- --- ----------- ---------
Balance, September 30, 1997 (Unaudited)..... 129 -- $ 601 $ 90 $ 3,839 $ 4,530
--- --- ----- --- ----------- ---------
--- --- ----- --- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-34
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income............................................................ $ 181 $ 1,618 $ 1,311 $ 1,126
--------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities
(Gain) loss on disposal of assets, net.............................. 38 (11) (2) 5
Depreciation........................................................ 94 151 81 104
(Increase) decrease in operating assets
Accounts receivable, trade........................................ (103) (573) (763) (1,319)
Accounts receivable, employee and other........................... (22) 16 16 3
Inventories....................................................... (472) (672) (578) (35)
Prepaid income taxes.............................................. (55) 55 55 --
Deferred income taxes............................................. -- (8) 30 (312)
Increase (decrease) in operating liabilities
Accounts payable.................................................. 353 (12) 110 (154)
Accrued expenses.................................................. 22 158 144 473
Construction contract payable..................................... 269 (269) (269) --
Income taxes payable.............................................. (137) 817 636 (346)
Deferred income taxes............................................. 4 (8) (30) 13
--------- --------- --------- ---------
Total adjustments, net.......................................... (9) (356) (570) (1,568)
--------- --------- --------- ---------
Net cash provided by (used by) operating activities................. 172 1,262 741 (442)
--------- --------- --------- ---------
Cash flows from investing activities
Payments for purchase of property and equipment, net.................. (994) (197) (125) (348)
Other investments..................................................... -- (100) -- --
Repayments of stockholder loans....................................... (240) -- -- --
Other assets.......................................................... (1) -- -- --
--------- --------- --------- ---------
Net cash used by investing activities............................... (1,235) (297) (125) (348)
--------- --------- --------- ---------
Cash flows from financing activities
Proceeds from common stock issuance................................... 600 -- -- --
Payments on long-term debt............................................ (15) (18) (14) (35)
Proceeds from issuance of long-term debt.............................. 597 168 152 14
--------- --------- --------- ---------
Net cash provided by (used by) financing activities................. 1,182 150 138 (21)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents................ 119 1,115 754 (811)
Cash and cash equivalents, beginning of period.......................... 355 474 474 1,589
--------- --------- --------- ---------
Cash and cash equivalents, end of period................................ $ 474 $ 1,589 $ 1,228 $ 778
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-35
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Audio International, Inc. (the Company), an Arkansas Corporation, was
incorporated January 2, 1987 for the primary purpose of designing, manufacturing
and marketing audio and video systems for the aviation industry. On February 16,
1995, the Company formed a new corporation, Audio International Sales, Inc. (a
Foreign Sales Corporation), in the Virgin Islands which is a wholly-owned
subsidiary of the Company. Foreign sales accounted for approximately 7.2% and
6.9% of total revenues for the years ended December 31, 1995 and 1996, and
approximately 6.2% and 13.9% of total revenues for the nine months ended
September 30, 1996 and 1997, respectively.
CONSOLIDATION
The accompanying financial statements present the consolidated accounts of
the Company and its wholly-owned subsidiary. Accordingly, the consolidated
financial statements include all of the assets, liabilities, income, expenses,
and cash flows for these companies. All significant intercompany transactions
and balances have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts receivable. The
balance of the allowance at December 31, 1995 and 1996, was $20,000, and at
September 30, 1997 was $174,000.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Major renewals and betterments
are capitalized while replacements, maintenance, and repairs which do not
improve or extend the life of an asset are expensed. Property and equipment is
depreciated over the estimated useful lives of the various assets using the
straight-line method for financial statement purposes.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Current income taxes are based on taxable income for federal and
state tax reporting purposes.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, management considers all
highly liquid debt instruments, including repurchase agreements, with an
original maturity of three months or less to be cash equivalents.
F-36
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Current operations are charged with all research, engineering, and product
development expenses which amounted to approximately $376,000 and $640,000 for
the years ended December 31, 1995 and 1996, and approximately $428,000 and
$742,000 for the nine months ended September 30, 1996 and 1997, respectively.
WARRANTY RESERVE
The financial statements include product warranty reserves of approximately
$25,000 and $62,000 at December 31, 1995 and 1996, and $109,000 at September 30,
1997. The reserve, which is classified as a current liability for financial
statement purposes, is based upon estimates of future costs associated with
fulfilling warranty obligations.
ADVERTISING EXPENSE
Advertising expenditures, including production cost related to various units
utilized for demonstrations and display, are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash in financial institutions, repurchase
agreements, and trade accounts receivable. The Company places its cash and
temporary cash investments with high credit quality institutions. At times such
deposits may be in excess of insurance limits. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for the year ended December 31, 1995, have been reclassified
to conform with the presentation of the December 31, 1996 amounts. The
reclassifications have no effect on net income for the years ended December 31,
1995 or 1996.
NOTE 2 - REPURCHASE AGREEMENTS
The Company is party to a contract with a local bank under which all
operating funds on deposit with the bank are invested in repurchase agreements
on a daily basis. The bank maintains, as collateral
F-37
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2 - REPURCHASE AGREEMENTS (CONTINUED)
for the benefit of the Company, certain securities in its investment portfolio.
The collateral consists of United States government obligations, obligations of
United States government agencies, or other obligations guaranteed by the United
States government. The securities are held by an agent bank or registered in the
agent's name as an owner or pledgee at the Federal Reserve Bank. Interest, at a
rate determined by the bank, is paid on a daily basis. The agreements are
repurchased by the bank upon presentation of any check or other withdrawal of
funds from the Company's operating account.
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 546 $ 863 $ 879
Work-in-process 147 403 492
Finished goods 138 237 167
--------- --------- -------
Total inventories $ 831 $ 1,503 $ 1,538
--------- --------- -------
--------- --------- -------
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
During 1995 the City of North Little Rock Industrial Development Corporation
conveyed title to certain land to the Company for consideration of $10 and an
agreement that the Company would locate its new facility on the property. This
land, and the related contribution of capital, was recorded for financial
statement purposes at its estimated fair market value of $90,000 at the date of
receipt.
The following is a summary of property and equipment (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1995 1996
------------ --------- --------- SEPTEMBER 30,
1997
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land, contributed............................................. -- $ 90 $ 90 $ 90
Building and improvements..................................... 40 years 727 786 915
Machinery and equipment....................................... 3-7 years 536 658 846
Office furniture and equipment................................ 3-7 years 70 96 96
Motor vehicles................................................ 5 years 111 95 90
--------- --------- -------
1,534 1,725 2,037
Accumulated depreciation.................................... (291) (426) (499)
--------- --------- -------
Net property and equipment................................ $ 1,243 $ 1,299 $ 1,538
--------- --------- -------
--------- --------- -------
</TABLE>
The Company substantially completed construction of its new facility, and
moved its operations from leased facilities, in December 1995. This change in
facilities resulted in losses from abandonment of leasehold improvements of
approximately $42,000.
F-38
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 5 - OTHER INVESTMENTS
In December 1996, the Company entered into a contract with an unrelated
entity, whereby the Company advanced the entity $100,000 to be used to
manufacture and develop certain products for the Company. The advance payment
will be recovered through annual discounts on Company purchases of products from
the entity over the term of the contract.
NOTE 6 - BANK LINE OF CREDIT
A revolving line of credit, which bears interest at the lender's prime rate,
is provided to the Company under the terms of a credit agreement dated June 15,
1996. The terms of the agreement allow the Company to borrow up to $200,000. The
line of credit is secured by amounts on deposit with the financial institution.
There was no balance outstanding on this line of credit at December 31, 1995 or
1996, or at September 30, 1997.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll.......................................................................... $ 52 $ 107 $ 366
Vacation......................................................................... 36 54 54
Payroll taxes withheld and accrued............................................... 33 75 65
Reserve for warranties........................................................... 25 61 109
Other............................................................................ 8 15 191
--------- --------- -----
Total accrued expenses......................................................... $ 154 $ 312 $ 785
--------- --------- -----
--------- --------- -----
</TABLE>
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Arkansas Development Finance Authority; due in annual
installments through May, 2011, including interest ranging from 5.25% to 6.0%,
secured by property and equipment.............................................. $ 597 $ 750 $ 724
Notes payable to bank; secured by vehicles; payable in monthly installments
including interest at 7.3%, through February, 2000............................. 21 18 23
--------- --------- -----
618 768 747
Current portion.................................................................. (39) (44) (45)
--------- --------- -----
Long-term debt, excluding current portion...................................... $ 579 $ 724 $ 702
--------- --------- -----
--------- --------- -----
</TABLE>
F-39
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 8 - LONG-TERM DEBT (CONTINUED)
During the year ended December 31, 1996, the Company obtained permanent
financing, which refinanced its interim note on its new facility. Thus, the note
has been classified as long-term debt as of December 31, 1995 and 1996, for
financial statement purposes. This debt requires a reserve account for monthly
deposits to provide for the next installment of debt service. The balance in
this account, which totaled $-0- and $43,000 at December 31, 1995 and 1996,
respectively, and $43,000 at September 30, 1997, is included in Cash in
Financial Institutions. The terms of the note also require the Company to meet
certain restrictive debt covenants, which have been met as of December 31, 1995
and 1996 and September 30, 1997.
Cash payments for interest on all debt amounted to $23,000 and $46,000 for
the years ended December 31, 1995 and 1996, and $34,000 and $35,000 for the nine
months ended September 30, 1996 and 1997, respectively.
Maturities of long-term debt, based upon the Company's monthly sinking fund
and other debt requirements, is as follows at December 31, 1996 (amounts in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1997.................................................................................................... $ 44
1998.................................................................................................... 39
1999.................................................................................................... 44
2000.................................................................................................... 41
2001.................................................................................................... 40
Thereafter.............................................................................................. 560
---------
Total................................................................................................. $ 768
---------
---------
</TABLE>
Maturities of long-term debt based upon the Company's monthly sinking fund
and other debt requirements, is as follows at September 30, 1997 (amounts in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Twelve months ending September 30,
1998.................................................................................................... $ 45
1999.................................................................................................... 44
2000.................................................................................................... 43
2001.................................................................................................... 41
2002.................................................................................................... 40
Thereafter.............................................................................................. 534
---------
Total................................................................................................. $ 747
---------
---------
</TABLE>
F-40
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 9 - INCOME TAXES
Income tax expense (benefit) is summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
----- ---------
<S> <C> <C>
Current:
Federal........................................................................................ $ 61 $ 794
State.......................................................................................... 1 149
--- ---------
Total current................................................................................ 62 943
--- ---------
Deferred:
Federal........................................................................................ 4 (14)
State.......................................................................................... 0 (3)
--- ---------
Total deferred............................................................................... 4 (17)
--- ---------
Total provision for income taxes........................................................... $ 66 $ 926
--- ---------
--- ---------
</TABLE>
The actual income tax expense differs from "expected" tax expense (computed
by applying appropriate U.S. Federal corporate income tax rates to income before
income taxes) primarily due to the effects of state income tax, Federal and
state tax credits, nondeductible life insurance premiums, Foreign Sales
Corporation income exclusions and entertainment expenses.
Cash payments for income taxes amounted to $259,000 and $88,000 for the
years ended December 31, 1995 and 1996, and $55,000 and $1,302,000 for the nine
months ended September 30, 1996 and 1997, respectively.
The Company's deferred tax assets and deferred tax liabilities are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----- -----
<S> <C> <C>
Current deferred tax assets, net.................................................................. $ 30 $ 38
Noncurrent deferred tax liabilities, net.......................................................... 31 23
--- ---
Net deferred tax asset (liability).............................................................. $ (1) $ 15
--- ---
--- ---
</TABLE>
The Company's deferred tax assets and deferred tax liabilities result
primarily from the use of accelerated methods of depreciation for tax purposes;
bad debt reserves, accrued warranty expense and accrued vacation expense being
recorded for financial statement purposes; and different inventory valuations
for tax and book purposes.
In assessing of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
F-41
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 9 - INCOME TAXES (CONTINUED)
temporary differences become deductible. Based upon the level of historical
taxable income, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code and therefore includes certain salary
deferral features for eligible employees. Employees may elect to contribute up
to fifteen percent of their gross earnings to the plan. The Company makes
matching contributions equal to employee contributions up to 3% of each
participating employee's salary. Matching contributions to the plan were
approximately $25,000 and $40,000 for the years ended December 31, 1995 and
1996, and $29,000 and $41,000 for the nine months ended September 30, 1996 and
1997, respectively.
NOTE 11 - BUSINESS CONCENTRATIONS
The majority of the Company's sales and service revenues are generated
through customers in the private aviation industry located throughout the United
States. At any given time, certain customers may account for significant
portions of the Company's business. The Company's largest six customers
accounted for approximately 58% and 63% of net sales for the years ended
December 31, 1995 and 1996, and 61% and 64% of net sales for the nine months
ended September 30, 1996 and 1997, respectively.
NOTE 12 - RESTATEMENT OF BALANCES
Effective January 1, 1995, the Company adopted generally accepted accounting
principles for the preparation of its financial statements. In previous years,
the records and financial statements of the Company were prepared on the income
tax basis of accounting. Certain adjustments have been applied to the beginning
retained earnings in order to restate amounts in accordance with generally
accepted accounting principles.
An analysis of these adjustments, and the restated beginning retained
earnings, is as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
January 1, 1995 balance, as previously reported........................................................... $ 853
Adjustments for expense accruals and reserves............................................................. (70)
Adjustments for inventory, property and equipment valuations.............................................. 131
---------
January 1, 1995 balance, as restated.................................................................... $ 914
---------
---------
</TABLE>
NOTE 13 - COMMON STOCK ISSUANCE
During 1995, the Company and its shareholders entered into an agreement
under which twenty-nine shares of the Company's $1 par value capital stock were
to be issued to a new shareholder in exchange for consideration of $600,000
deposited with the Company during 1995. In addition, the then existing
shareholders of the Company each would sell seven shares of their capital stock
to the new
F-42
<PAGE>
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 13 - COMMON STOCK ISSUANCE (CONTINUED)
shareholder, creating a one-third interest for each of the three shareholders.
This agreement was consummated February 20, 1996. For comparative financial
statement purposes, certain reclassifications have been made to reflect this
transaction as of December 31, 1995. Thus, at December 31, 1995 and 1996, one
hundred and twenty-nine of the Company's one thousand authorized shares were
considered to be issued and outstanding.
The stock acquisition agreement contained additional provisions requiring
the employment of each of the three shareholders for a minimum of five years
from the date of the agreement and various other provisions related to bonus
arrangements and fringe benefits.
NOTE 14 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
On November 14, 1997, the Company's stockholders entered into an acquisition
agreement, under which all shares of the Company were acquired by DeCrane
Aircraft Holdings, Inc.
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH 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 THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
The Company.................................... 3
Risk Factors................................... 7
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 25
Management..................................... 42
Principal and Selling Stockholders............. 49
Certain Transactions........................... 52
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 57
Underwriting................................... 58
Legal Matters.................................. 59
Experts........................................ 59
Additional Information......................... 59
Index to Financial Statements.................. F-1
</TABLE>
2,500,000 SHARES
J
COMMON STOCK
------------
PROSPECTUS
------------
BT ALEX. BROWN
FURMAN SELZ LLC
SBC WARBURG DILLON READ INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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> <C>
SEC Registration Fee.........................................
NASD Filing 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>
All amounts are estimated except for the SEC Registration Fee and the NASD
Filing 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.
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.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) Pursuant to a Securities Purchase Agreement dated February 9, 1996 among
the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John Hinson, an
officer of the Company, 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.
(2) Pursuant to a Securities Purchase Agreement dated as of February 20,
1996 between the Company and Nassau, the Company issued for 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.
(3) Pursuant to a Securities Purchase Agreement dated September 18, 1996
among the Company, [Nassau and Electra,] 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.
(4) Pursuant to an Amended and Restated Credit Agreement dated as of
September 18, 1996 among the Company, ING (U.S.) Capital Corporation and
Provident Bank the Company issued to 70,892 warrants to purchase Common Stock as
additional consideration for amendments to the Prior Credit Facility. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A filed
April 14, 1997)
5.1 Opinion of Spolin & Silverman (re legality)
10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead International,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o Michael E. Allard(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1, Registration
No. 333-19939)
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela Nazarian,
Trustees of the Nazarian Family Trust(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
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(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 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. and NAS Partners 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. and NAS Partners I
L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
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(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, 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(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number
6-5752-0002(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0004(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January
1, 1995 through December 31, 1999(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing
Commercial Airplane Group and Tri-Star Electronics International(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
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.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition, Inc.,
William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker
Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
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.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital Partners L.P.
and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
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.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
</TABLE>
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker,
Robert Rankin(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company
and The Lincoln National Life Insurance Company.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the
Recapitalization.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank of
America Illinois, as agent and lender, and the other lenders party thereto(incorporated by reference
to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft Holdings,
Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.(incorporated
by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft Holdings,
Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.
10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead International,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown, Richard
Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to Exhibit 2.1 to
the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for real
property in Garden Grove California
11.1 Statement regarding computation of per share earnings of the Company*
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)
23.3 Consent of Thomas & Thomas
24.1 Power of Attorney (appears on signature page)
</TABLE>
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment.
(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-6
<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 6th day of March, 1998.
<TABLE>
<S> <C> <C>
DECRANE AIRCRAFT HOLDINGS, INC.
By: /s/ R. JACK DECRANE
-----------------------------------------
R. Jack DeCrane
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints R. Jack
DeCrane, R.G. MacDonald and Robert A. Rankin, and each of them, his true and
lawful attorneys-in-fact and agents, with the full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and to take such actions in, and file with the appropriate
authorities in, whatever states said attorneys-in-fact and agents, and each of
them, shall determine, such applications, statements, consents and other
documents as may be necessary or expedient to register securities of the Company
for sale, granting unto said attorneys-in-fact and agents full power and
authority to do so and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents or any of them, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof and the
registrant hereby confers like authority on its behalf. This Registration
Statement and Power of Attorney, pursuant to the requirement of the Securities
Act of 1933, as amended, have been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ R. JACK DECRANE Chairman of the Board,
- ------------------------------ Chief Executive Officer March 6, 1998
R. Jack DeCrane and Director
/s/ R. G. MACDONALD
- ------------------------------ Vice Chairman of the Board March 6, 1998
R. G. MacDonald and Director
Chief Financial Officer,
/s/ ROBERT A. RANKIN Secretary and Treasurer
- ------------------------------ (principal accounting March 6, 1998
Robert A. Rankin officer)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JAMES R. BERGMAN
- ------------------------------ Director March 6, 1998
James R. Bergman
/s/ PAUL H. CASCIO
- ------------------------------ Director March 6, 1998
Paul H. Cascio
/s/ MITCHELL I. QUAIN
- ------------------------------ Director March 6, 1998
Mitchell I. Quain
/s/ JONATHAN A. SWEEMER
- ------------------------------ Director March 5, 1998
Jonathan A. Sweemer
</TABLE>
II-8
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO OTHER BALANCE AT
CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------ ------------- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts........... $ 243,000 $ 66,000 $ 62,000(A) $ 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(B) $ 19,000 $ 379,000
Reserve for excess, slow moving and
potentially obsolete material........... $ 1,154,000 $ 1,055,000 -- $ 116,000 $ 2,093,000
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts........... $ 379,000 $ 111,000 $ 174,000(C) $ 177,000 $ 487,000
Reserve for excess, slow moving and
potentially obsolete material........... $ 2,093,000 $ 1,374,000 $ 59,000(D) $ 162,000 $ 3,364,000
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C>
(A) Comprised of the following:
Effect of foreign currency translation; $ 3,000
Recovery of amounts previously written off. 59,000
------------
$ 62,000
------------
------------
(B) Comprised of the following:
Effect of foreign currency translation; $ (4,000)
Recovery of amounts previously written off; 20,000
Attributable to companies acquired. 55,000
------------
$ 71,000
------------
------------
(C) Attributable to company acquired.
(D) Attributable to companies acquired.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A
filed April 14, 1997)
5.1 Opinion of Spolin & Silverman (re legality)
10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack
DeCrane(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o Michael E. Allard(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela
Nazarian, Trustees of the Nazarian Family Trust(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
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(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 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. and NAS Partners I L.L.C.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <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. and
NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
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(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, 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(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0002(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0004(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory Components,
January 1, 1995 through December 31, 1999(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between
Boeing Commercial Airplane Group and Tri-Star Electronics International(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
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.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition,
Inc., William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the
Whitaker Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
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.(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital
Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
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.(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles
Becker, Robert Rankin(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the
Company and The Lincoln National Life Insurance Company.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the
Recapitalization.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank
of America Illinois, as agent and lender, and the other lenders party thereto(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party
thereto.(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No.
1), filed November 14, 1997)
10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party
thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead
International, Inc.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown,
Richard Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for
real property in Garden Grove California
11.1 Statement regarding computation of per share earnings of the Company*
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)
23.3 Consent of Thomas & Thomas
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment.
<PAGE>
EXHIBIT 1.1
__________________ Shares
DeCrane Aircraft Holdings, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
__________________, 1998
BT Alex. Brown Incorporated
SBC Warburg Dillon Read Inc.
Furman Selz LLC
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
1 South Street
Baltimore, Maryland 21202-3220
Gentlemen:
DeCrane Aircraft Holdings, Inc., a Delaware corporation (the "Company"),
and certain shareholders of the Company (the "Selling Shareholders") propose
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as representatives (the "Representatives") an
aggregate of ___________ shares of the Company's Common Stock, $.01 par value
(the "Firm Shares"), of which ________ shares will be sold by the Company and
___________ shares will be sold by the Selling Shareholders. The respective
amounts of the Firm Shares to be so purchased by the several Underwriters are
set forth opposite their names in Schedule I hereto, and the respective
amounts to be sold by the Selling Shareholders are set forth opposite their
names in Schedule II hereto. The Company and the Selling Shareholders are
sometimes referred to herein collectively as the "Sellers." The Company [and]
[the] [certain] Selling Shareholders] also propose[s] to sell at the
Underwriters' option an aggregate of up to _________ additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
<PAGE>
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and
the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to, and agrees with, each of
the Underwriters as follows:
(i) A registration statement on Form S-1 (File No. 333- )
with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with the term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus." Any reference herein to the Registration Statement, any
Preliminary Prospectus or to the Prospectus shall be deemed to refer to and
include any documents
-2-
<PAGE>
incorporated by reference therein, and, in the case of any reference
herein to any Prospectus, also shall be deemed to include any documents
incorporated by reference therein, and any supplements or amendments
thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of
the offering of the Shares by the Underwriters.
(ii) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and otherwise) to own or lease its
properties and conduct its business as described in the Registration
Statement. Each of the subsidiaries of the Company as listed in Exhibit A
hereto (collectively, the "Subsidiaries"), other than Tri-Star Technologies
("TST"), has been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation,
and, in the case of TST, has been duly formed and is validly existing as a
partnership in good standing under the laws of its jurisdiction of
formation, with power and authority (corporate and other) to own or lease
its properties and conduct its business as described in the Registration
Statement. The Subsidiaries are the only subsidiaries, direct or indirect,
of the Company. The Company and each of the Subsidiaries are duly
qualified as a foreign corporation, or, in the case of TST, as a foreign
partnership, to transact business in all jurisdictions in which the conduct
of their business requires such qualification. The outstanding shares of
capital stock of each of the Subsidiaries, and, in the case of TST, all
partnership interests, have been duly authorized and validly issued, are
fully paid and non-assessable and are owned by the Company free and clear
of all liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into shares of capital
stock or ownership interests in the Subsidiaries are outstanding, except as
otherwise described in the Prospectus. Except for the partnership
interests in TST and the shares of capital stock of each other Subsidiary,
neither the Company nor any Subsidiary owns, directly or indirectly, any
shares of capital stock of any corporation or has any equity interest in
any firm, partnership, joint venture, association, limited liability
company or other entity.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; no preemptive rights of stockholders exist
with respect to any of the Shares or the issue and sale thereof; and the
Shares will be quoted on the Nasdaq National Market as of the Closing
Date. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for
or relating to the registration of any shares of Common Stock.
(iv) The Company has all requisite power and authority to
execute, deliver and perform its obligations under this Agreement; the
execution, delivery and performance by the Company of its obligations under
this Agreement have been duly and
-3-
<PAGE>
validly authorized by all requisite corporate action of the Company; and
this Agreement constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms
except as enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and except as enforceability of those
provisions relating to indemnity may be limited by the Federal securities
laws and the principles of public policy.
(v) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(vi) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of
the Shares nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be, stated
therein by, and will conform, to the requirements of the Act and the Rules
and Regulations. The Registration Statement and any amendment thereto do
not contain, and will not contain, any untrue statement of a material fact
and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments and supplements thereto do
not contain, and will not contain, any untrue statement of material fact;
and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter through the Representatives, specifically for use
in the preparation thereof.
(vii) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set forth in
the Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement
presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company. The pro forma financial
statements
-4-
<PAGE>
and other pro forma financial information included in the Registration
Statement and the Prospectus present fairly the information shown therein,
have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein.
(viii) There are no statutes or governmental regulations, or any
contracts or other documents that are required to be described in or filed
as exhibits to the Registration Statement which are not described therein
or filed as exhibits thereto; and all such contracts to which the Company
or any Subsidiary is a party have been duly authorized, executed and
delivered by the Company or such Subsidiary, constitute legal, valid and
binding agreements of the Company or such Subsidiary and are enforceable
against the Company or Subsidiary in accordance with the terms thereof.
(ix) Price Waterhouse LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(x) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries or any of their respective executive officers or directors
before any court or administrative agency or otherwise which if determined
adversely to the Company or any of the Subsidiaries or any of their
respective executive officers or directors might result in any material
adverse change in the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth
in the Registration Statement.
(xi) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of
any kind except those reflected in such financial statements (or as
described in the Registration Statement) or which are not material in
amount. The Company and the Subsidiaries occupy their leased properties
under valid and binding leases conforming in all material respects to the
description thereof set forth in the Registration Statement, the interests
of the Company or any of the Subsidiaries in such leases are free and clear
of all material liens, encumbrances and defects, except as disclosed in the
Prospectus, and the Company and the Subsidiaries are in compliance in all
material respects with the terms and conditions of such leases. Except for
such assets and facilities as are immaterial in the aggregate to the
business of the Company and the Subsidiaries taken as a whole, tangible
assets and facilities of the Company and the
-5-
<PAGE>
Subsidiaries are adequate, in the reasonable opinion of the Company, for
the use to which they are being put or would be put in the ordinary course
of business, and the operation and use of such assets and facilities is in
compliance with all municipal, county, state and federal laws,
regulations, ordinances, standards, orders and other regulations where the
failure to comply therewith would have a material adverse effect on the
condition (financial or otherwise) or the earnings, business affairs or
business prospects of the Company and the Subsidiaries, taken as a whole.
(xii) The Company and the Subsidiaries have timely filed all
Federal, state, county, local and foreign income tax returns which have
been required to be filed and have paid all taxes (whether or not disclosed
on such returns) and all assessments received by them or any of them to the
extent that such taxes have become due. All tax liabilities have been
adequately provided for in the financial statements of the Company. The
Company has no knowledge, or any reasonable grounds to know, of any tax
deficiencies which would have a material adverse effect on the Company or
any of the Subsidiaries taken as a whole.
(xiii) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented,
there has not been any material adverse change or any development involving
a prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company and the Subsidiaries
taken as a whole, whether or not occurring in the ordinary course of
business, and there has not been any material transaction entered into or
any material transaction that is probable of being entered into by the
Company or the Subsidiaries, other than transactions in the ordinary course
of business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and the
Subsidiaries have no material contingent obligations which are not
disclosed in the Company's financial statements which are included in the
Registration Statement.
(xiv) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both, will be, in violation of or
in default under its Charter or By-Laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default
is of material significance in respect of the condition, financial or
otherwise of the Company and the Subsidiaries taken as a whole or the
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party,
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or of the Charter or by-laws of the Company or any order, rule or
regulation applicable to the Company or any Subsidiary of any court or of
any regulatory body or administrative agency or other governmental body
having jurisdiction.
(xv) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(xvi) The Company and each of the Subsidiaries holds all material
licenses, certificates, permits and other approvals from governmental or
regulatory authorities, including, without limitation, the Federal Aviation
Administration (the "FAA") (collectively, "Permits") which are necessary to
the conduct of their businesses; neither the Company nor any of the
Subsidiaries has received any notice of proceedings or has any reason to
believe proceedings are pending relating to the revocation or modification
of any such Permits where the revocation of such Permit would have a
material adverse effect on the Company and the Subsidiaries taken as a
whole; and the Company and the Subsidiaries have fulfilled and performed in
all material respects of their respective obligations with respect to such
Permits, and no event has occurred which allows, or after notice or lapse
of time or both would allow, revocation or termination thereof or result in
any other material impairment of the rights of the holder of any such
Permits which would have a material adverse effect on the Company and the
Subsidiaries taken as a whole.
(xvii) The Company and the Subsidiaries own or possess adequate
patent rights or licenses or other rights to use patent rights, inventions,
trademarks, service marks, trade names, copyrights, technology and know-how
necessary to conduct the general business now or proposed to be operated by
them as described in the Registration Statement; neither the Company nor
any of the Subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trademarks, service marks, trade names, copyrights,
technology or know-how which, singly or in the aggregate, could materially
adversely affect the business, operations, financial condition, income or
business prospects of the Company and the Subsidiaries taken as a whole;
and, the discoveries, inventions, products or processes of the Company and
the Subsidiaries referred to in the Registration Statement do not, to the
Company's knowledge, infringe or conflict with any patent or right of any
third party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the
Company.
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<PAGE>
(xviii) Neither the Company, nor to the Company's best knowledge,
any of its affiliates, has taken or may take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares. The Company acknowledges that the
Underwriters may engage in passive market making transactions in the Shares
on The Nasdaq Stock Market in accordance with Regulation M.
(xix) None of the Company or the Subsidiaries is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder, or is
subject to regulation under the Public Utility Holding Company Act of 1935,
as amended, the Federal Power Act, the Interstate Commerce Act or to any
federal or state statute or regulation limiting its respective ability to
incur indebtedness for borrowed money, except statutes or regulations
applicable generally to business corporations incorporated or doing
business in the various states in which the Company and the Subsidiaries do
business.
(xx) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxi) The Company and each of the Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in
similar industries.
(xxii) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has
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occurred, whether by action or by failure to act, which would cause the
loss of such qualification.
(xxiii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section l of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and any
similar law, and the Company further agrees that if it commences engaging
in business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or has
become effective with the Commission or with the Florida Department of
Banking and Finance (the "Department"), whichever date is later, or if the
information reported or incorporated by reference in the Prospectus, if
any, concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material way, the Company will
provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(xxiv) (A) Neither the Company nor any of the Subsidiaries is
engaged in any unfair labor practice which would have a material adverse
effect on the Company and the Subsidiaries, taken as a whole; (B) there is,
to the Company's knowledge, (I) no unfair labor practice complaint pending
or threatened against the Company or any of the Subsidiaries before the
National Labor Relations Board, and no grievance or arbitration proceeding
arising out of or under collectible bargaining agreements is pending or
threatened, (II) no strike, labor dispute, slowdown or stoppage is pending
or threatened against the Company or any of the Subsidiaries and (III) (1)
no union representation question existing with respect to the employees of
the Company or any of the Subsidiaries and, no union organizing activities
are taking place, and (2) there has been no violation of any federal, state
or local law relating to discrimination in the hiring, promotion or pay of
employees, of any applicable wage or hour laws.
(xxv) (A) Each of the Company and the Subsidiaries has obtained
all permits, licenses and other authorizations that are required under all
applicable federal, state, local and foreign environmental laws, including,
but not limited to, the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 ET SEQ.), Resource Conservation & Recovery Act (42 U.S.C.
Section 6901 ET SEQ.), Safe Drinking Water Act (21 U.S.C. Section 349, 42
U.S.C. Sections 201, 300f), Toxic Substances Control Act (15 U.S.C. Section
2601 ET SEQ.), Clean Air Act (42 U.S.C. Section 7401 ET SEQ.),
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. Section 9601 ET SEQ.), the appropriate laws of any state in which
the Company or any of the Subsidiaries owns or leases real property and any
other laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment (including, without
limitation, ambient air, surface water, ground water or land), or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or
wastes or under any regulation, code, plan,
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<PAGE>
order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder (collectively, the
"Environmental Laws"), except as otherwise set forth in the Registration
Statement or to the extent failure to have any such permit, license or
authorization, individually, or in the aggregate, does not have a
material adverse effect on the Company and the Subsidiaries, taken as a
whole; (B) except as described in the Registration Statement, each of
the Company and the Subsidiaries is in compliance will all terms and
conditions of any required permits, licenses and authorizations, and is
also in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws, except to the extent
failure to comply would not have a material adverse effect on the
Company and the Subsidiaries, taken as a whole; and (C) except as
disclosed in the Registration Statement, the Company and the
Subsidiaries do not have any material liabilities arising under
Environmental Laws.
(xxvi) (A) There are no past or present events, conditions,
circumstances, activities, practices, incidents, actions, or plans relating
to the business as presently being conducted by the Company or the
Subsidiaries that interfere with or prevent compliance or continued
compliance with the Environmental Laws, or which would be reasonably likely
to give rise to any legal liability (whether statutory or common law) or
otherwise would be reasonably likely to form the basis of any claim,
action, demand, suit, proceeding, hearing, notice of violation, study,
investigation, remediation or cleanup based on or related to the
generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge, release into
the workplace, the community or the environment of any pollutant,
contaminant, chemical or industrial, toxic, or hazardous substance or
waste, except for any liabilities or any claims, demands or other actions
specified above that are described in the Registration Statement or which
will not individually or in the aggregate have a material adverse effect on
the Company and the Subsidiaries, taken as a whole, and (B) except as
previously disclosed to the Underwriters or their counsel, no asbestos-
containing material and no underground or above-ground storage tanks are
located on property owned or leased by the Company or the Subsidiaries and
none have been previously removed or filled by the Company or the
Subsidiaries or, to the best of their knowledge, any predecessor of the
Company or the Subsidiaries.
(xxvii) Except as disclosed in the Registration Statement, there
are no business relationships or related party transactions required to be
disclosed therein by Item 404 of Regulation S-K promulgated under the Act.
(xxviii) None of the Company and the Subsidiaries, or its
executive officers, directors, employees or agents has used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity, or made any unlawful payment of
funds of the Company or any Subsidiary or received or retained any funds in
violation of any law, rule or regulation.
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<PAGE>
(xxix) The Directors' and Officers' Questionnaires delivered by
the Company to the Underwriters on or prior to the Closing Date are true
and correct in all material respects.
(xxx) All documents filed with the Commission conform in all
respects to the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or the Act, as applicable, and the rules and
regulations of the Commission thereunder.
(b) Each of the Selling Shareholders severally represents and warrants
as follows:
(i) Such Selling Shareholder now has and at the Closing Date [and
the Option Closing Date, as the case may be] (as such date[s] [is] [are]
hereinafter defined) will have good and marketable title to the Firm Shares
[and the Option Shares] to be sold by such Selling Shareholder, free and
clear of any liens, encumbrances, equities and claims, and full right,
power and authority to effect the sale and delivery of such Firm Shares
[and Option Shares]; and upon the delivery of, against payment for, such
Firm Shares [and Option Shares] pursuant to this Agreement, the
Underwriters will acquire good and marketable title thereto, free and clear
of any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has full right, power and authority
to execute and deliver this Agreement, the Power of Attorney, and the
Custodian Agreement referred to below and to perform its obligations under
such Agreements; the execution, delivery and performance by such Selling
Shareholder of its obligations under this Agreement, Power of Attorney and
the Custodian Agreement have been duly and validly authorized by all
requisite action (corporate and other) of such Selling Shareholder; and
this Agreement, the Power of Attorney and the Custodian Agreement
constitutes the legal, valid and binding obligation of such Selling
Shareholder, enforceable against such Selling Shareholder in accordance
with its terms except as enforceability of the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and except as enforceability of those
provisions relating to indemnity may be limited by Federal securities laws
and principles of public policy. The execution and delivery of this
Agreement and the consummation by such Selling Shareholder of the
transactions herein contemplated and the fulfillment by such Selling
Shareholder of the terms hereof will not require any consent, approval,
authorization, or other order of any court, regulatory body, administrative
agency or other governmental body (except as may be required under the Act,
state securities laws or Blue Sky laws) and will not result in a breach of
any of the terms and provisions of, or constitute a default under,
organizational documents of such Selling Shareholder, if not an individual,
or any indenture, mortgage, deed of trust or other agreement or instrument
to which such Selling Shareholder is a party, or of any order, rule or
regulation applicable
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<PAGE>
to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Shareholder and its affiliates have not taken
and will not take, directly or indirectly, any action designed to, or which
has constituted, or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Common Stock of
the Company and, other than as permitted by the Act, the Selling
Shareholder will not distribute any prospectus or other offering material
in connection with the offering of the Shares.
(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of
the Company contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason to believe
that the representations and warranties of the Company contained in this
Section l are not true and correct, is familiar with the Registration
Statement and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement which has adversely
affected or may adversely affect the business of the Company or any of the
Subsidiaries; and the sale of the Firm Shares [and the Option Shares] by
such Selling Shareholder pursuant hereto is not prompted by any information
concerning the Company or any of the Subsidiaries which is not set forth in
the Registration Statement or the documents incorporated by reference
therein. The information pertaining to such Selling Shareholder under the
caption ["Selling Shareholders"] in the Prospectus is complete and accurate
in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $ ______ [net price]
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each
Underwriter from each Seller shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by each Seller as
the number of Firm Shares being purchased by each Underwriter bears to the
total number of Firm Shares to be sold hereunder. The obligations of the
Company and of each of the Selling Shareholders shall be several and not
joint.
(b) Certificates in negotiable form for the total number of the Shares
to be sold hereunder by the Selling Shareholders have been placed in
custody with BankBoston, N.A., as custodian (the "Custodian") pursuant to
the Custodian Agreement executed by each Selling Shareholder for delivery
of all Firm Shares [and any Option Shares] to be
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sold hereunder by the Selling Shareholders. Each of the Selling
Shareholders specifically agrees that the Firm Shares [and any Option
Shares] represented by the certificates held in custody for the Selling
Shareholders under the Custodian Agreement are subject to the interests
of the Underwriters hereunder, that the arrangements made by the Selling
Shareholders for such custody are to that extent irrevocable, and that the
obligations of the Selling Shareholders hereunder shall not be terminable
by any act or deed of the Selling Shareholders (or by any other person,
firm or corporation including the Company, the Custodian or the
Underwriters) or by operation of law (including the death of an individual
Selling Shareholder or the dissolution of a corporate Selling Shareholder)
or by the occurrence of any other event or events, except as set forth in
the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Firm Shares [or the Option Shares]
hereunder, certificates for the Firm Shares [or the Options Shares, as the
case may be,] shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such event has not occurred.
The Custodian is authorized to receive and acknowledge receipt of the
proceeds of sale of the Shares held by it against delivery of such Shares.
(c) [Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House funds by certified or bank cashier's checks drawn
to the order of the Company for the shares to be sold by it and to the
order of "BankBoston, N.A., as Custodian" for the shares to be sold by the
Selling Shareholders, in each case against delivery of certificates
therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made at the offices of
BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland, at 10:00
a.m., Baltimore time, on the third business day after the date of this
Agreement or at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date
being herein referred to as the "Closing Date." (As used herein, "business
day" means a day on which the New York Stock Exchange is open for trading
and on which banks in New York are open for business and not permitted by
law or executive order to be closed.) The certificates for the Firm Shares
will be delivered in such denominations and in such registrations as the
Representatives request in writing not later than the second full business
day prior to the Closing Date, and will be made available for inspection by
the Representatives at least one business day prior to the Closing Date.]
(d) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company [and [the] [certain] Selling Shareholders [listed on Schedule
III hereto]] hereby grant[s] an option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. [The maximum number of Option Shares to be
sold by the Company and the Selling Shareholders is set forth opposite
their respective names on Schedule III hereto.] The option granted hereby
may be exercised in whole or in part by giving written notice (i) at any
time before the Closing Date and (ii)
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<PAGE>
only once thereafter within 30 days after the date of this Agreement,
by you, as Representatives of the several Underwriters, to the Company,
[the Attorney-in-Fact,] and the Custodian setting forth the number of
Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to
be registered and the time and date at which such certificates are to
be delivered. [If the option granted hereby is exercised in part, the
respective number of Option Shares to be sold by the Company and each
of the Selling Shareholders listed in Schedule III hereto shall be
determined on a pro rata basis in accordance with the percentages set
forth opposite their names on Schedule III hereto, adjusted by you in such
manner as to avoid fractional shares.] The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is
three or more days before the Closing Date, the notice of exercise shall
set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion
to the total number of Option Shares being purchased as the number of Firm
Shares being purchased by such Underwriter bears to the total number of
Firm Shares, adjusted by you in such manner as to avoid fractional shares.
The option with respect to the Option Shares granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving
written notice of such cancellation to the Company [and the Attorney-in-
Fact]. To the extent, if any, that the option is exercised, payment for
the Option Shares shall be made on the Option Closing Date in New York
Clearing House funds by certified or bank cashier's check drawn to the
order of the Company [for the Option Shares to be sold by it and to the
order of "BankBoston, as Custodian" for the Option Shares to be sold by
the Selling Shareholders] against delivery of certificates therefor at
the offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore,
Maryland.
(e) If on the Closing Date [or Option Closing Date, as the case may
be,] any Selling Shareholder fails to sell the Firm Shares [or Option
Shares] which such Selling Shareholder has agreed to sell on such date as
set forth in SCHEDULE II hereto, the Company agrees that it will sell or
arrange for the sale of that number of shares of Common Stock to the
Underwriters which represents Firm Shares [or the Option Shares] which such
Selling Shareholder has failed to so sell, as set forth in SCHEDULE II
hereto, or such lesser number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares
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<PAGE>
are to be initially offered to the public at the initial public offering
price set forth in the Prospectus. The Representative may from time to
time thereafter change the public offering price and other selling terms.
To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on
the foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Shares in accordance with
a Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, and (B)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with
the Rules and Regulations
(ii) The Company will advise the Representatives promptly (A)
when the Registration Statement or any post-effective amendment thereto
shall have become effective, (B) of receipt of any comments from the
Commission, (C) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (D) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the use of the Prospectus or of the institution of any proceedings for that
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order preventing or suspending the use of the Prospectus and
to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will,
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from time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in
effect for so long a period as the Representatives may reasonably request
for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
and of all amendments thereto, as the Representatives may reasonably
request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution
of the Shares as contemplated in this Agreement and the Prospectus. If
during the period in which a prospectus is required by law to be delivered
by an Underwriter or dealer, any event shall occur as a result of which, in
the judgment of the Company or in the reasonable opinion of the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not
misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and
file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so
amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with
the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 45 days after the close of the period covered thereby, an earning
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and
copies of all other documents, reports and information furnished by the
Company to its stockholders or filed with any
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securities exchange pursuant to the requirements of such exchange or with
the Commission pursuant to the Act or the Exchange Act. The Company will
deliver to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of ___ days
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of BT Alex.
Brown Incorporated.
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each officer and director and
specific shareholders of the Company to furnish to you, on or prior to the
date of this agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall
agree not to offer, sell, sell short or otherwise dispose of any shares of
Common Stock of the Company or other capital stock of the Company, or any
other securities convertible, exchangeable or exercisable for Common Shares
or derivative of Common Shares owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of 90
days after the date of this Agreement, directly or indirectly, except with
the prior written consent of BT Alex. Brown Incorporated ("Lockup
Agreements").
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(xii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of the Subsidiaries to register
as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
(xiii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(xiv) The Company and its affiliates will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be
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expected to constitute, the stabilization or manipulation of the price of
any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the
several Underwriters that:
(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the
Company or other securities convertible, exchangeable or exercisable
for Common Stock or derivative of Common Stock owned by the Selling
Shareholder or request the registration for the offer or sale of any
of the foregoing (or as to which the Selling Shareholder has the right
to direct the disposition of) will be made for a period of 90 days
after the date of this Agreement, directly or indirectly, by such
Selling Shareholder otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, each of the Selling Shareholders agrees to deliver to
you prior to or at the Closing Date a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu
thereof).
(iii) Such Selling Shareholder and its affiliates will not take,
directly or indirectly, any action designed to cause or result in, or
that has constituted or might reasonably be expected to constitute,
the stabilization or manipulation of the price of any securities of
the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company and the Selling Shareholders; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the
Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters'
Invitation Letter, the Listing Application, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the
filing fees and expenses (including legal fees and disbursements) incident
to securing any required review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the
Listing Fee of the Nasdaq National Market; and the expenses, including the
fees and disbursements of
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<PAGE>
counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. [The
Selling Shareholders have agreed with the Company to reimburse the
Company for a portion of such expenses. To the extent, if at all, that
any of the Selling Shareholders engage special legal counsel to represent
them in connection with this offering, the fees and expenses of such
counsel shall be borne by such Selling Shareholder. Any transfer taxes
imposed on the sale of the Shares to the several Underwriters will be
paid by the Sellers pro rata.] The Company agrees to pay all costs and
expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, incident to the offer and sale of directed
shares of the Common Stock by the Underwriters to employees and persons
having business relationships with the Company and the Subsidiaries. The
Sellers shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under NASD regulation
and State securities or Blue Sky laws) except that, if this Agreement shall
not be consummated because the conditions in Section 6 hereof are not
satisfied, or because this Agreement is terminated by the Representatives
pursuant to Section 1l hereof, or by reason of any failure, refusal or
inability on the part of the Company or the Selling Shareholders to perform
any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on their part to be performed, unless such
failure to satisfy said condition or to comply with said terms be due to
the default or omission of any Underwriter, then the Company shall
reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the Shares
or in contemplation of performing their obligations hereunder; but the
Company and the Selling Shareholders shall not in any event be liable to
any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Shareholders contained herein,
and to the performance by the Company and the Selling Shareholders of their
covenants and obligations hereunder and to the following additional
conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose
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<PAGE>
shall have been taken or, to the knowledge of the Company or the Selling
Shareholders, shall be contemplated by the Commission and no injunction,
restraining order, or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which
would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinions of (i) Spolin &
Silverman and (ii) Hogan & Hartson L.L.P., counsel for the Company[, and
__________, counsel for the Selling Shareholders], dated the Closing Date
or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority and all material governmental
authorizations, permits and approvals to own, lease and operate its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries (other than TST) has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, and, in the case of TST,
has been duly formed and is validly existing a partnership in good standing
under the laws of the jurisdiction of its incorporation, with all necessary
power (corporate and other) and authority and all material governmental
authorizations, permits and approvals to own, lease and operate its
properties and conduct its business as described in the Registration
Statement; the Company and each of the Subsidiaries are duly qualified to
transact business and in good standing in all jurisdictions in which its
ownership or leasing of property requires such qualification or the conduct
of its business requires such qualification, or in which the failure to
qualify would have a materially adverse effect upon the business of the
Company and the Subsidiaries taken as a whole; and the outstanding shares
of capital stock of each of the Subsidiaries, and, in the case of TST, all
partnership interests, have been duly authorized and validly issued and are
fully paid and non-assessable and are owned by the Company or a Subsidiary;
and, to the best of such counsel's knowledge, the outstanding shares of
capital stock of each of the Subsidiaries, and, in the case of TST, all
partnership interests, is owned (A) beneficially and (B) free and clear of
all liens, encumbrances and equities and claims, and no options, warrants
or other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into any shares of capital stock or
any partnership interests or of ownership interests in the Subsidiaries are
outstanding, except as otherwise described in the Prospectus.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly authorized;
the outstanding shares of the Company's Common Stock, including the Shares
to be sold by the Selling Shareholders,
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<PAGE>
have been duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof contained
in the Prospectus; the certificates for the Shares, assuming they are in
the form filed with the Commission, are in due and proper form; the shares
of Common Stock, including the Option Shares, if any, to be sold by the
Company pursuant to this Agreement have been duly authorized and will be
validly issued, fully paid and non-assessable when issued and paid for as
contemplated by this Agreement; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of
the Company convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock
or any securities convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel, no holder of
any securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively
waived, to cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, any of the Shares or the right to
have any Common Shares or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial
statements and related schedules therein).
(vi) All descriptions in the Prospectus of statutes, regulations
(including without limitation, those of the Subsidiaries) or legal or
governmental proceedings, and the statements under the captions "Risk
Factors - Regulation," "Business - Industry Regulation and Approvals,"
"Description of Capital Stock" and ["Shares Eligible for Future Sale"]
insofar as such statements constitute a summary of documents referred to
therein or matters of law, fairly summarize in all material respects the
information presented.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described
in the Registration
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<PAGE>
Statement or the Prospectus which are not so filed or described as
required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries or any of their respective officers or directors or of which
any property of the Company or any of the Subsidiaries is the subject,
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, the Charter or by-laws of the Company or any
of the Subsidiaries, or any agreement or instrument known to such counsel
to which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion) except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion), to sell, assign, transfer and deliver the portion of the Shares
to be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed
and delivered by each Selling Shareholder is valid and binding.
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<PAGE>
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired
good and marketable title to the Shares being sold by each Selling
Shareholder on the Closing Date, and the Option Closing Date, as the case
may be, free and clear of all liens, encumbrances, equities and claims.
(xvii) To the best of such counsel's knowledge, neither the
Company nor any of the Subsidiaries is currently in violation of, or in
default under, its Certificate of Incorporation, by-laws, Certificate of
Limited Partnership or Partnership Agreement, or any indenture, mortgage,
deed of trust, lease, bank loan or credit agreement, or any other agreement
or instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their property may be bound or affected (in
any respect that is material in light of the financial condition of the
Company and the Subsidiaries, taken as a whole).
(xviii) Nothing has come to such counsel's attention to give such
counsel reason to believe that any of the representations and warranties of
the Company contained in the Agreement or in any certificate or document
contemplated under the Agreement to be delivered are not true or correct or
that any of the covenants and agreements herein contained, or set forth in
the Registration Statement, to be fulfilled or complied with by the Company
have not been or will not be duly and timely performed, fulfilled or
complied with.
In rendering such opinion Spolin & Silverman [and Hogan & Hartson LLP]
may rely as to matters governed by the laws of states other than Delaware,
California or Federal laws on local counsel in such jurisdiction and as to
the matters set forth in subparagraphs (xiii), (xiv), (xv) and (xvi) on
opinions of other counsel representing the respective Selling Shareholders,
provided that in each case Spolin & Silverman [and Hogan & Hartson LLP]
shall state that they believe that they and the Underwriters are justified
in relying on such other counsel. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Spolin &
Silverman may state that
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<PAGE>
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Morgan, Lewis &
Bockius LLP, counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the
effect specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph
(b) of this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In addition
to the matters set forth above, such opinion shall also include a statement
to the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, or any amendment
thereto, as of the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, Morgan, Lewis & Bockius LLP, may state that their belief is
based upon the procedures set forth therein, but is without independent
check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Morgan, Lewis & Bockius LLP a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Price Waterhouse LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
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<PAGE>
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the company contained
in Section l hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration Statement, no
event has occurred which should have been set forth in a supplement to or
an amendment of the Prospectus which has not been so set forth in such
supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of
the Company and the Subsidiaries taken as a whole or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole, whether or not arising in the ordinary course of
business.
(g) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
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<PAGE>
(i) The Lockup Agreements described in Section 4(x) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to Morgan,
Lewis & Bockius LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company and the Selling
Shareholders of such termination in writing or by telegram at or prior to
the Closing Date or the Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholders, jointly and severally,
agrees to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act, against
any losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse
each Underwriter and each such controlling person upon demand for any legal
or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such
loss, claim, damage or liability, action or proceeding or in responding to
a subpoena or governmental inquiry related to the offering of the Shares,
whether or not such Underwriter or controlling person is a party to any
action or proceeding; provided, however, that the Company and the Selling
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<PAGE>
Shareholders will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. In no
event, however, shall the liability of any Selling Shareholder for
indemnification under this Section 8(a) exceed the proceeds received by
such Selling Shareholder from the Underwriters in the offering. This
indemnity agreement will be in addition to any liability which the Company
or the Selling Shareholders may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each
person, if any, who controls the Company or the Selling Shareholders within
the meaning of the Act, against any losses, claims, damages or liabilities
to which the Company or any such director, officer, Selling Shareholder or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such
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notice shall not relieve the indemnifying party or parties from any
liability which it or they' may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section 8(a)
or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days
of presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing-interests between them
or (iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable
period of time after notice of commencement of the action. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm for all
such indemnified parties. Such firm shall be designated in writing by you
in the case of parties indemnified pursuant to Section 8(a) and by the
Company [and the Selling Shareholders] in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling
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<PAGE>
Shareholders on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of
the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or,
omissions which resulted in such losses, claims, damages or liabilities,
(or actions or proceedings in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling
Shareholders on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and
(ii) no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation, and (iii)
no Selling Shareholder shall be required to contribute any amount in excess
of the lesser of (A) that proportion of the total of such losses, claims,
damages or liabilities indemnified or contributed against equal to the
proportion of the total Shares sold hereunder which is being sold by such
Selling Shareholder, or (B) the proceeds received by such Selling
Shareholder from the Underwriters in the offering. The Underwriters'
obligations in this Section 8(d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
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<PAGE>
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(e) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company or
a Selling Shareholder), you, as Representatives of the Underwriters, shall
use your reasonable efforts to procure within 36 hours thereafter one or
more of the other Underwriters, or any others, to purchase from the Company
and the Selling Shareholders such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case
may be, which the defaulting Underwriter or Underwriters failed to
purchase. If during such 36 hours you, as such Representatives, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
shares with respect to which such default shall occur does not exceed 10%
of the Firm Shares or Option Shares, as the case may be, covered hereby,
the other Underwriters shall be obligated, severally, in proportion to the
respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares
or Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number
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<PAGE>
of shares of Firm Shares or Option Shares, as the case may be, with respect
to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters
will have the right, by written notice given within the next 36-hour
period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of
the Company or of the Selling Shareholders except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representatives may determine in order
that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve
any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to BT Alex.
Brown Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention:
_________; with a copy to BT Alex. Brown Incorporated, 1 South Street,
Baltimore, Maryland 21202. Attention: General Counsel; if to the Company
or the Selling Shareholders, to
DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Ave., Suite 180
El Segundo, California 90245
Attention: ______________________
11. TERMINATION.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a
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<PAGE>
prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company and the Subsidiaries taken as a
whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
and the Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (ii) any outbreak or escalation of hostilities
or declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares, or
(iii) suspension of trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or Nasdaq or limitation on prices
(other than limitations on hours or numbers of days of trading) for
securities on any such exchange, (iv) the enactment, publication, decree
or other promulgation of any statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, [(vi) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Exchange Act);] (vii) the suspension of trading of the Company's
common stock by the Commission on the Nasdaq National Market or (viii) the
taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person
will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to
the Underwriters), legends required by Item 502(d) of Regulation
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<PAGE>
S-K under the Act and the information under the caption "Underwriting" in
the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or
by or on behalf of the Company or its directors or officers and (c)
delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of [Maryland].
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
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<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
DECRANE AIRCRAFT HOLDINGS, INC.
By: ______________________________________
R. Jack DeCrane
Chairman of the Board
and Chief Executive Officer
Selling Shareholders listed on Schedule II
By: ______________________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written
BT ALEX. BROWN INCORPORATED
_____________________________________
_____________________________________
As representatives of the several Underwriters
listed on Schedule I
By: BT Alex. Brown Incorporated
By: ____________________________
[Authorized Officer]
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
BT Alex. Brown Incorporated
Furman Selz LLC
SBC Warburg Dillon Read Inc.
________
Total ________
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<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
Number of Firm Shares
Selling Shareholder to be Purchased
------------------- ---------------------
________
Total ________
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<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
Maximum Number Percentage
of Option Shares of Total Number of
Name of Seller to be Sold Option Shares
- -------------- ---------------- ------------------
________
Total 100&
-----
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<PAGE>
EXHIBIT 5.1
[LETTERHEAD]
March , 1998
DD120.017
DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Ave., Suite 180
El Segundo, Calif. 90245
RE: DECRANE AIRCRAFT HOLDINGS, INC.
REGISTRATION STATEMENT ON FORM S-1 (NO. )
Gentlemen:
You have requested our opinion as counsel for DeCrane Aircraft Holdings,
Inc., a Delaware corporation (the "Company") and the selling shareholders
(the "Selling Shareholders"), in connection with the offer and sale by the
Company and the Selling Shareholders of shares (the "Shares") of the
Company's Common Stock, $0.01 par value per share (the "Offering"), in
accordance with the Company's Registration Statement on Form S-1 No.
(the "Registration Statement").
In rendering our opinion herein, we have assumed, with your permission:
the genuineness and authenticity of all signatures on original documents
submitted to us; the authenticity of all documents submitted to us as
originals; the conformity to originals of all documents submitted to us as
copies or facsimiles; the continued accuracy of all certificates and other
documents from public officials dated earlier than the date of this letter;
the Registration Statement being declared effective by the Securities and
Exchange commission; the issuance by any necessary regulatory agencies of
appropriate permits, consents, approvals, authorizations and orders relating
to the Offering; the offer and sale of the Shares being made in the manner
set forth in the Registration Statement and pursuant to said permits,
consents approvals, authorizations and orders; due adoption of resolutions by
the Company's Board of Directors approving the offer and sale of the shares,
the public offering price and underwriters' discount and commissions and the
execution, delivery and performance of the Underwriting Agreement; and the
receipt by the Company and the Selling Shareholders of full and valid
consideration for the Shares.
<PAGE>
[LETTERHEAD]
DeCrane Aircraft Holdings, Inc.
March , 1998
Page 2
Based on the foregoing, it is our opinion that, when issued, the Shares
will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to, and
the references to this firm contained in, the Registration Statement.
Sincerely,
<PAGE>
EXHIBIT 10.10.1
FIFTH AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS FIFTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") 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 in Schedule I hereto (the "Shareholders").
PRELIMINARY STATEMENTS:
A. The Shareholders hold the amounts of Common Shares, without
par value ("Common Shares"), Warrants to purchase Common Shares ("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"),
Series D Convertible Preferred Shares, without par value (the "Series D
Shares"), Series E Convertible Preferred Shares, without par value (the
"Series E Shares") and the other securities set forth opposite their
respective names on Schedule I hereto (the Series A Shares, Series B Shares,
Series C Shares, Series D Shares and Series E Shares, collectively the
"Preferred Stock") (the Common Warrants and Series B Warrants, collectively
the "Warrants").
B. The Company and certain of the parties hereto executed that
certain Amended and Restated Registration Rights Agreement dated as of
October 15, 1991, as amended (the "Amended Registration Rights Agreement"),
that certain Second Amended and Restated Registration Rights Agreement dated
as of November 2, 1994 (the "Second Amended Registration Rights Agreement"),
and that certain Third Amended and Restated Registration Rights Agreement
dated as of February 20, 1996 (the "Third Amended and Restated Registration
Rights Agreement"), and that certain Fourth Amended and Restated Registration
Rights Agreement dated as of September 18, 1996 (the "Fourth Amended
Registration Rights Agreement"), governing, among other things, certain
matters with respect to the registration of the shares of capital stock of
the Company.
C. The Company and the parties hereto desire to amend and
restate the Fourth Amended and Restated Registration Rights Agreement in its
entirety by the execution of this Agreement.
AGREEMENT:
1. CERTAIN DEFINITIONS. As used herein, the following terms
shall have the following respective meanings:
<PAGE>
2
"ADDITIONAL RESTRICTED SECURITIES" shall mean, the Common Warrants
and shares of Common Stock now held or hereafter acquired by
Internationale Nederlanden (U.S.) Capital Corporation, a Delaware
corporation ("ING"), and by The Provident Bank, a banking association
organized under the laws of the State of Ohio ("Provident"), and ING's and
Provident's successors and assigns.
"COMMISSION" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean the Common Shares as constituted as of the
date of this Agreement, and Common Shares issuable upon exercise of the
Common Warrants.
"CONVERSION SHARES" shall mean shares of Common Stock issued upon
conversion of the Preferred Stock and Common Stock issued upon conversion
of the Series B Shares issuable upon exercise of the Series B Warrants.
"ELECTRA RESTRICTED SECURITIES" shall mean, collectively, Common
Shares, Common Warrants, Series B Warrants and Preferred Stock now held or
hereafter acquired by Electra Investment Trust PLC, a corporation
organized under the laws of the United Kingdom ("EIT") and Electra
Associates, Inc. ("Electra") and EIT's and Electra's successors and
assigns.
"INITIAL 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.
"NASSAU RESTRICTED SECURITIES" shall mean, collectively, Common
Shares, Common Warrants, Series D Shares and Series E Shares now held or
hereafter acquired by Nassau Capital Partners L.P., a Delaware limited
partnership ("Nassau Capital") and NAS Partners I L.L.C., a Delaware
limited liability company ("NAS") and Nassau Capital's and NAS's
successors and assigns.
"PRIMARY RESTRICTED STOCK" shall mean, collectively, the Preferred
Stock, the Common Stock and those Common Warrants which are not Electra
Restricted Securities, Nassau Restricted Securities or Additional
Restricted Securities. For purposes hereof, "Preferred Stock" also shall
include the Series B Warrants and the Series B Shares issuable upon
exercise of the Series B Warrants.
"REGISTRATION EXPENSES" shall mean the expenses so described in
Section 8 hereof.
<PAGE>
3
"RESTRICTED STOCK" shall mean, collectively, the Electra Restricted
Securities, Nassau Restricted Securities, the Primary Restricted Stock,
the Additional Restricted Securities and all Common Shares issuable upon
exercise of options to purchase the same granted hereafter to R. Jack
DeCrane.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SECURITIES PURCHASE AGREEMENT" shall mean the Securities Purchase
Agreement of even date herewith among the Company, Nassau Capital, NAS and
EIT.
"SELLING EXPENSES" shall mean the expenses so described in Section 8
hereof.
2. RESTRICTIVE LEGEND. Each instrument representing the
Restricted Stock, except as provided in Section 3 hereof, shall be stamped
or otherwise imprinted with a legend substantially in the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED
UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE."
3. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer
of any Restricted Stock (other than under the circumstances described in
Section 4, 5 or 6 hereof), the holder thereof shall give written notice to
the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the
Company, shall be accompanied by an opinion of counsel reasonably
satisfactory to the Company to the effect that the proposed transfer of the
Restricted Stock, as the case may be, may be effected without registration
under the Securities Act. In the event that (but only in the event that) the
holder of such Restricted Stock gives such written notice and provides such
opinion, if requested by the Company, the holder of such Restricted Stock
shall be entitled to transfer such Restricted Stock in accordance with the
terms of its notice, PROVIDED, HOWEVER, that no such opinion or documentation
shall be required if the notice pertains to distribution by any holder
pursuant to subpart (b) or (c) of Section 2 of that certain Fourth Amended
and Restated Shareholders Agreement between the parties hereto (the
"Shareholders Agreement"). Each instrument for Restricted Stock transferred
as above provided shall bear the legend set forth in Section 2, except that
such instrument shall not bear such legend if (i) such transfer is in
accordance with the provisions of Rule 144 (or any other rule permitting
public sale
<PAGE>
4
without registration under the Securities Act) or (ii) the opinion of counsel
referred to above is to the further effect that the transferee and any
subsequent transferee (other than an affiliate of the Company) would be
entitled to transfer such securities in a public sale without registration
under the Securities Act.
The foregoing restrictions on transferability of Restricted Stock
shall terminate as to any particular shares of Restricted Stock when such
shares shall have been effectively registered under the Securities Act and
sold or otherwise disposed of in accordance with the intended method of
disposition by the seller or sellers thereof set forth in the registration
statement concerning such shares.
4. REQUIRED REGISTRATION.
(a) At any time, (i) the holders of Electra Restricted
Securities constituting at least a majority of the total Electra Restricted
Securities outstanding at such time (treating for the purpose of such
computation (A) the holders of Preferred Stock as the holders of the
Conversion Shares then issuable upon conversion of such Preferred Stock, (B)
the holders of Common Warrants if then issued and outstanding, as the holders
of the shares of Common Stock issuable upon exercise of the Warrant, and (C)
the holders of Series B Warrants as the holders of the shares of Common Stock
then issuable upon exercise of the Series B Warrant and conversion of the
Series B Shares issuable thereby), or (ii) the holders of Nassau Restricted
Securities constituting at least a majority of the total Nassau Restricted
Securities outstanding at such time (treating for the purpose of such
computation (A) the holders of Series D Shares as the holders of the
Conversion Shares then issuable upon conversion of such Series D Shares, (B)
the holders of Series E Shares as the holders of the Conversion Shares then
issuable upon conversion of such Series E Shares and (C) the holders of
Common Warrants if then issued and outstanding, as the holders of the shares
of Common Stock issuable upon exercise of the Warrant), or (iii) the holders
of Primary Restricted Stock constituting at least a majority of the total
Primary Restricted Stock outstanding at such time (treating for the purpose
of such computation (A) the holders of Preferred Stock as the holders of the
Conversion Shares then issuable upon conversion of such Preferred Stock, (B)
the holders of Common Warrants if then issued and outstanding, as the holders
of the shares of Common Stock issuable upon exercise of the Warrant, and (C)
the holders of Series B Warrants as the holders of the shares of Common Stock
then issuable upon exercise of the Series B Warrant and conversion of the
Series B Shares issuable thereby) may request the Company to register under
the Securities Act all or any portion of the Nassau Restricted Securities,
Electra Restricted Securities or Primary Restricted Stock, as the case may
be, held by such requesting holder or holders for sale in the manner
specified in such notice, PROVIDED, HOWEVER, that the only securities which
the Company
<PAGE>
5
shall be required to register pursuant hereto shall be shares of Common
Stock, PROVIDED, FURTHER, HOWEVER, that, in any underwritten public offering
contemplated by Section 4, 5 or 6 hereof, other holders of Preferred Stock or
Warrants shall be entitled to sell such Preferred Stock or Warrants to the
underwriters for conversion or exchange and the sale of the shares of Common
Stock issued upon such conversion; PROVIDED FURTHER, HOWEVER, that if the
Warrants are to be sold to the underwriters, there shall be deducted from the
proceeds due to the selling holder the aggregate exercise price required to
be paid by such holder upon exercise of the Warrants.
(b) Promptly following receipt of any notice under this Section
4, the Company shall immediately notify (i) any holders of Nassau Restricted
Securities, Electra Restricted Securities or Primary Restricted Stock from
whom notice has not been received and (ii) any other holders of Restricted
Stock, and shall use its best efforts to register under the Securities Act,
for public sale in accordance with the method of disposition specified in
such notice from requesting holders, the number of shares of Restricted Stock
specified in such notice (and in any notices received from other holders
within 20 days after their receipt of such notice from the Company). If such
method of disposition shall be an underwritten public offering, the Company
may designate the managing underwriter of such offering, subject to the
approval of the selling holders of Nassau Restricted Securities, Electra
Restricted Securities or Primary Restricted Stock, as the case may be,
requesting registration under the Securities Act, which approval shall not be
unreasonably withheld. The Company shall only be obligated to register
Nassau Restricted Securities or Primary Restricted Stock pursuant to a demand
by each such holder under this Section 4 on one occasion and shall only be
obligated to register Electra Restricted Securities pursuant to a demand by
such holder under this Section 4 on one occasion. Notwithstanding anything
to the contrary contained herein, the obligation of the Company under this
Section 4 shall be deemed satisfied only when a registration statement
covering all shares of Nassau Restricted Securities, Electra Restricted
Securities or Primary Restricted Stock specified in notices received as
aforesaid, for sale in accordance with the method of disposition specified by
the requesting holder, shall have become effective.
(c) The number of shares of Restricted Stock to be included in
such an underwriting may be reduced (PRO RATA among the requesting holders
based upon the number of shares so requested to be registered, treating for
purposes of such computation (i) the holders of Preferred Stock as the
holders of the Conversion Shares then issuable upon conversion of such
Preferred Stock, (ii) the holders of Common Warrants, if then issued and
outstanding, as the holders of the shares of Common Stock issuable upon
exercise of the Common Warrants, and (iii) the holder of the Series B
Warrants, if then outstanding, as the holder of the shares of Common Stock
then issuable upon exercise
<PAGE>
6
of the Series B Warrant and conversion of the Series B Shares issuable
thereby) if and to the extent that the managing underwriter shall be of the
opinion that such inclusion would adversely affect the marketing of the
securities to be sold therein; PROVIDED, HOWEVER, if a demand registration is
a request by holders of Nassau Restricted Securities, Electra Restricted
Securities or Primary Restricted Securities pursuant to subpart (a) of this
Section 4 to register and sell Nassau Restricted Securities, Electra
Restricted Securities or Primary Restricted Securities, as the case may be,
in the Initial Public Offering, and the managing underwriters advise the
Company in writing that in their opinion the number of (A) Nassau Restricted
Securities, Electra Restricted Securities or Primary Restricted Securities,
as the case may be, requested to be included in the offering, (B) securities
desired by the Company to be included in such offering and pro rata among the
Holders of Nassau Restricted Securities or Electra Restricted Securities, as
the case may be, on the basis of the amount of Nassau Restricted Securities
or Electra Restricted Securities, respectively, owned by each such holder,
and (C) if permitted hereunder, other securities requested to be included in
such offering, exceeds the number of securities which can be sold therein
without adversely affecting the marketability of the offering, there shall be
included in such registration (i) first, the securities the Company proposes
to sell, (ii) second, the Nassau Restricted Securities or Electra Restricted
Securities, as the case may be, requested to be included in such
registration, and PRO RATA among the holders of Nassau Restricted Securities
or Electra Restricted Securities, as applicable, on the basis of the amount
of Nassau Restricted Securities or Electra Restricted Securities, as the case
may be, owned by each such holder, or PRO RATA among the holders of Nassau
Restricted Securities and Electra Restricted Securities if such demand
registration is a request by holders of Nassau Restricted Securities and
holders of Electra Restricted Securities pursuant to subpart (a) of this
Section 4 and (iii) third, other securities requested to be included in such
registration by holders of the Restricted Stock; PROVIDED, FURTHER, HOWEVER,
if a demand registration is a request by holders of Nassau Restricted
Securities, Electra Restricted Securities or Primary Restricted Securities
pursuant to subpart (a) of this Section 4 to register and sell Nassau
Restricted Securities, Electra Restricted Securities or Primary Restricted
Securities, as the case may be, subsequent to the Initial Public Offering,
and the managing underwriters advise the Company in writing that in their
opinion the number of (A) Nassau Restricted Securities, Electra Restricted
Securities or Primary Restricted Securities, as applicable, requested to be
included in the offering, (B) securities desired by the Company to be
included in such offering and PRO RATA among the Holders of Nassau Restricted
Securities or Electra Restricted Securities, as the case may be, on the basis
of the amount of Nassau Restricted Securities or Electra Restricted
Securities, as applicable, owned by each such holder, and (C) if permitted
hereunder, other securities requested to be included in such offering,
exceeds the number of
<PAGE>
7
securities which can be sold therein without adversely affecting the
marketability of the offering, there shall be included in such registration
(i) first, the Nassau Restricted Securities or Electra Restricted Securities,
as the case may be, requested to be included in such registration, PRO RATA
among the holders of such Nassau Restricted Securities or Electra Restricted
Securities, as applicable, on the basis of the amount of Nassau Restricted
Securities or Electra Restricted Securities, as the case may be, owned by
each holder, or PRO RATA among the holders of Nassau Restricted Securities
and Electra Restricted Securities if such demand registration is a request by
holders of Nassau Restricted Securities and Electra Restricted Securities
pursuant to subpart (a) of this Section 4 (ii) second, the securities the
Company proposes to sell, and (iii) third, other securities requested to be
included in such registration.
(d) Subject to subpart (c) of this Section 4, the Company shall
be entitled to include in any registration statement referred to in this
Section 4, for sale in accordance with the method of disposition specified by
the requesting holders, shares of Common Stock to be sold by the Company for
its own account, except as and to the extent that, in the opinion of the
managing underwriter (if such method of disposition shall be an underwritten
public offering), such inclusion would adversely affect the marketing of the
Nassau Restricted Securities, Electra Restricted Securities or Primary
Restricted Stock to be sold. Except as provided in this paragraph (d), the
Company will not effect any other registration of its Common Stock, whether
for its own account or that of other holders, from the date of receipt of a
notice from requesting holders pursuant to this Section 4 until the
completion of the period of distribution of the registration contemplated
thereby.
(e) Notwithstanding anything to the contrary contained in this
Section 4, the Company shall not be required to take any action to effect any
registration pursuant to this Section 4:
(i) if in the case of the Initial Public Offering, the
securities covered by such registration statement will not have an
aggregate offering price of at least $25,000,000.00;
(ii) if the Company intends in good faith to file a registration
statement pertaining to an underwritten public offering of securities for
the account of the Company within 90 days after receipt of a notice under
Section 4(a), and the Company so notifies the requesting holder of its
intention in accordance with Section 6; or
(iii) if the holders of a majority of the Additional
Restricted Securities have requested pursuant to Section 5 that the
Company file a registration statement pertaining to an underwritten
public offering of securities at any time
<PAGE>
8
within 180 days prior to the receipt by the Company of a notice under
Section 4(a).
5. ADDITIONAL REQUIRED REGISTRATION.
(a) At any time after such date as the Company has completed a
public offering of shares of Common Stock pursuant to an effective
registration statement filed under the Securities Act, the holders of the
Additional Restricted Securities constituting at least a majority of the
total Additional Restricted Securities outstanding at such time (treating for
the purpose of such computation the holders of the Additional Restricted
Securities as the holders of the shares of Common Stock issuable upon
exercise of the Additional Restricted Securities) may request the Company to
register under the Securities Act all or any portion of the Additional
Restricted Securities held by such requesting holder or holders for sale in
the manner specified in such notice, PROVIDED, HOWEVER, that the only
securities which the Company shall be required to register pursuant hereto
shall be shares of Common Stock, PROVIDED, FURTHER, HOWEVER, that, in any
underwritten public offering contemplated by Section 4, 5 or 6 hereof, the
holders of Additional Restricted Securities shall be entitled to sell such
Additional Restricted Securities to the underwriters for conversion or
exchange and the sale of the shares of Common Stock issued upon such
conversion; PROVIDED, FURTHER, HOWEVER, that if the Additional Restricted
Securities are to be sold to the underwriters, there shall be deducted from
the proceeds due to the selling holder the aggregate exercise price required
to be paid by such holder upon exercise of the Additional Restricted
Securities.
(b) Promptly following receipt of any notice under this Section
5, the Company shall immediately notify (i) any holders of Additional
Restricted Securities from whom notice has not been received and (ii) any
other holders of Restricted Stock, and shall use its best efforts to register
under the Securities Act, for public sale in accordance with the method of
disposition specified in such notice from requesting holders, the number of
shares of Restricted Stock specified in such notice (and in any notices
received from other holders within 20 days after their receipt of such notice
from the Company). If such method of disposition shall be an underwritten
public offering, the Company may designate the managing underwriter of such
offering, subject to the approval of the selling holders of Additional
Restricted Securities, which approval shall not be unreasonably withheld.
The Company shall be obligated to register Additional Restricted Securities
pursuant to a demand by such holder under this Section 5 on one occasion
only. Notwithstanding anything to the contrary contained herein, the
obligation of the Company under this Section 5 shall be deemed satisfied only
when a registration statement covering all of the shares of Common Stock
issuable upon exchange of the Additional Restricted Securities specified in
notices received as aforesaid, for sale in accordance with the
<PAGE>
9
method of disposition specified by the requesting holder, shall have become
effective.
(c) The number of shares of Restricted Stock to be included in
such an underwriting may be reduced (PRO RATA among the requesting holders
based upon the number of shares so requested to be registered, treating for
purposes of such computation (i) the holders of Preferred Stock as the
holders of the Conversion Shares then issuable upon conversion of such
Preferred Stock, (ii) the holders of Common Warrants, if then issued and
outstanding, as the holders of the shares of Common Stock issuable upon
exercise of the Common Warrants, and (iii) the holder of the Series B
Warrants, if then outstanding, as the holder of the shares of Common Stock
then issuable upon exercise of the Series B Warrant and conversion of the
Series B Shares issuable thereby) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold therein.
(d) The Company shall be entitled to include in any registration
statement referred to in this Section 5, for sale in accordance with the
method of disposition specified by the requesting holders, shares of Common
Stock to be sold by the Company for its own account, except as and to the
extent that, in the opinion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such inclusion would
adversely affect the marketing of the Additional Restricted Securities to be
sold. Except as provided in this paragraph (d), the Company will not effect
any other registration of its Common Stock, whether for its own account or
that of other holders, from the date of receipt of a notice from requesting
holders pursuant to this Section 5 until the completion of the period of
distribution of the registration contemplated thereby.
(e) Notwithstanding anything to the contrary contained in this
Section 5, the Company shall not be required to take any action to effect any
registration pursuant to this Section 5:
(i) if the Company intends in good faith to file a
registration statement pertaining to an underwritten public offering of
securities for the account of the Company within 90 days after receipt of
a notice under Section 5(a), and the Company so notifies the requesting
holder of its intention in accordance with Section 6; or
(ii) if the holders of a majority of the Nassau
Restricted Securities, or the holders of a majority of the Electra
Restricted Securities, or the holders of a majority of the Primary
Restricted Stock have pursuant to Section 4 requested that the Company
file a registration statement pertaining to an underwritten public
offering of securities at any time within 180 days prior to the receipt by
the Company of a notice under Section 5(a).
<PAGE>
10
6. INCIDENTAL REGISTRATION. If the Company at any time (other
than pursuant to Section 4 or 5 hereof) proposes to register any of its
Common Stock under the Securities Act for sale to the public, whether for its
own account or for the account of other security holders or both (except with
respect to registration statements on Form S-4 or S-8 or another form not
available for registering the Restricted Stock for sale to the public), each
such time it will give written notice to all holders of outstanding
Restricted Stock of its intention to do so. Upon the written request of any
such holder, given within 30 days after receipt of any such notice, to
register any of its Restricted Stock (which request shall state the intended
method of disposition thereof), the Company will use its best efforts to
cause the Restricted Stock as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed, all to the extent requisite to permit the
sale or other disposition by the holder (in accordance with its written
request) of such Restricted Stock so registered. In the event that any
registration pursuant to this Section 6 shall be, in whole or in part, an
underwritten public offering of Common Stock, any request by a holder
pursuant to this Section 6 to register Restricted Stock shall specify that
either (i) such Restricted Stock is to be included in the underwriting on the
same terms and conditions as the shares of Common Stock otherwise being sold
through underwriters under such registration or (ii) such Restricted Stock is
to be sold in the open market without any underwriting, on terms and
conditions comparable to those normally applicable to offerings of common
stock in reasonably similar circumstances. The number of shares of
Restricted Stock to be included in such an underwriting may be reduced (PRO
RATA among the requesting holders based upon the number of shares so
requested to be registered, treating for purposes of such computation (A) the
holders of Preferred Stock as the holders of the Conversion Shares then
issuable upon conversion of such Preferred Stock, (B) the holders of Common
Warrants, if then issued and outstanding, as the holders of the shares of
Common Stock issuable upon exercise of the Common Warrants, and (C) the
holder of the Series B Warrants, if then outstanding, as the holder of the
shares of Common Stock then issuable upon exercise of the Series B Warrant
and the conversion of the Series B Shares issuable thereby) if and to the
extent that the managing underwriter shall be of the opinion that such
inclusion would adversely affect the marketing of the securities to be sold
therein. Notwithstanding anything to the contrary contained in this Section
6, in the event that there is a firm commitment underwritten offering of
securities of the Company pursuant to a registration statement covering
Restricted Stock and a selling holder of Restricted Stock does not elect to
sell such holder's Restricted Stock to the underwriters of the Company's
securities in connection with such offering, such holder shall refrain from
selling such Restricted Stock so registered pursuant to this Section 6 during
the period of distribution of the Company's securities by such underwriters
and the period in which the
<PAGE>
11
underwriting syndicate participates in the aftermarket; PROVIDED, HOWEVER,
that such holder shall, in any event, be entitled to sell such holder's
Restricted Stock in connection with such registration commencing on the 90th
day after the effective date of such registration statement.
7. REGISTRATION PROCEDURES AND EXPENSES. (a) If and whenever
the Company is required by the provisions of Section 4, 5 or 6 hereof to use
its best efforts to effect the registration of any of the Restricted Stock
under the Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering pursuant to
Section 4 or 5 hereof, shall be on Form S-1 or other form of general
applicability satisfactory to the managing underwriter selected as therein
provided) with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for the period of
the distribution contemplated thereby (determined as hereinafter provided);
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for the period specified in paragraph (i) above and to comply with
the provisions of the Securities Act with respect to the disposition of all
Restricted Stock covered by such registration statement in accordance with
the sellers' intended method of disposition set forth in such registration
statement for such period;
(iii) furnish to each seller and to each underwriter such
number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons may
reasonably request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;
(iv) use its best efforts to register or qualify the Restricted
Stock covered by such registration statement under the securities or blue sky
laws of such jurisdictions as the sellers of Restricted Stock or, in the case
of an underwritten public offering, the managing underwriter, shall
reasonably request;
(v) immediately notify each seller under such registration
statement and each underwriter, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing; upon the occurrence of
<PAGE>
12
any such event, the Company shall, as promptly as reasonably practicable,
prepare a post-effective amendment to the registration statement or a
supplement to the related prospectus or file any other required document so
that, as thereafter delivered to purchasers of the Restricted Stock, the
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading.
(vi) use its best efforts (if the offering is underwritten) to
furnish, at the request of any seller, on the date that Restricted Stock is
delivered to the underwriters for sale pursuant to such registration: (i) an
opinion dated such date of counsel representing the Company for the purposes
of such registration, addressed to the underwriters and to such seller,
stating that such registration statement has become effective under the
Securities Act and that (A) to the best knowledge of such counsel, no stop
order suspending the effectiveness thereof has been issued and no proceedings
for that purpose have been instituted or are pending or contemplated under
the Securities Act, (B) the registration statement, the related prospectus,
and each amendment or supplement thereof, comply as to form in all material
respects with the requirements of the Securities Act and the applicable rules
and regulations of the Commission thereunder (except that such counsel need
express no opinion as to financial statements contained therein), and (C) to
such other effects as may reasonably be requested by counsel for the
underwriters or by such seller or its counsel, and (ii) a letter dated such
date from the independent public accountants retained by the Company,
addressed to the underwriters and to such seller, stating that they are
independent public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereof, comply as to form in all material respects
with the applicable accounting requirements of the Securities Act, and such
letter shall additionally cover such other financial matters (including
information as to the period ending no more than five business days prior to
the date of such letter) with respect to the registration in respect of which
such letter is being given as such underwriters or seller may reasonably
request; and
(vii) make available for inspection by each seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with
such registration statement.
(b) For purposes of paragraphs (i) and (ii) above and of Section
4(c) hereof, the period of distribution of Restricted
<PAGE>
13
Stock in a firm commitment underwritten public offering shall be deemed to
extend until each underwriter has completed the distribution of all
securities purchased by it, and the period of distribution of Restricted
Stock in any other registration shall be deemed to extend until the earlier
of the sale of all Restricted Stock covered thereby or nine months after the
effective date thereof.
(c) In connection with each registration hereunder, the selling
holders of Restricted Stock will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them
as shall be necessary in order to assure compliance with federal and
applicable state securities laws.
(d) In connection with each registration pursuant to Section 4,
5 or 6 hereof covering an underwritten public offering, the Company and the
selling holders of Restricted Stock agree to enter into a written agreement
with the managing underwriter selected in the manner herein provided in such
form and containing such provisions as are customary in the securities
business for such an arrangement between major underwriters and companies of
the Company's size and investment stature, provided that such agreement shall
not contain any such provision applicable to the Company which is
inconsistent with the provisions hereof.
8. EXPENSES. (a) All expenses incurred by the Company in
complying with Sections 4, 5, 6 and 7 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements
of counsel and independent public accountants for the Company, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars, costs of insurance and fees and expenses of
one counsel for the sellers of Restricted Stock but excluding any Selling
Expenses, are herein called "Registration Expenses". All underwriting
discounts and selling commissions applicable to the sale of Restricted Stock
are herein called "Selling Expenses".
(b) The Company will pay all Registration Expenses in connection
with each registration statement filed pursuant to Section 4, 5 or 6 hereof.
All Selling Expenses in connection with any registration statement filed
pursuant to Section 4, 5 or 6 hereof shall be borne by the holders of
Restricted Stock sold pursuant to such registration statement, PRO RATA in
proportion to the number of securities of each such holder included in such
registration.
9. INDEMNIFICATION. (a) In the event of a registration of any
of the Restricted Stock under the Securities Act pursuant to Section 4, 5 or
6 hereof, the Company will indemnify and hold harmless each seller of such
Restricted Stock thereunder and each underwriter of Restricted Stock
thereunder
<PAGE>
14
and each other person, if any, who controls such seller or underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller or underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each such seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
Company will not be liable in any such case if and to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by such seller, such
underwriter or such controlling person in writing specifically for use in
such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Section 4, 5 or 6 hereof, each seller of
such Restricted Stock thereunder, severally and not jointly, will indemnify
and hold harmless the Company and each person, if any, who controls the
Company within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning
of the Securities Act, against all losses, claims, damages or liabilities,
joint or several, to which the Company or such officer or director or
underwriter or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
registration statement under which such Restricted Stock was registered under
the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and will reimburse the Company
and each such officer, director, underwriter and controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
PROVIDED, HOWEVER, that such seller will be
<PAGE>
15
liable hereunder in any such case if and only to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with information pertaining to such seller,
as such, furnished in writing to the Company by such seller specifically for
use in such registration statement or prospectus, PROVIDED, FURTHER, HOWEVER,
that the liability of each seller hereunder shall not exceed the proceeds
received by such seller from the sale of Restricted Stock covered by such
registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party other than under this Section 9.
In case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 9 for any legal expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison
with counsel so selected, PROVIDED, HOWEVER, that, if the defendants in any
such action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of
the indemnifying party, the indemnified party shall have the right to select
a separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) Notwithstanding the foregoing, in any such action, any
indemnified party shall have the right to retain its own counsel, but the
fees and disbursements of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party shall have failed to
retain counsel for the indemnified person as aforesaid or (ii) the
indemnifying party and such indemnified party shall have mutually agreed to
the retention of such counsel. It is understood that the indemnifying party
shall not, in connection with any action or related actions in the same
jurisdiction, be liable for the fees
<PAGE>
16
and disbursements of more than one separate firm qualified in such
jurisdiction to act as counsel for the indemnified party. The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent but if settled with such consent or if there be a
final judgment for the plaintiff, the indemnifying party agrees to indemnify
the indemnified party from and against any loss or liability by reason of
such settlement or judgment. The indemnifying party shall not, except with
the consent of the indemnified party, enter into any settlement that does not
include as a term thereof an unconditional release of the indemnified party
from all liability with respect to the applicable claim.
(e) If the indemnification provided for in the first two
paragraphs of this Section 9 is unavailable or insufficient to hold harmless
an indemnified party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in such proportion as appropriate to
reflect the relative fault of the Company, on the one hand, and the sellers
of such Restricted Stock, on the other, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
actions as well as any other relevant equitable considerations, including the
failure to give the notice required under such paragraphs, then the relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact relates to information
supplied by the Company, on the one hand, or the sellers of such Restricted
Stock, on the other hand, and to the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the parties hereto agree that it would not be just
and equitable if contributions pursuant to this paragraph were determined by
PRO RATA allocation (even if all of the sellers of such Restricted Stock
were treated as one entity for such purpose) or by any other method of
allocation which did not take account of the equitable considerations
referred to above in this paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
action in respect thereof, referred to above in this paragraph, shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph, the
sellers of such Restricted Stock shall not be required to contribute any
amount in excess of the amount, if any, by which the total price at which the
Common Stock sold by each of them was offered to the public exceeds the
amount of any damages which they otherwise have been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
<PAGE>
17
(f) The indemnification of underwriters provided for in this
Section 9 shall be on such other terms and conditions as are at the time
customary and reasonably required by such underwriters, in which event the
indemnification of the sellers of Restricted Stock in such underwriting shall
at the sellers' request be modified to conform to such terms and conditions.
Upon the reasonable request of any stockholder selling Restricted Stock
pursuant to a registration statement or any underwriter of such stock, the
Company shall obtain an insurance policy covering the risks described above
in this Section 9 in an amount and with a deductible reasonably requested by
such seller or underwriter and naming such seller, any underwriter of such
stock and any person controlling such seller or underwriter as beneficiaries.
The costs of obtaining and maintaining any such insurance shall be borne by
the Company.
10. CHANGES IN COMMON STOCK. If, and as often as, there are any
changes in the Common Stock by way of stock split, stock dividend,
combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof, as may be required, so
that the rights and privileges granted hereby shall continue with respect to
the Common Stock as so changed.
11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each other party hereto as follows:
(a) The execution, delivery and performance of this Agreement by
the Company have been duly authorized by all requisite corporate action and
will not violate any provision of law, any order of any court or other agency
of government, the Amended and Restated Articles of Incorporation or Code of
Regulations of the Company, or any provision of any indenture, agreement or
other instrument to which it or any of its 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
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the
Company, 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.
<PAGE>
18
12. MISCELLANEOUS.
(a) This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express
assignment shall have been made, the provisions of this Agreement which are
for the benefit of the holders of Restricted Stock (or any portion thereof)
as such shall be for the benefit of and enforceable by any subsequent holder
of any Restricted Stock (or of such portion thereof), subject to the
provisions respecting the minimum numbers or percentages of shares of Primary
Restricted Stock, Additional Restricted Securities, Nassau Restricted
Securities or Electra Restricted Securities (or of such portion of each)
required in order to be entitled to certain rights, or take certain actions,
contained herein.
(b) 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:
(i) if to the Company, at 155 Montrose West Avenue,
Suite 210, Copley, Ohio 44321, facsimile number: (216) 668-2518,
Attention: Chief Executive Officer; and
(ii) if to any holder of Restricted Stock, to such
holder 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 holder to the others. Each holder
of Restricted Stock 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 (A)
in the case of personal delivery, on the date of such delivery, (B) in the
case of facsimile delivery, upon confirmation of delivery and (C) in the case
of mailing, on the fifth business day following such mailing.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(d) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and supersedes in their
entirety all previous agreements and understandings, including, without
limitation, the Registration Rights Agreement, dated July 23, 1990, the
Amended Registration Rights Agreement, the Second Amended Registration Rights
Agreement, and the Third Amended and Restated Registration Rights Agreement,
and may not be modified or amended except in writing. The Company shall not
grant any rights to register any of its
<PAGE>
19
capital stock in addition to the rights granted in this Agreement to any
party without amending this Agreement.
(e) This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13. SECURITIES MATTERS. To the extent required, the Company will,
and will cause each of its subsidiaries to, comply in all material respects
with the reporting requirements of the Securities Act and the 1934 Act, or
successor rules thereto or otherwise. The Company will cooperate with each
holder of securities in supplying such information as may be requested by
such holder to comply with the Securities Act or 1934 Act, including Rule 144
and Rule 144A, or successor rules thereto or otherwise.
IN WITNESS WHEREOF, the Company and the parties hereto have
executed this Third Amended and Restated Registration Rights Agreement as of
the day and year first above written.
DeCRANE AIRCRAFT HOLDINGS, INC.
By: /s/
-----------------------------------------
R. Jack DeCrane, Chief Executive Officer
BANC ONE CAPITAL PARTNERS, L.P.
By: /s/
-----------------------------------------
BOCP Corporation, General Partner,
By Authorized Signatory
BRANTLEY VENTURE PARTNERS II, L.P
By: /s/
-----------------------------------------
Paul H. Cascio, General Partner
/s/
-------------------------------------------
R. JACK DeCRANE, in his individual capacity
<PAGE>
DSV PARTNERS, IV
By: DSV Management, Ltd.
By: /s/
-----------------------------------------
James R. Bergman, General Partner
ELECTRA INVESTMENT TRUST, P.L.C.
By: /s/
-----------------------------------------
Its:
-----------------------------------------
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By: /s/
-----------------------------------------
Its:
-----------------------------------------
ELECTRA ASSOCIATES, INC.
By: /s/
-----------------------------------------
Its:
-----------------------------------------
THE PROVIDENT BANK
By: /s/
-----------------------------------------
Its:
-----------------------------------------
NASSAU CAPITAL PARTNERS L.P.
By: NASSAU CAPITAL L.L.C.
General Partner
By: /s/
-----------------------------------------
Its:
-----------------------------------------
NAS PARTNERS I L.L.C.
By: /s/
-----------------------------------------
Its:
-----------------------------------------
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Warrants to
Purchase
Warrants to Series A Series B Series B Series C Series D Series E
Common Common Preferred Preferred Preferred Preferred Preferred Convertible
Shares Shares Shares Shares Shares Shares Shares Preferred Shares
------ ----------- --------- --------- ----------- --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banc One Capital
Partners, L.P. -- 343,569 -- -- -- -- -- --
300 Crescent Court
Suite 1600
Dallas, TX 75201
Fax: (214) 979-4355
Brantley Venture 38,076 17,228 101,244 955,996 30,008 603,712 -- --
Partners II, L.P.
20600 Chagrin Blvd.
Suite 1150
Cleveland, Ohio 44122
Fax: (216) 668-2518
R. Jack DeCrane 230,770 4,455 -- -- -- -- -- --
4966 Tulip Drive
Akron, OH 44313
(216) 668-2518
DSV Partner, IV 13,174 5,960 35,030 330,775 13,446 1,347,987 -- --
620 Newport Center Dr.
Suite 990
Newport Beach, CA 92660
Fax: (714) 760-6947
Electra Investment 10,327 942,705 27,459 259,283 8,152 279,479 -- 500,000
Trust, P.L.C.
65 Kings Way
London, England
WC2B6QT
Fax: (171) 242-3429
Electra Associates, Inc. 1,493 119,581 3,969 37,478 1,178 40,397 -- --
65 Kings Way
London, England
WC2B6QT
Fax: (171) 242-3429
Internationale Nederlanden -- 411,645 -- -- -- -- -- --
(U.S.)
Capital Corporation
135 East 57th Street
New York, NY 10021
Fax: (212) 593-3562
The Provident Bank -- 137,215 -- -- -- -- -- --
1800 Provident Tower
East Fourth Street
Cincinnati, OH 45202
Fax: (513) 579-2858
Nassau Capital Partners -- 911,284 -- -- -- -- 1,989,114 991,124
L.P.
22 Chambers Street
Princeton, NJ 08542
Fax: (609) 924-8887
NAS Partners I L.L.C. -- 5,777 -- -- -- -- 10,886 8,876
22 Chambers Street
Princeton, NJ 08542
Fax: (609) 924-8887
Richard G. MacDonald -- -- -- -- -- 30,000 -- --
Chuck H. Becker -- -- -- -- -- 20,000 -- --
Robert A. Rankin -- -- -- -- -- 15,000 -- --
John R. Hinson -- -- -- -- -- 10,000 -- --
John Schnepf 8,000 -- -- -- -- -- -- --
</TABLE>
<PAGE>
RIDER TO
FIFTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
14. EXTENSION OF REQUIRED REGISTRATION AND ADDITIONAL
REQUIRED REGISTRATION TIME PERIODS. Notwithstanding any other provision of
this Agreement, the rights granted pursuant to Sections 4 and 5 shall
terminate on the fourth anniversary of the funding of the proceeds by the
Company following the effectiveness of the registration statement filed by
the Company for the Initial Public Offering of the Company's Common Stock;
provided, however, that the demand rights under either Section 4 or Section 5
shall be extended for an additional year (or years) in the event that (i) a
notice has been given under either such section which did not result in a
registration statement covering all shares of the securities specified in any
such notice having become effective or (ii) a shareholder was unable to give
a demand notice as a result of Section 15.
15. TIME BETWEEN REQUIRED REGISTRATION AND ADDITIONAL REQUIRED
REGISTRATION NOTICES. Notwithstanding any other provisions of this
Agreement, no holder of any securities of the Company shall have the right to
give any demand notice pursuant to Section 4 or Section 5 during the 9 month
period following the date of any registration statement filed as a result of
any other demand notice given pursuant to Section 4 or Section 5 of this
Agreement.
16. HOLDBACK PERIOD. In the event that at the time of receipt
by the Company of any notice pursuant to either Section 4 or Section 5 of
this Agreement, the Company shall be in possession of material non public
information which it reasonably and in good faith after consulting counsel
deems it has a bona fide business purpose for maintaining as confidential,
the Company may so notify the party to this Agreement from whom such notice
was received and thereby delay the performance of the Company's obligations
for a period not to exceed 90 days.
<PAGE>
EXHIBIT 10.35.2
AMENDMENT NO. 2 TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 2 to Loan and Security Agreement (this
"Amendment") is made as of February 6, 1998, among DeCrane Aircraft Holdings,
Inc., a Delaware corporation ("Borrower"), Bank of America National Trust and
Savings Association, successor-by-merger to Bank of America Illinois,
individually as a lender ("BoA") and as agent ("Agent"), Comerica Bank -
California ("Comerica"), Mellon Bank, N.A. ("Mellon"), and Sumitomo Bank of
California ("Sumitomo"; Sumitomo, BoA, Comerica and Mellon being collectively
referred to as "Lenders").
Reference is made to that certain Loan and Security Agreement dated
as of April 15, 1997 among Borrower, Agent and Lenders (as amended or
otherwise modified to the date hereof, the "Loan Agreement"; capitalized
terms used herein without definition shall have the meanings ascribed to such
terms in the Loan Agreement).
Borrower has requested that all of the Lenders agree to amend the
Loan Agreement in certain respects.
NOW, THEREFORE, Agent, Lenders and Borrower agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. Subject to the conditions
precedent set forth in Section 4 of this Amendment, the Loan Agreement is
hereby amended as follows:
1.1. The definition of the term "Maximum Revolving Loan Amount" in
SECTION 1.1 of the Loan Agreement is hereby amended by adding the following
sentence to the end of such definition:
"Upon the satisfaction of the conditions precedent set forth
in that certain Amendment No. 2 to Loan and Security
Agreement dated as of February 6, 1998 among Borrower, Agent
and Lenders ("Amendment No. 2"), each Lender's then existing
Maximum Revolving Loan Amount shall automatically reduce on
the last day of each calendar month commencing January 31,
1999 by such Lender's Pro Rata Share (determined immediately
prior to the applicability of this sentence with respect to
any Lender for any applicable date) of $500,000."
1.2. The definition of the term "Revolving Credit Amount" in SECTION
1.1 of the Loan Agreement is hereby amended and restated as follows:
"Revolving Credit Amount" means the maximum amount of
Revolving Loans which Lenders will make available to
Borrower. Prior to the satisfaction of the
conditions precedent set forth in Amendment No. 2, the Revolving
Credit Amount shall be equal to $60,000,000. Upon the satisfaction
of the
<PAGE>
conditions precedent set forth in Amendment No. 2,
the Revolving Credit Amount shall be equal to $75,000,000,
subject to automatic reduction by $500,000 on the last day
of each calendar month commencing January 31, 1999. The
Revolving Credit Amount shall be subject to reduction
pursuant to SECTION 2.1.2."
1.3. New SECTION 4.25 is hereby added to the Loan Agreement, which
section shall read as follows:
"4.25 YEAR 2000 COMPLIANCE.
The Borrower has conducted a comprehensive review and
assessment of the computer applications of the Borrower and
its Subsidiaries with respect to, among other things,
computer application errors (including date-sensitive
functions) anticipated to occur in connection with the
advent of the calendar year 2000 (herein, the "Year 2000
Problem"). As a result of the foregoing review and
assessment, the Borrower and its Subsidiaries are taking
certain steps, including the upgrading of substantially all
existing software to newer, off-the-shelf integrated
manufacturing and business application software which will
be year 2000 compliant by early 1999. Based on the
foregoing, the Companies reasonably believe that the Year
2000 Problem will not result in a material adverse change in
the Companies' business condition (financial or otherwise),
operations, properties or prospects, in each case measured
against the Companies taken as a whole, or ability to repay
Liabilities."
1.4. Subject to automatic reduction in accordance with the Loan
Agreement as amended hereby, the Maximum Revolving Loan Amount of each Lender
shall be amended and restated as set forth on the signature pages to this
Amendment.
2. CONDITIONS PRECEDENT. The amendments to the Loan Agreement set
forth in Section 1 of this Amendment shall become effective as of the date of
this Amendment upon the satisfaction of the following conditions precedent:
2.1. Borrower shall have executed and delivered to Agent for
distribution to the Lenders amended and restated Revolving Credit Notes in form
and substance substantially similar to Revolving Credit Notes previously
executed by the Borrower in connection with the execution of the Loan Agreement,
each in an amount equal to each Lender's then existing Maximum Revolving Loan
Amount;
2.2. The Subsidiaries of Borrower shall have executed and delivered a
certain Reaffirmation of Guaranties, in the form of EXHIBIT A to this Amendment;
-2-
<PAGE>
2.3. No Event of Default or Unmatured Event of Default shall have
occurred and be continuing;
2.3. Borrower shall have delivered to Agent a certificate in form
and substance satisfactory to Agent of Borrower's Secretary or an Assistant
Secretary as to Borrower's certificate of incorporation and by-laws, the
incumbency of Borrower's officers and corporate resolutions adopted by
Borrower's board of directors with respect to this Amendment;
2.5. Agent shall have received an opinion of Borrower's legal
counsel, in form and substance substantially similar to a legal opinion
delivered by such counsel to Agent in connection with the execution and
delivery of the Loan Agreement; and
2.6. Agent shall have received, for the benefit of the Lenders
based on each Lender's pro rata share of the increase in the Revolving Credit
Amount pursuant to the terms of this Amendment, an amendment fee in the
amount of $30,000.
3. LOAN REALLOCATION. Effective immediately upon satisfaction of
the conditions precedent set forth in Section 2, (i) each of BoA and Sumitomo
shall be deemed automatically to have sold and assigned to Comerica and
Mellon, without recourse and without representation and warranty, and each of
Comerica and Mellon shall be deemed automatically to have purchased and
assumed from BoA and Sumitomo, that interest in Revolving Loans funded by BoA
and Sumitomo immediately prior to the satisfaction of such conditions
precedent so that, after giving effect to such purchase and sale, the ratio
of the amount of Revolving Loans funded by each Lender to the aggregate
outstanding amount of Revolving Loans equals such Lender's Pro Rata Share
after giving effect to the amendments contemplated by this Amendment and (ii)
upon request by Agent, each of Comerica and Mellon shall promptly wire
transfer to Agent for further reallocation to BoA and Sumitomo immediately
available funds requested by Agent in full satisfaction of the purchases and
sales contemplated by the preceding clause (i).
4. MISCELLANEOUS.
4.1. EXPENSES. Borrower agrees to pay on demand all costs and
expenses of Agent (including Attorneys' Fees) in connection with the
preparation, negotiation, execution, delivery and administration of this
Amendment and all other instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith. In
addition, Borrower agrees to pay, and save Agent and each Lender harmless
from all liability for, any stamp or other taxes which may be payable in
connection with the execution or delivery of this Amendment, the borrowings
under the Loan Agreement, as amended hereby, and the execution and delivery
of any instruments or documents provided for herein or delivered or to be
delivered hereunder or in connection herewith. All obligations provided in
this Section 4.1 shall survive any termination of this Amendment or the Loan
Agreement as amended hereby.
4.2. GOVERNING LAW. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois.
-3-
<PAGE>
4.3. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be
an original, but all such counterparts shall together constitute but one and
the same Amendment.
4.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the
Loan Agreement shall remain in full force and effect and is hereby ratified
in all respects. On and after the effectiveness of the amendments to the
Loan Agreement accomplished hereby, each reference in the Loan Agreement to
"this Agreement," "hereunder," "hereof," "herein" or words of like import,
and each reference to the Loan Agreement in any note and in any Related
Agreements, or other agreements, documents or other instruments executed and
delivered pursuant to the Loan Agreement, shall mean and be a reference to
the Loan Agreement, as amended by this Amendment.
4.5. SUCCESSORS. This Amendment shall be binding upon Borrower, each
Lender, Agent and their respective successors and assigns, and shall inure to
the benefit of Borrower, each Lender, Agent and their respective successors and
assigns.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized and
delivered at Chicago, Illinois as of the date first above written.
DECRANE AIRCRAFT HOLDINGS, INC.,
as Borrower
By /s/
-------------------------------------
Its
------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, successor-by-merger
to Bank of America Illinois, as Agent
By /s/
------------------------------------
Its
-----------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, successor-by-merger
to Bank of America Illinois, as a Lender
By /s/
------------------------------------
Its
-----------------------------------
Maximum Revolving Loan Amount: $27,000,000
-5-
<PAGE>
COMERICA BANK - CALIFORNIA, as a Lender
By______________________________________
Its_____________________________________
Maximum Revolving Loan Amount: $18,000,000
-6-
<PAGE>
MELLON BANK, N.A., as a Lender
By______________________________________
Its_____________________________________
Maximum Revolving Loan Amount: $18,000,000
-7-
<PAGE>
SUMITOMO BANK OF CALIFORNIA, as a Lender
By______________________________________
Its_____________________________________
Maximum Revolving Loan Amount: $12,000,000
-8-
<PAGE>
Exhibit 10.37
STOCK PURCHASE AND SALE AGREEMENT
This Stock Purchase and Sale Agreement ("Agreement") is made and entered
into by and among Robert S. Brown, Rick Marsh and Wayne Richie, the
shareholders (the "Shareholders") of Audio International, Inc. ("AI") and
DeCrane Aircraft Holdings, Inc. ("DAH"), based on the following facts:
Shareholders own all of the outstanding stock of AI (the "Stock"); and
desire to sell 100% of the Stock to DAH;
DAH desires to purchase 100% of the Stock from the Shareholders on the
terms and conditions of this Agreement.
Based on the foregoing facts and circumstances, the parties hereby agree
as follows (capitalized terms being used herein as defined where noted in
Schedule A):
1. STOCK TO BE PURCHASED AND SOLD; PURCHASE PRICE.
1.1 PURCHASE AND SALE OF STOCK. At the Closing, DAH shall
purchase from the Shareholders 100% of the Stock for the amount specified in
Section 1.2. Attached as Exhibit 1.1 is a list of the Shareholders which
reflects the percentage of the aggregate payments to be made pursuant to
Sections 1.2.1 and 1.2.2 to each of the Shareholders. Each of the
Shareholders, jointly and severally, hereby agrees to indemnify and hold DAH
harmless from any and all loss, damage, claim or expense, resulting from any
claim by any Shareholder or the successor or heir of any Shareholder that the
percentage received by the Shareholder or such successor or heir is not
correct as a percentage of the aggregate amount paid.
1.2 PURCHASE PRICE OF THE STOCK.
1.2.1 At the Closing, DAH shall make federal funds and
wire transfers to each of the Shareholders, to accounts designated by the
Shareholders on Exhibit 1.2.1 hereto the aggregate sum of $24 million;
1.2.2 On March 31, 1999 and March 31, 2000, the
Shareholders shall receive such additional payments as are required pursuant
to the Earnout Agreement, attached as Exhibit 1.2.2.
1
<PAGE>
2. REPRESENTATIONS AND WARRANTIES.
2.1 BY DAH. Except as set forth on Schedule 2.1, the
representations and warranties of DAH, contained in this Agreement, including
those contained in this Section 2.1, are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date.
DAH hereby represents and warrants to the Shareholders the following:
2.1.1 ORGANIZATION. DAH is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own, lease
and operate its properties and conduct its business as now being conducted.
DAH is duly qualified to do business and in good standing in Delaware and
California. Except as set forth on Schedule 2.1.1, DAH has not received any
written notice or assertion within the last three years from any governmental
official of any jurisdiction to the effect that DAH is required to be
qualified or otherwise authorized to do business in any other jurisdiction,
in which DAH, has not qualified or obtained such authorization. Attached
hereto as Exhibit 2.1.1 are complete and correct copies of DAH's certificate
of incorporation and by-laws as in effect on the date hereof, and DAH is not
in default in the performance, observation or fulfillment of any provision of
its articles of incorporation or by-laws.
2.1.2 AUTHORIZATION. DAH has all requisite corporate
power and authority to enter into this Agreement and the other Transaction
Documents to which DAH is a party, perform its obligations hereunder and
thereunder and consummate the transactions contemplated hereby and thereby.
All necessary corporate action has been taken by DAH with respect to the
execution and delivery of this Agreement and the other Transaction Documents
to which DAH is a party, the consummation of the transactions contemplated by
this Agreement and the other Transaction Documents to which DAH is a party,
constitute valid and binding obligations of DAH, enforceable against DAH, in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance and moratorium laws and
other laws of general application affecting the enforcement of creditors'
rights generally.
2.1.3 LITIGATION. There is no claim, litigation, action,
suit, proceeding, investigation or inquiry, administrative or judicial,
pending or, to the knowledge of DAH, threatened against DAH, at law or in
equity, before any federal, state or local court or regulatory agency, or
other governmental authority, which might have an adverse effect on DAH's
ability to perform any of its obligations under this Agreement or upon the
consummation of the transactions contemplated by this Agreement.
2.1.4 BROKERS AND FINDERS. Except as disclosed in
Schedule 2.1.4, neither DAH nor any of its officers, directors or employees,
has engaged any broker or finder or incurred any liability for any brokerage
fees, commissions, finders' fees or similar fees or expenses and no broker or
finder has acted directly or indirectly for DAH in connection with this
Agreement or the transactions contemplated hereby.
2
<PAGE>
2.1.5 SEC REPORTS, FINANCIAL STATEMENTS OBLIGATIONS AND
LIABILITIES. Since April 16, 1997, DAH has filed all required forms, reports
and documents with the Securities and Exchange Commission (the "SEC")
required to be filed by it pursuant to the federal securities laws and the
SEC rules and regulations thereunder, all of which forms, reports and
documents have complied in all material respects as of the respective filing
dates, or, in the case of the S-1 Registration Statement effective April 16,
1997 as of such date (the "Registration Statement"), with all applicable
requirements of the Securities Act of 1933 (the "Securities Act") and the
Securities and Exchange Act of 1934 (the "Exchange Act"), and the rules and
regulations promulgated thereunder. None of such forms, reports or
documents, including without limitation, any exhibits, financial statements
or schedules included therein, at the time filed, contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading. DAH's
forms, reports and documents filed by DAH with the SEC under the Exchange Act
since April 16, 1997 are hereinafter collectively referred to as the "DAH 34
Act Reports."
The "DAH Financial Statements" means the consolidated financial
statements of DAH and its subsidiaries included in the Registration Statement
and the DAH 34 Act Reports. Each of the consolidated balance sheets of DAH
in the DAH Financial Statements (including the related notes and schedules)
fairly present the consolidated financial position of DAH and its
consolidated subsidiaries as of their respective dates and each of the
consolidated statements of income, stockholders' equity and the cash flows of
DAH and its consolidated subsidiaries in the DAH Financial statements
(including the related notes and schedules) fairly present the results of
operations, shareholders' equity and cash flows of DAH and its consolidated
subsidiaries (subject, in the case of unaudited statements to normal year-end
audit adjustments which would not be material in amount or effect), in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein.
DAH, on a consolidated basis, does not have any material debt,
liability, or obligation (whether accrued, absolute, contingent, by
guarantee, indemnity, or otherwise, and whether due or to become due) nor has
there been any occurrence which involves material liability of a type
required to be disclosed in the DAH Financial Statements or the notes
thereto, except those (i) disclosed in the DAH Financial Statements, the
Registration Statement or the DAH 34 Act Reports, or (ii) incurred in the
ordinary course of business since December 31, 1996.
2.1.6 ABSENCE OF CERTAIN EVENTS. Except as disclosed in
Schedule 2.1.7 and in the DAH 34 Act Reports, since December 31, 1996, there
has not been any event, circumstance or condition that has had or is
reasonably likely to have a DAH Material Adverse Effect, and (iii) DAH and
its subsidiaries have not introduced any principle or practice of accounting.
3
<PAGE>
2.1.7 COMPLETE DISCLOSURE. No representation or warranty
made by DAH in this Agreement, and no exhibit, schedule, statement,
certificate or other writing furnished to the Shareholders by or on behalf of
DAH pursuant to this Agreement or in connection with the transactions
contemplated hereby or thereby, contains or will contain, any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein and therein not misleading.
2.2 THE SHAREHOLDERS. Except as set forth on Schedule 2.2, the
representations and warranties of the Shareholders, contained in this
Agreement, including those contained in this Section 2.2, are correct and
complete as of the date of this Agreement and will be correct and complete as
of the Closing Date. The Shareholders represent and warrant to DAH the
following:
2.2.1 CORPORATE ORGANIZATION. AI is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Arkansas, and has all requisite corporate power and authority to own,
lease and operate its properties and conduct its business as now being
conducted. AI is duly qualified to do business and in good standing in each
jurisdiction listed on Schedule 2.2.1, and neither the nature of the business
conducted by it nor the property it owns, leases or operates requires it to
qualify to do business as a foreign corporation in any other jurisdiction.
Except as set forth on Schedule 2.2.1, AI has not received any written notice
or assertion within the last three years from any governmental official of
any jurisdiction to the effect that AI is required to be qualified or
otherwise authorized to do business therein, in which AI has not qualified or
obtained such authorization. Attached as Schedules 2.2.1 are complete and
correct copies of AI's articles of incorporation and by-laws as in effect on
the date hereof, and AI is not in default in the performance, observation or
fulfillment of any provision of either of its articles of incorporation or
by-laws.
2.2.2 CAPITALIZATION AND SECURITY HOLDERS. The authorized
capital stock of AI consists solely of 1,000 shares of Common Stock, $1.00
par value ("AI Common Shares"); AI has issued and outstanding 129 AI Common
Shares, constituting all of the issued and outstanding shares of capital
stock of any class of AI; all outstanding AI Common Shares have been validly
issued and are fully paid and non-assessable and free of preemptive rights;
there are no outstanding subscriptions' options, warrants, puts, calls,
agreements, understandings, or other commitments or rights of any type
relating to the issuance, sale or transfer by AI of any securities of AI, nor
are there outstanding any securities which are convertible into or
exchangeable for any shares of capital stock of AI; and AI has no obligation
of any kind to issue any additional securities. Schedule 2.2.2 accurately
sets forth the names and addresses of, the number of AI Common Shares held at
the date of this Agreement of record and/or beneficially by, and any AI
Common Shares to be issued, sold or otherwise transferred at or prior to the
Closing Date to, each and every shareholder of AI. All of such AI Common
Shares are owned free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, equities and restrictions whatsoever.
4
<PAGE>
2.2.3 AUTHORIZATION OF THE SHAREHOLDERS. Each of the
Shareholders has all requisite power, authority and legal capacity and is
competent to execute and deliver this agreement, and the other Transaction
Documents to which he is a party, perform his obligations hereunder and
thereunder and consummate the transactions contemplated hereby. This
Agreement constitutes, and the other Transaction Documents to which the
Shareholders are parties when executed and delivered by the Shareholders will
constitute, valid and binding obligations of the Shareholders, enforceable
against the Shareholders in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance
and moratorium laws and other laws of general application affecting the
enforcement of creditors' rights generally.
2.2.4 FINANCIAL STATEMENTS. Attached hereto as Schedule
2.2.4 are (i) the balance sheets of AI as at December 31, 1996, 1995 and 1994
and September 30, 1997, (ii) the related statements of income for the years
ended December 31, 1996, 1995 and 1994 and the nine months ended September
30, 1997, and (iii) the related statements of retained earnings and cash
flows for the years ended December 31, 1996 and 1995 (all of such documents
referred to collectively as the "Financial Statements"). The 1996 Financial
Statements reflect all year-end adjustments reflected in the audited
consolidated financial statements of AI. The Financial Statements (i) are
true, correct and complete in all material respects, (ii) have been prepared
from and are in accordance with the books and records of AI, (iii) have been
prepared using an accrual basis method and FIFO inventory cost flow
assumptions, (iv) are in conformity with generally accepted accounting
principles applied on a consistent basis for such periods, and (v) fairly
present the financial position of AI as of the dates stated and the results
of operations and cash flows of AI for the periods then ended in accordance
with such practices. On the date of this Agreement, AI does not have any
material contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except as referred to or reflected or provided for
in the balance sheets in the Financial Statements. Since September 30, 1997,
there has been no material adverse change in the financial condition,
operations, business or prospects taken as a whole of AI from that set forth
in the Financial Statements dated as of September 30, 1997.
2.2.5 ABSENCE OF CERTAIN CHANGES IN EVENTS. Except as set
forth on Schedule 2.2.5, since December 31, 1996, there has not been:
(a) Any material adverse change in the business
operations, assets, properties or rights, prospects or condition (financial
or otherwise) of AI or, any occurrence, circumstance, or combination thereof
which reasonably could be expected to result in any such material adverse
change (a "Material Adverse Effect");
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(b) Any material increase in amounts payable by AI to or
for the benefit of, or committed to be paid by AI: (A) to or for the benefit
of (x) any person listed on Schedule 2.2.5(b) (each a "Restricted Employee")
or (y) in the aggregate, all shareholders, directors, officers, partners,
consultants, agents and employees, in any capacity, of AI who are not listed
on Schedule 2.2.5(b) (the "Non-Restricted Employees") or (B) in any benefits
granted under any bonus, stock option, profit sharing, pension, retirement,
deferred compensation, insurance, or other direct or indirect benefit plan,
payment or arrangement made to, for the benefit of, or with (x) any
Restricted Employee or (y) in the aggregate, all Non-Restricted Employees;
(c) Any transaction entered into or carried out by AI
other than in the ordinary and usual course of business;
(d) Any borrowing or agreement to borrow funds; any
incurring of any assumption, guarantee or other obligation or liability,
contingent or otherwise except current liabilities incurred in the usual and
ordinary course of business or those not exceeding at any one time
outstanding $50,000;
(e) Any material change made by AI in the methods of
doing business, or other than such changes required by GAAP, any change in
the accounting principles or practices of AI with respect to the Financial
Statements or the method of application of such principles or practices;
(f) Other than those which are involuntary and in
amounts which are not material, any mortgage, pledge, lien, security
interest, hypothecation, charge or other encumbrance imposed or agreed to be
imposed on or with respect to the real (the "Real Property") or tangible or
intangible personal property of AI (the "Personal Property") (collectively
the "Property");
(g) Any sale, lease or other disposition of or any
agreement to sell, lease or otherwise dispose of any of the material
properties or assets of AI, other than sales of finished goods in the usual
and ordinary course of business for AI's scheduled prices;
(h) Any purchase of or any agreement to purchase capital
assets for an amount in excess of $50,000 for any one such purchase or
$100,000 for all such purchases made by AI on behalf of AI or any lease or
any agreement to lease, as lessee, any capital assets with payments over the
term thereof to be made by AI exceeding an aggregate of $50,000 for any one
lease or $100,000 in the aggregate;
(i) Any loan or advance made by AI to any individual,
firm, corporation or other entity except for advances not material in amount
made in the usual and ordinary course of business to employees;
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(j) Any modification, waiver, change, amendment,
release, rescission or termination of, or accord and satisfaction with
respect to, any material term, condition or provision of any material
contract, agreement, license or other instrument to which AI is a party,
other than any satisfaction by performance in accordance with the terms
thereof in the usual and ordinary course of business;
(k) Any delay or postponement (beyond normal practice)
by AI on behalf of AI of the payment of material Accounts Payable or other
material liabilities of AI; or
(l) Any other event or condition of any character which
has had a Material Adverse Effect or may reasonably be expected to result in
a Material Adverse Effect.
2.2.6 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
2.2.6, AI has no material liability or obligation of any nature (whether
liquidated, unliquidated, accrued, absolute, known or unknown, contingent or
otherwise and whether due or to become due) except:
(a) those set forth or reflected in the September 30, 1997
Balance Sheet which have not been paid or discharged since the date thereof;
(b) those arising under agreements or other commitments
expressly identified in any Schedule hereto; and
(c) current liabilities incurred in or as a result of the
conduct of its business in the ordinary and usual course consistent with past
practice since September 30, 1997, which are completely and accurately reflected
on its books and records and which are not inconsistent with the other
representations, warranties and agreements of AI and the Shareholders, set forth
in this Agreement or in the other Transaction Documents.
2.2.7 TAXES. Except as set forth on Schedule 2.2.7, AI
has filed all Federal, State and local tax returns. AI has filed, when due,
all federal, state and local tax returns; all amounts payable pursuant to
such returns by AI for taxes through the Closing Date have been or will be
paid or adequately provided for as reserves in the financial statements of
AI. No deficiency for any material amount of tax has been asserted or
assessed by a taxing authority against AI. Except as reserved for in the
Closing Date Balance Sheet, there will not be any amount owing for taxes,
penalties or interest.
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2.2.8 COMPLIANCE WITH LAW.
(a) Each of AI and the Shareholders, is in
compliance in all material respects (with respect to the business of AI) with
all applicable laws, statutes, orders, rules, regulations, policies or
guidelines promulgated, or judgments, decisions or orders entered, by any
federal, state, local or foreign court or governmental authority or
instrumentality relating to AI or any of its businesses or properties.
(b) AI is in compliance in all material respects
with all federal, state and local laws, ordinances, rules and regulations
pertaining to environmental matters, including solid waste disposal, toxic
substances, hazardous substances, hazardous materials, hazardous waste, toxic
chemicals, pollutants, contaminants and air or water pollution and to the
storage, use, handling, transportation, discharge and disposal (including
spills and leaks) of gaseous, liquid, semi-solid or solid materials. AI has
not, and to the best knowledge of AI and the Shareholders, no third party
has, disposed or discharged any chemicals, oil or solid wastes on any part of
the Real Property or any other any property owned, operated, leased or used
by AI. There are no underground storage tanks located on any part of the
Real Property or any other property owned, operated, leased or used by AI.
(c) Schedule 2.2.8(c) contains a complete copy of
the repair station approval. AI maintains all franchises, licenses, permits,
consents, authorization, approvals, and certificates of any regulatory,
administrative or other agency or body, to the extent reasonably necessary to
conduct the business of AI (collectively, the "Permits"). Each of the Permits
is currently valid and in full force and effect and, to the best knowledge of
AI and its Shareholders, closing of and the transactions contemplated by this
Agreement will not result in the termination of any Permit. AI is not in
material violation of any of the Permits and there is no pending or, to the
knowledge of AI and its Shareholders, threatened proceeding which could
result in the revocation, cancellation or inability of AI to renew or
transfer any Permit.
(d) To the best of the knowledge of AI and the
Shareholders, except as set forth in Schedule 2.2.8(d), the business of AI)
has not been charged with, or given notice of any material violation of, any
applicable law.
2.2.9 PROPRIETARY RIGHTS. AI has full right, title and
interest to all patents, patent applications, trademarks, tradenames, service
marks, copyrights, trade secrets, inventions, know-how and other similar
rights ("Intellectual Property") which are material to the operation of the
business of AI. AI conducts its business without conflict or infringement
with any intellectual property claimed or held by others.
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2.2.10 RESTRICTIVE DOCUMENTS OR LAWS. With the exception
of the matters listed on Schedule 2.2.10, AI, (with respect to the business
of AI), is not a party to or bound under any certificate, mortgage, lien,
lease, agreement, contract, instrument, vote, which materially adversely
affects, (i) the condition, financial or otherwise, of AI or the Property;
(ii) the continued operation by DAH of the business of AI after the Closing
Date on substantially the same basis as said business was theretofore
operated; or (iii) the consummation of the transactions contemplated in this
Agreement.
2.2.11 INSURANCE. AI has been and is insured with respect
to its property and the conduct of its business in such amounts and against
such risks as are sufficient for compliance with law and as it in good faith
deems to be adequate to protect its properties and businesses in accordance
with normal industry practice. Schedule 2.2.11 is a true, correct and
complete list of all insurance policies and bonds in force in which AI is
named as an insured party, as respects the business of AI, or for which AI
has been charged or has paid any premiums. Except as disclosed in Schedule
2.2.11, all such policies or bonds are currently in full force and AI has not
received any notice from any such insurer with respect to the cancellation of
any such Insurance. AI will continue all of such insurance in full force and
effect up to and including the Closing Date. All premiums due and payable on
such policies have been paid. AI is not a co-insurer under any term of any
Insurance policy.
2.2.12 BANK ACCOUNTS, DEPOSITORIES AND POWERS OF ATTORNEY.
Schedule 2.2.12 is a true, correct and complete list of the names and
locations of all banks or other depositories in which AI maintains accounts
or safe deposit boxes, and the names of the persons authorized to draw
thereon, borrow therefrom or have access thereto. No person or entity holds a
power of attorney on behalf of AI.
2.2.13 REAL PROPERTY. Except as set forth in Schedule
2.2.13, and except with respect to real property leased pursuant to the Real
Property Leases listed on Schedule 2.2.13, AI has no real property. The
Property which is real property constitutes all of the Real Property now used
in and necessary for the conduct of the business of AI as presently
conducted. All such properties are held free and clear of all mortgages,
pledges, liens, security interests, encumbrances and restrictions of any
nature whatsoever. Schedule 2.2.13 contains a complete and accurate legal
description of each parcel of Real Property owned or used by AI in the
conduct of its business. Except as set forth in Schedule 2.2.13; all real
property, buildings and structures owned or used by AI and material to the
operation of its business is suitable for the purpose or purposes for which
it is being used, and is in such condition and repair as to permit the
continued operation of said businesses. To the best knowledge of AI and the
Shareholders none of the Real Property, buildings or structures is in need of
material maintenance or repairs except for ordinary, routine maintenance and
repairs. To the best knowledge of AI and the Shareholders, there are no
material structural defects in the exterior walls or the interior bearing
walls, the foundation or the roof of any plant, building, garage or other
such structure owned, leased or used by AI and the electrical, plumbing and
heating systems, and the air conditioning system, if any, of any such plant,
building, garage or structure are
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in reasonable operating condition in light of their age and prior use. The
utilities servicing the real property owned, leased or used by AI are
adequate to permit the continued operation of the business of AI and to the
best knowledge of AI and the Shareholders there are no pending or threatened
zoning, condemnation or eminent domain proceedings, building, utility or
other moratoria, or injunctions or court orders which would materially effect
such continued operation. Schedule 2.2.13 lists, and AI have furnished or
made available to DAH copies, if any of, all engineering, geologic and
environmental reports prepared by or for AI with respect to the Real Property
owned, leased or used by AI.
2.2.14 PERSONAL PROPERTY. Except as set forth in Schedule
2.2.14, and except with respect to personal property leased pursuant to the
Personal Property Leases listed on Schedule 2.2.14, AI has good, valid and
marketable title to all of its assets and properties which are Personal
property of every kind, nature and description, tangible or intangible
wherever located, including all property and assets which are personal
property shown or reflected on the September 30, 1997 Balance Sheet. The
Personal Property constitutes all of the personal property now used in and
necessary for the conduct of the business of AI as presently conducted, and
is held free and clear of all mortgages, pledges, liens, security interests,
encumbrances and restrictions of any nature whatsoever. Except as set forth
in Schedule 2.2.14 no financing statement naming AI as debtor has been filed
in any jurisdiction, and AI is not a party to or bound under any agreement or
legal obligation authorizing any party to file any such financing statement.
Schedule 2.2.14 contains a complete and accurate description of all tangible
Personal Property having an individual value of $5,000 or more owned or used
by AI in the conduct of its business. Schedule 2.2.14 contains a complete
and accurate description of all machinery, equipment, tooling, parts,
furniture, supplies and other tangible Personal Property having an individual
value of $5,000 or more owned or used by AI. Schedule 2.2.14 contains a
complete and accurate description of all automobiles, trucks and other
vehicles owned or used by AI. Except as noted on Schedule 2.2.14 as
unsuitable, all machinery and equipment and tangible personal property owned
or used by AI and material to the operation of the business is suitable for
the purpose or purposes for which it is being used, and is in such condition
and repair as to permit the continued operation of said business. None of
such machinery or equipment is in need of material maintenance or repairs
except for ordinary, routine maintenance and repairs.
2.2.15 ENVIRONMENTAL MATTERS. Except as set forth on
Schedule 2.2.15, the operations of AI are in material compliance with all
occupational health and safety acts and all environmental laws and
regulations of all federal, state and local governmental or regulatory bodies
having jurisdiction over AI. Without limiting the generality of the
foregoing, and by way of example only, except as set forth on Schedule 2.2.15:
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(a) There has not been, and is not occurring, any
Release of any Hazardous Substance on any real property owned or used by AI.
For purposes of this Agreement, the terms "Release" and "Hazardous Substance"
shall have the same meanings as those terms are given in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
Section 9601 ET SEQ. ("CERCLA"), except that for purposes of this Agreement
petroleum (including crude oil or any fraction thereof) shall be deemed a
Hazardous Substance.
(b) AI has never sent a Hazardous Substance to a site
which, pursuant to CERCLA or any similar state law, (A) has been placed, or
is proposed to be placed, or, to the best knowledge of AI or Shareholders,
may in the future be placed, on the "National Priorities List" of hazardous
waste sites or on any similar list of any federal, state or local
governmental agency, including the Comprehensive Environmental Response,
Compensation and Liability System list for potential hazardous waste sites,
or (B) is subject to a claim, an administrative order or other request to
take "removal" or "remedial" action (as defined under CERCLA) or to pay for
any costs relating to such site.
(c) AI has never been or is currently in violation of
any provision of the Toxic Substances Control Act or the regulations
promulgated thereunder.
(d) AI is not involved in any suit or has received
notice of any claim relating to personal injuries from exposure to Hazardous
Substances.
2.2.16 BROKERS, FINDERS. Except as set forth on Schedule
2.2.16, the transactions contemplated herein were not submitted to AI by any
broker or other person entitled to a commission or finder's fee thereon, and
were not with the consent of AI submitted to DAH by any such broker or other
person. Except as set forth on Schedule 2.2.16, neither AI nor any of its
offices, directors or employees has engaged any broker or finder or incurred
or taken any action which may give rise to any liability against itself or
the Property for any brokerage fees, commissions, finders fees or similar
fees or expenses and no broker or finder has acted directly or indirectly for
AI in connection with this Agreement or the transactions contemplated hereby.
No investment banking, financial advisory or similar fees have been incurred
or are or will be payable by AI in connection with this Agreement or the
transactions contemplated hereby.
2.2.17 LEGAL PROCEEDINGS, ETC. Except as set forth on
Schedule 2.2.17, there is no claim, litigation, action, suit or proceeding,
administrative or judicial, filed, pending or, to the knowledge of AI and the
Shareholders, threatened against AI or the Shareholders or involving the
Property, this Agreement or the transactions contemplated hereby, at law or
in equity, before any federal, state or local court or regulatory agency, or
other governmental authority, including any unfair labor practice or
grievance, proceedings or claim. Except as disclosed in Schedule 2.2.17,
neither the Shareholders nor AI is subject to any judgment, order or decree,
or, to the best knowledge of the Shareholders, any governmental restriction
applicable to AI, the Shareholders, or AI which has a reasonable probability
of having a Material Adverse Effect, or which
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materially adversely affects the ability of AI to conduct business in any
area.
2.2.18 NO CONFLICT OR DEFAULT. Neither the execution and
delivery of this Agreement or any other Transaction Document, nor compliance
with the terms and provisions hereof or thereof, including the consummation
of the transactions contemplated hereby and thereby, will (a) violate in any
material respect any statute, regulation or ordinance of any governmental
authority, or (b) conflict with or result in the breach of any term,
condition or provision of the articles of incorporation or bylaws of AI or of
any agreement, deed, contract, mortgage, indenture, writ, order, decree,
legal obligation or instrument (with respect to the business of AI) to which
AI or any of the Shareholders, is a party or by which AI or any of the
Shareholders or any part of the Property is or may be bound, or (c)
constitute a material default (or an event which with the lapse of time or
the giving of notice, or both, would constitute a material default)
thereunder, or (d) result in the creation or imposition of any material lien,
charge, encumbrance, or restriction of any nature whatsoever with respect to
any part of the Property, or (e) give to others any interest or rights,
including rights of termination, acceleration or cancellation in or with
respect to any part of the Property or the business of AI.
2.2.19 LABOR RELATIONS. Schedule 2.2.19 sets forth all
collective bargaining or other labor agreements to which AI is bound and the
Shareholders have previously delivered to DAH true, correct and complete
copies of each such agreement. There is no labor strike, dispute, slowdown
or stoppage, or any union organizing campaign, or petition for certification
actually pending or, to the best knowledge of the Shareholders, threatened
against or involving AI. Schedule 2.2.19 sets forth all pending grievances
and arbitration proceedings against AI arising out of or under a collective
bargaining or other labor agreement. No collective bargaining or other labor
agreement is currently being negotiated by AI. AI has not experienced any
work stoppage or other material labor difficulty over the past three years.
No such agreement which is binding on AI restricts it from relocating or
closing any or all of its operations.
2.2.20 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in Schedule 2.2.20, AI does not
currently sponsor, maintain or contribute, or has within the past 3 years
sponsored, maintained or contributed to, to any pension, retirement,
profit-sharing, deferred compensation, bonus, stock option or other incentive
plan, or any other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, or any other employee benefit plan as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), whether or not any such employee benefit plan is otherwise
exempt from the provisions of ERISA, and whether or not formal or informal,
written or oral, and whether or not legally binding. All such plans, funds
or programs sponsored, maintained or contributed to by AI currently or within
the past 3 years, whether or not listed on Schedule 2.2.20, are hereinafter
referred to as the "Employee Benefit Plans"). For the purpose of this
Section 2.2.20, the term "AI" shall include all "affiliates" of AI, whether or
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not incorporated, as such term is used in Section 407(d)(7) of ERISA.
(b) Full payment has been made of all amounts which AI
is required, under applicable law or under any Employee Benefit Plan or any
agreement relating to any Employee Benefit Plan to which it is a party, to
have paid as contributions to or benefits under any Employee Benefit Plan as
of the last day of the most recent fiscal year of such Employee Benefit Plan
ended prior to the date hereof. AI has made adequate provision in its
financial statements for liabilities to meet current contributions or benefit
payments.
(c) AI has performed all obligations required to be
performed by it under the Employee Benefit Plans. AI has not engaged in any
transaction with respect to the Employee Benefit Plans which would subject AI
or DAH to a tax, penalty or liability for a prohibited transaction under
section 406, 407 or 502(i) of ERISA or Section 4975 of the Code, nor have
either of AI's or AI' directors, officers, partners, employees or agents, to
the extent they or any of them are fiduciaries with respect to such Employee
Benefit Plans, breached any of their responsibilities or obligations imposed
upon fiduciaries under Title I of ERISA or which would result in any claim
being made under or by or on behalf of any such Employee Benefit Plans by any
party with standing to make such claim. AI will not have any plan or
commitment, whether formal or informal, written or oral, and whether or not
legally binding, to modify or change any Employee Benefit Plan in any
material manner prior to the Closing Date. AI and any "administrator(s)" (as
described in Section 3(16)(A) of ERISA) of the Employee Benefits Plans have
complied in all material respects with the applicable requirements of ERISA,
the Code and all other statutes, orders, rules or regulations, specifically
including material compliance with all reporting and disclosure requirements
of Part 1 of Title 1 of ERISA and of the Code in a timely and accurate
manner, and no penalties have been or will be imposed, nor is AI, AI or any
administrator liable for any penalties imposed, under ERISA, the Code or
otherwise with respect to the Employee Benefit Plans or any related trusts of
AI. AI is not delinquent in the payment of any federal, state or local taxes
with respect to the Employee Benefit Plans. There is no pending litigation,
arbitration, or disputed claim, settlement adjudication or proceeding with
respect to the Employee Benefit Plans, and none of AI, AI or any
administrator is aware of any threatened litigation, arbitration or disputed
claim, adjudication proceeding, or any governmental or other proceeding, or
investigation with respect to the Employee Benefit Plans or with respect to
any fiduciary or administrator thereof (in their capacities as such), or any
party-in-interest thereto (with respect to their relationship as such). There
is no "defined benefit plan" within the meaning of Section 414(j) of the Code
or Section 3(35) of ERISA to which AI has been a party or has been required
to make any contributions at any time during the last ten (10) years. There
is no multiemployer plan to which AI has been a party or has been required to
make any contributions at any time during the last ten (10) years.
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(d) The Shareholders have delivered or caused to be
delivered to DAH prior true, accurate and complete copies of (A) all Employee
Benefit Plans and any related trust agreements, custodial agreements,
investment management agreements, insurance contracts or policies, and
administrative service contracts, all as in effect, together with all
amendments thereto which will become effective at a later date; (B) the
latest Summary Plan Description and any modifications thereto for each
Employee Benefit Plan requiring same under ERISA; (C) the Summary Annual
Report for the current and prior fiscal years for each Employee Benefit Plan
requiring same under ERISA; (D) each Form 5500 and/or Form 990 series filing
(including required schedules and financial statements) for the current and
prior fiscal years for each Employee Benefit Plan required to file such form;
and (E) the most recent actuarial evaluation, analysis or other report issued
with respect to any Employee Benefit Plan. None of AI or any officer,
partner, employee representative or agent of either of them, has made any
written or oral representations or statements to any current or former
employees, dependents, participants or beneficiaries or other persons which
are inconsistent in any material manner with the provisions of these
documents.
(e) With respect to any of AI's employee welfare plans
(as defined in Section 3(1) of ERISA and including those Employee Benefits
Plans which qualify as such) which are "group health plans" under Section
162(k) or Section 4980B of the Code and Section 607(1) of ERISA and related
regulations (relating to the benefit continuation rights imposed by the
Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"), as amended
to date), there has been timely compliance in all material respects with all
requirements imposed thereunder, as and when applicable to such plans, so
that AI has (or will incur any) loss, assessment, penalty, loss of federal
income tax deduction or other sanction, arising on account of or in respect
of any failure to comply with any COBRA benefit continuation requirement,
which is capable of being assessed or asserted directly or indirectly against
AI, or against DAH or DAH or any of their respective subsidiaries or other
member of DAH's corporate control group, with respect to any such plan.
2.2.21 CONTRACTS AND COMMITMENTS. Schedule 2.2.21 is a
list of all contracts, agreements, contract rights, leases, license
agreements, franchise rights and agreements, policies, purchase and sales
orders, quotations and executory commitments, instruments, guaranties,
indemnifications, arrangements, obligations and understandings (written or
oral) to which AI is a party and which involve the payment by or to AI in the
aggregate of $100,000 or more during any year (the "Material Contracts"). The
Material Contracts are valid and binding, in full force and effect and
enforceable against AI in accordance with their respective provisions. AI
has not assigned, mortgaged, pledged, encumbered, or otherwise hypothecated
any of its right, title or interest under any Real Property Lease, any
Personal Property Lease, or any Material Contract. AI is not in violation
of, in default in respect of, nor has there occurred an event or condition
which, with the passage of time of giving of notice (or both) would
constitute a violation or default of any Material Contract; and, there are no
facts or circumstances which would reasonably indicate that AI (or any other
party) will be or may be in violation of or in default in respect
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of any Material Contract, subsequent to the date hereof. No notice has been
received by AI claiming any such default by AI or indicating the desire or
intention of any other party thereto to amend, modify, rescind or terminate
the same.
2.2.22 ACCOUNTS RECEIVABLE. All of the accounts and notes
receivable, investments, deposits and prepaid expenses of AI as of September
30, 1997 are set forth on Schedule 2.2.22. All such accounts receivable,
arising between the date hereof and the Closing Date (in each case net of
allowances for doubtful accounts as disclosed on such Schedule, (a) are or
will be valid and subsisting, (b) represent or will represent sales actually
made, (c) arose or will arise in the ordinary and usual course of the
business of AI and (d) to the extent not collected prior to the Closing Date,
will be collectible according to their terms within 180 days after the date
of the Closing Date.
2.2.23 INVENTORIES. Schedule 2.2.23 completely and
accurately lists of all raw materials, supplies, parts, work-in-process, and
finished goods inventory and other inventory owned by AI and the accurate
cost of such inventory as of September 30, 1997. Except as set forth in
Schedule 2.2.23, the inventories except for amounts which in the aggregate
are not material, of AI (i) consist of a quality and quantity usable and
saleable in the ordinary and usual course of business, except for items of
obsolete materials and materials of substandard quality, all of which have
been written off or written down on the books of AI to net realizable value
prior to September 30, 1997 and (ii) have been priced at the lower of cost or
market on a FIFO basis. The quantities of all material portions of each
type of inventory (whether raw materials, work-in-process, or finished goods)
are not excessive, but are reasonable and warranted in the present
circumstances of AI; and all material portions of work-in-process and
finished goods inventory is free of any material defect or other deficiency.
Notwithstanding the foregoing, quantities of raw materials, work in process
and finished goods may be present which, in the aggregate, are not material
in the dollar amount for which said items are carried on the books and which
items cannot be used as a result of specification changes of which AI has not
been notified by AI's customer.
2.2.24 BACKLOG. All unfilled orders to purchase goods of
AI as of September 29, 1997 are set forth in Schedule 2.2.24 and are firm and
binding commitments (subject to cancellation rights set forth therein) of the
respective purchasers (assuming that such purchaser has properly authorized
by all requisite corporate or, if not a corporation, by all other requisite
action and has properly executed and delivered such purchase order, which, is
the case) to purchase the goods indicated.
2.2.25 BOOKS OF ACCOUNT; RECORDS. Except as disclosed in
Schedule 2.2.25, the general ledgers, books of account and other financial
records of AI are complete and correct, have been maintained in accordance
with generally accepted accounting principles and practices and the matters
contained therein are appropriately and accurately reflected in the Financial
Statements in all material respects.
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2.2.26 OFFICERS, PARTNERS, EMPLOYEES AND COMPENSATION.
Schedule 2.2.26 sets forth the name of all directors, partners and officers
of AI, their respective terms of office, the total salary, bonus payments,
fringe benefits and perquisites each received in each of the last 3 fiscal
years ended December 31, 1996, and changes to the foregoing which have
occurred since December 31, 1996; such Schedule also lists and describes the
current base salary, bonus payments, fringe benefits and perquisites of any
other employee, agent or representative of AI whose total current salary,
bonus or other compensation exceeds $50,000 annually during any of the last 3
fiscal years ended December 31, 1996, and changes to the foregoing since
December 31, 1996. There are no other material forms of compensation paid to
any such director, officer or employee of AI. The provisions for wages and
salaries accrued on the September 30, 1997 Balance Sheet are adequate for
salaries and wages, including accrued vacation pay, for the period up through
the date thereof, and AI has accrued on its books and records all obligations
for wages and salaries and other compensation to its employees, including,
but not limited to, vacation pay and sick pay, and all commissions and other
fees payable to agents, salesmen and representatives. AI will file any and
all payroll tax returns due through the Closing Date and pay or reserve on
the Closing Date Balance Sheet all payroll taxes due for any and all AI
employees.
Except as set forth on Schedule 2.2.26, AI has not become
obligated, directly or indirectly, to any shareholder, director, officer or
partner of AI or any member of their families, except for current liability
for employment compensation. Except as set forth on Schedule 2.2.26, no
shareholder, director, officer, partner, agent or employee of AI holds any
position or office with or has any financial interest, direct or indirect, in
any supplier, customer or account of, or other outside business which has
transactions with AI. AI, nor, any third party, has taken any action with
respect to any shareholder, director, officer, partner, employee or
representative of AI to attempt to induce or which would influence any such
person not to become associated with DAH from and after the Closing Date or
from serving DAH in a capacity similar to the capacity presently held. To
the best of the knowledge of the Shareholders, no employee of AI has a
present intention to leave the employ of AI or has taken any action directed
towards leaving the employ of AI. Except as set forth on Schedule 2.2.26, no
former employee of AI is currently or intends to enter into competition with
the business of AI.
2.2.27 CREDIT TERMS; PRODUCT WARRANTIES. The aggregate
amount of losses and expenses incurred by reason of allowances, customer
dissatisfaction or liabilities arising under AI's warranties and guarantees
during the three years ended December 31, 1996 are completely accounted for
in the financial statements of AI for such years and there has been no
materially adverse change in that experience since said date. Except as set
forth on Schedule 2.2.27, AI has conducted all qualification inspections and
quality conformance inspections required by the specifications for products
of AI included on qualified products lists in material compliance with the
requirements of such specifications, and all products shipped have been in
material conformance with such specifications.
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2.2.28 CONTRACTS WITH AFFILIATES. Any contract,
commitment, lease, permit or other instrument, agreement, understanding or
obligation (each a "Commitment") between AI and any affiliate including each
Shareholder), is the equivalent of an "arms-length" transaction with a third
party, and each such Commitment is described on Schedule 2.2.28 hereto.
2.2.29 GOVERNMENT CONTRACTS. AI is not a party to, nor is
it bound, nor does it have any liability, with respect to any Government
Contracts. For purposes of this Section 2.2.29, the term "Government" means
any agency, division, subdivision, audit group, or procuring office of the
federal government, including the employees or agents thereof; the term
"Transferor" means AI and its subsidiaries, divisions, affiliates, joint
venturers, agents, employees, officers and directors; the term "Government
Contract" means any prime contract, subcontract, basic ordering agreement,
letter contract, purchase order or delivery order of any kind, including all
amendments, modifications and options thereunder or relating thereto, between
the Transferor and any of the Government, any prime contractor of the
Government, any subcontractor of such a prime contractor or any subcontractor
of another subcontractor, however far removed from the prime contractor such
subcontractor may be, (A) currently in force; (B) which, within the three
years preceding the date of this Agreement, expired or were terminated; or
(C) for which final payment was received within the three years preceding the
date of this Agreement; and the term "Bid" means any outstanding quotation,
bid or proposal submitted by Transferor to the Government, any proposed prime
contractor of the Government, or any proposed subcontractor.
2.2.30 SOLVENCY. The total assets of each of the
Shareholders exceed their respective total liabilities; each of the
Shareholders are able to perform their respective financial obligations as
performance thereof becomes due.
2.2.31 NO STRATEGIC ALLIANCES. Except as disclosed in
Schedule 2.2.31, no agreement or understanding has been entered into between
AI and any company which is an arrangement with any other person which
involves equity investment or ownership, a joint venture or revenue or profit
sharing a "Strategic Alliance."
An arrangement for a preferred supplier relationship
which does not have any of the characteristics described in the foregoing
sentence is not a strategic alliance.
2.2.32 PAYMENTS AND EXPENDITURES. Except as set forth in
Schedule 2.2.32 since June 30, 1997, AI has not made (i) any payment or
incurred any liability on behalf of any Shareholder, (ii) made any payment to
or on behalf of any Shareholder except for the Shareholder's salary and
expense reimbursements made in the ordinary course of business, (iii) not
paid any amount not in the ordinary course of AI's business, or (iv) not made
any capital expenditure in excess of $100,000 in the aggregate.
2.2.33 COMPLETE DISCLOSURE. No representation or warranty
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made by AI or any of the Shareholders in this Agreement, and no exhibit,
schedule, statement, certificate or other writing furnished to DAH by or on
behalf of AI or any of the Shareholders pursuant to this Agreement or in
connection with the transactions contemplated hereby or thereby, contains or
will contain, any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained herein
and therein not misleading. Without limiting the foregoing, to the extent
applicable, no representation or warranty made in any of Sections 2.2.4
through 2.2.32 would differ in any material respect if the representation
contained information concerning AI's wholly owned subsidiary, Audio
International Sales, Inc.
3. COVENANTS.
3.1 COVENANTS OF THE SHAREHOLDERS.
3.1.1 COVENANT AGAINST DISCLOSURE. Other than in the
ordinary course of business of AI and except for professional advisors
(including attorneys, accountants and investment bankers) who agree to
maintain the confidentiality of such information, each of the Shareholders
agree not to (a) disclose to any person, association, firm, corporation or
other entity (other than DAH) or those designated in writing by DAH) in any
manner, directly or indirectly, any information or data relevant to the
business of AI, whether of a technical or commercial nature, or (b) use,
permit or assist, by acquiescence material or otherwise, any person,
association, firm corporation or other entity (other than DAH or those
designated in writing by DAH) to use, in any manner, directly or indirectly,
any such information or data, excepting only use of such data or information
as is at the time generally known to the public and which did not become
generally known through any breach of any provision of this Section 4.2.2.
3.1.2 COVENANT AGAINST HIRING. Each of the Shareholders
understands that it is essential to the successful operation of the business
to be acquired hereunder that DAH retain substantially unimpaired AI's
operating organization. Each of the Shareholders agrees not to purposefully
take any action which would induce any current employee or representative of
AI not to become or continue as an employee. Without limiting the generality
of the foregoing, the Shareholders shall not, whether directly or indirectly
through any subsidiary or affiliate, employ, whether an employee, officer,
director, agent, consultant or independent contractor, or enter into any
partnership, joint venture or other business association with, any current
employee, partner, representative, or manager of AI, for a period of the 12
months, after such person ceases or has ceased, for any reason, to be an
employee, representative, partner, or manager of AI; provided, however, that
Wayne Richie may hire any person (i) who is terminated by AI or (ii) who
prior to being solicited for employment by Wayne Richie, voluntarily
terminates his or her employment with AI.
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3.1.3 INJUNCTIVE RELIEF. Each of the Shareholders
acknowledges and agrees that DAH's remedy at law for any breach of any of
such Shareholders obligations under Subsections 3.1.1 and 3.1.2 hereof would
be inadequate, and agrees and consents that temporary and permanent
injunctive relief may be granted in a proceeding which may be brought to
enforce any such provision without the necessity of proof of actual damage.
The rights and remedies conferred upon DAH under this Section, or by any
instrument or law shall be cumulative and may be exercised singularly or
concurrently.
3.1.4 CONDUCT OF BUSINESS OF AI PRIOR TO CLOSING DATE.
Each of the Shareholders agrees that on and after the date hereof and prior
to the Closing Date:
(a) The business and operations, activities and
practices of AI shall be conducted only in the ordinary course of business
and consistent with past practice;
(b) No change shall be made in the articles of
incorporation or bylaws of AI, except as is necessary to comply with Section
7.2(a) hereof;
(c) No change shall be made in the number of shares
of authorized or issued capital stock of AI; nor shall any option, warrant,
call, right, commitment or agreement of any character be granted or made by
AI relating to its equity;
(d) No dividend shall be declared or paid or other
distribution (whether in cash, stock, property or any combination thereof) or
payment declared or made in respect of the AI Common Shares by AI nor shall
AI purchase, acquire, redeem or split, combine or reclassify any shares of
the capital stock of AI;
(e) The Shareholders shall, directly or indirectly,
solicit or encourage (including by way of furnishing any non-public
information concerning the business, properties or assets of AI), or enter
into any negotiations or discussions concerning, any Acquisitions Proposal
(as defined below). Any Shareholder will notify DAH promptly by telephone,
and thereafter promptly confirm in writing, if any such information is
requested from, or any Acquisition Proposal is received by AI or Shareholder.
As used in this Agreement, "Acquisition Proposal" shall mean any proposal
received by AI or any Principal Shareholder prior to the Closing Date for a
merger or other business combination involving AI or for the acquisition of,
or the acquisition of a substantial equity interest in, or a substantial
portion of the assets of AI other than the one contemplated by this Agreement.
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(f) Except as set forth in Schedule 3.1.4(f), Shareholder
will not permit AI to:
(A) incur, become subject to, or suffer, or agree to
incur, become subject to or suffer, any obligation or liability (absolute or
contingent) except current liabilities incurred, and obligations entered into in
the ordinary course of business;
(B) discharge or satisfy any lien or encumbrance or
pay any obligation or liability (absolute or contingent) other than
liabilities payable in the ordinary course of business;
(C) mortgage, pledge or subject to lien, charge or
any other encumbrance, any of the Property or agree so to do;
(D) sell or transfer or agree to sell or transfer
any of its assets, or cancel or agree to cancel any debt or claim, except in
each case in the ordinary course of business;
(E) consent or agree to a waiver of any right of
substantial value;
(F) enter into any transaction other than in the
ordinary course of its business;
(G) increase the rate of compensation payable or to
become payable by it to any Restricted Employee over the rate being paid to
such Restricted Employee at September 30, 1997;
(H) increase the rate of compensation payable or to
become payable by it to any officer, partner, employee or agent of AI not
listed on Schedule 2.2.5(b) (a "Non-Restricted Employee") over the rate being
paid to such Non-Restricted Employee at September 30, 1997, other than in the
ordinary course of business and in accordance with AI's past practice;
(I) terminate any material contract, agreement,
license or other instrument to which it is a party;
(J) through negotiation or otherwise, make any
commitment or incur any liability or obligation of a material nature to any
labor organization;
(K) make or agree to make any accrual or
arrangement for or payment of bonuses or special compensation of any kind to
any Restricted Employee;
(L) make or agree to make any accrual or
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arrangement for or payment of bonuses or special compensation of any kind to
any Non-Restricted Employee, other than in the ordinary course of business
and in accordance with AI's practice;
(M) directly or indirectly pay or make a commitment
to pay any severance or termination pay to any Restricted Employee;
(N) directly or indirectly pay or make a commitment
to pay any severance or termination pay to any Non-Restricted Employee, other
than in the ordinary course of business and in accordance with AI's past
practice;
(O) introduce any new method of management,
operation or accounting with respect to its business or any of the assets,
properties or rights applicable thereto other than changes required by GAAP;
(P) offer or extend more favorable prices,
discounts or allowances than were offered or extended regularly on and prior
to September 30, 1997, other than in the ordinary course of business; and
(Q) make capital expenditures in excess of $100,000
in the aggregate, or make any commitments for such capital expenditures.
(R) Enter into any Strategic Alliance.
(g) Each of the Shareholders will use their respective
reasonable efforts to preserve AI's business organization materially intact,
to keep available to AI the present service of AI's employees; and to
preserve for AI the good will of its suppliers, customers and others with
whom business relationships exist; and
(h) None of the Shareholders will take, agree to take or
permit to be taken any action or do or permit to be done anything in the
conduct of the business of AI, or otherwise, which would be contrary to or in
breach of any of the terms or provisions of this Agreement or which would
cause any of the representations or warranties of AI or the Shareholders
contained herein to be or become untrue in any material respect.
3.1.5 INSPECTION OF BOOKS AND RECORDS. From the date of this
Agreement until the Closing Date, AI shall make or cause to be made available
to DAH for examination the Property and all corporate records, minute books,
share records, treasury shares, tax returns, books of account, contract,
agreements, commitments, records and its documents of every character
relating to AI and its business and shall permit DAH and its representatives,
attorneys, accountants and agents to have access to and to copy, at DAH's
expense, the same at all reasonable times, so as to allow DAH to confirm
compliance with covenants and satisfaction of conditions hereunder.
3.1.6 FURTHER ASSURANCES. On and after the Closing Date, the
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Shareholders shall prepare, execute and deliver, at DAH's expense, such
further instruments of conveyance, sale, assignment or transfer, and shall
take or cause to be taken such other or further action as DAH shall
reasonably request at any time or from time to time in order to perfect,
confirm or evidence in DAH title to all or any part of the Stock or to
consummate, in any other manner, the terms and conditions of this Agreement.
3.1.7 PRESS RELEASES AND ANNOUNCEMENTS. Neither AI, any
Principal Shareholder, DAH nor DAH shall issue any press release or
announcement relating to the subject matter of this Agreement without the
prior written approval of the other parties hereto; PROVIDED, HOWEVER that
DAH may make any public disclosure it believes in good faith is required by
law (in which case he or it will advise the other parties hereto prior to
making the disclosure).
3.1.8 BANKRUPTCY. Neither AI nor any Principal
Shareholder shall commence any case, proceeding or other action (A) under any
existing or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to have
an order for relief entered with respect to either of them or seeking to
adjudicate either of them bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to either of them or for all of any substantial
part of either of their assets; (ii) neither AI nor any Shareholder shall
make a general assignment for the benefit of its creditors; (iii) no case,
proceeding or other action of a nature referred to in clause (i) above shall
be commenced by any person which (A) results in the entry of an order for
relief or any such adjudication or appointment or (B) remains undismissed or
discharged for a period of 60 days; (iv) no case, proceeding or other action
shall be commenced by any person seeking issuance of a warrant of attachment,
execution distraint or similar process against all or any substantial part of
either of their respective assets which results in the entry of an order for
any such relief; and (v) neither AI nor any Shareholder shall take any action
in furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in clause (i), (ii), (iii), or (iv) above.
3.1.9 LANDLORD'S CONSENTS, ETC. The Shareholders agree
that if the terms of any Agreement relating to the right to use AI's Real
Property requires they shall obtain, on or prior to the Closing Date, all
consents required from any person whatsoever to effect the transfer to DAH,
free and clear of all mortgages, pledges, liens, security interest,
encumbrances, restrictions and claims of any nature whatsoever.
3.1.10 DELIVERY OF FINANCIAL STATEMENTS. As soon as
reasonably practicable but no later than 10 business days prior to the
Closing, the Shareholders shall deliver to DAH the balance sheet of AI as at
October 31, 1997 and the related statements of income, retained earnings and
cash flows for the period then ended, which shall be true, correct and
complete, shall have been prepared from and are in accordance with the books
and records of AI and shall have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis for such periods
using an accrual basis method, and fairly present the financial condition of
AI as of the dates stated and the
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results of operations of AI for the periods then ended in accordance with
such practices. Such October 31, 1997 Financial Statements (including all
notes accompanying such statements) shall not disclose any event or
circumstance materially adversely affecting AI or its businesses. The
October 31, 1997 Financial Statements shall upon delivery to DAH become part
of the Financial Statements as defined herein for all purposes hereof.
3.1.11 COOPERATION OF SHAREHOLDERS. The Shareholders shall
cooperate and shall use their best efforts to have AI's independent certified
public accountant deliver to DAH on or before 45 days following the Closing
Date, the audited financial statements of AI for periods which are presently
unaudited and for which DAH will become obligated to include such statements
in DAH's filings with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
3.1.12 CLOSING DATE BALANCE SHEET. The Shareholders will
cause a balance sheet as of the Closing Date to be delivered to DAH within a
reasonable time after the Closing Date (the "Closing Date Balance Sheet")
which shall be true, correct and complete, shall have been prepared from and
are in accordance with the books and records of AI and shall have been
prepared in conformity with generally accepted accounting principles applied
on a consistent basis for such periods using an accrual basis method, and
fairly present the financial condition of AI as of the date stated on such
dates in accordance with such practices.
3.2 COVENANTS OF DAH. On or prior to the Closing Date, DAH
covenants shall deliver to the Shareholders, all duly and properly executed,
the following:
3.2.1 LEGAL OPINION. The legal opinion referred to in
Section 6.2(a).
3.2.2 PAYMENT. The Payment pursuant to Section 1.2.1.
3.2.3 FURTHER ASSURANCES. On and after the Closing Date,
DAH shall prepare, execute and deliver, at its expense, such further
instruments of conveyance, sale, assignment or transfer, and shall take or
cause to be taken such other or further action as the Shareholders shall
reasonably request at any time or from time to time in order to perfect,
confirm or evidence in DAH title to all or any part of the Stock or to
consummate, in any other manner, the terms and conditions of this Agreement.
3.2.4 CONFIDENTIALITY AGREEMENTS. Between the date of
this Agreement and the Closing Date, DAH shall continue to be bound by its
obligations pursuant to the written confidentiality agreements to which DAH
and AI are parties.
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4. INDEMNIFICATION.
4.1 The Shareholders, with full recourse, hereby indemnify and
hold DAH harmless from any and all claim, loss, damage or expense (including
attorneys' fees) ("losses") as a result of any breach of any warranty or
representation made in this Agreement by the Shareholders. Anything in
Section 4.3 to the contrary notwithstanding, no claim may be asserted nor may
any action be commenced against the Shareholders for breach of any
representation or warranty contained herein, unless written notice of such
claim or action is received by the Shareholders describing in detail the
facts and circumstances with respect to the subject matter of such claim or
action or prior to the date on which the representation or warranty on which
such claim or action is based ceases to survive as set forth in Section 4.3,
irrespective of whether the subject matter of such claim or action shall have
occurred before or after such date.
4.2 Without limiting the generality of the foregoing, the
Shareholders agree to pay to DAH in immediately available funds within 10
days after notice from DAH to pay, the following amounts:
4.2.1 On or before 180 days following the Closing Date, an
amount equal to (i) 100% of any Accounts Receivable of AI owing on the
Closing Date which have not been collected on or before 180 days after the
Closing Date, less (ii) the amount for doubtful accounts on the Closing Date
Balance Sheet of AI. With respect to any such Accounts Receivable, DAH will
cause AI, without warranty or recourse, to assign all of its right title and
interest in such accounts to the Shareholders in the percentages specified in
Exhibit 1.1.
4.2.2 On or before two years and three months following
the Closing Date, an amount equal to 100% of the value on the Closing Date
Balance Sheet (or if acquired subsequent to the Closing Date at cost) of any
Inventory of AI owned by AI on both the Closing Date and the date two years
following the Closing Date. With respect to any such Inventory, DAH will
cause AI, without warranty or recourse, to transfer all of its right title
and interest in such Inventory to the Shareholders in the percentages
specified in Exhibit 1.1. Notwithstanding the foregoing, the Shareholders
shall not be responsible for indemnification of quantities of raw materials,
work in process and finished goods may be present which, in the aggregate,
are not material in the dollar amount for which said items are carried on the
books and which items cannot be used as a result of specification changes of
which AI has not been notified by AI's customer.
4.2.3 On or before each of April 30, 1999 and 2000, an
amount equal to 100% of the amount by which the cost to AI for performing
warranty work and providing replacement parts and equipment to customers for
sales made prior to the Closing Date, PROVIDED, HOWEVER, that no such
indemnification shall be required to be made by the Shareholders if adjusted
EBIT (as defined in the Earnout Agreement) is equal to or greater than $4
million in each of such years and, FURTHER PROVIDED, that for purposes of
this subsection, "warranty work" shall not be deemed to include immaterial
expenditures made
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in connection with product refinement.
4.2.4 Any amounts not paid by the Shareholders pursuant to
this Section 4 when due shall bear interest at the highest rate permitted by
law.
4.2.5 Subject to the other terms and provisions of this
Agreement and the Earnout Agreement, the representations and warranties of
the parties hereto contained in Section 2 herein shall survive the Closing
and shall remain in full force and effect, regardless of any investigation
made by or on behalf of the Shareholders or DAH until April 30, 2000.
4.2.6 The indemnification obligations of the Shareholders
hereto shall not be effective until the aggregate dollar amount of all Losses
which would otherwise be indemnifiable pursuant to this Section 4.2 exceeds
$250,000 (the "Threshold Amount"), and then only to the extent such aggregate
amount exceeds the Threshold Amount. In addition, no claim may be made
against the Shareholders for indemnification with respect to any individual
item of Loss (except for multiple losses which result from breach of the
representations the subject matter of each such loss being substantially
similar in nature), unless such item exceeds $5,000, nor shall any such item
be applied to or considered part of the Threshold Amount. The Indemnification
obligations of the Shareholders pursuant to this Section 4.2 shall be
effective only until the dollar amount paid, by the Shareholders
individually, in respect of the Losses (including those related to all
representations and warranties, except as provided below, and those for
Sections 4.2.1, 4.2.2, and 4.2.3) indemnified against an amount equal to
$500,000 as respects to each Shareholder provided, however that the
limitation of the amount of the indemnity if the indemnification results from
(i) with respect to the financial statements, any untrue statement of a
material fact or failure to state a material fact required to be stated
therein or (ii) the breach of any provision in Section 2.2.15 shall be
$1,700.000 for each Shareholder, severally and not jointly. In the event of
any obligation by the Shareholders to DAH resulting from a determination of
actual fraud, there shall be no limitation of dollar amount. Without limiting
DAH's rights pursuant to this Section 4, DAH may offset such amounts, if any,
as may be owing to the Shareholders pursuant to Sections 1.2.2, 1.2.3 or
1.2.4.
5. CONDITIONS PRECEDENT TO OBLIGATIONS.
5.1 CONDITIONS TO OBLIGATIONS OF DAH. Each and every obligation
of DAH to be performed at the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by DAH):
5.1.1 CONSENTS. AI shall have obtained and delivered to
DAH all consents set forth on Schedule 5.1.
5.1.2 OPINION OF COUNSEL. The Shareholders shall have
delivered or caused to be delivered to DAH an opinion of counsel for the
Shareholders, addressed to DAH and dated the Closing Date, in the form of
Exhibit C attached hereto.
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5.1.3 DELIVERY OF CERTAIN AGREEMENTS BY SHAREHOLDERS.
Robert S. Brown and Rick Marsh shall have executed and delivered Employment
Agreements to DAH in the form to be agreed upon between DAH and Robert S.
Brown and DAH and Rick Marsh. Robert S. Brown and Rick Marsh shall have
executed and delivered Covenants Not to Compete to DAH in the form of Exhibit
5.1.3(A) and Wayne Richie shall have executed and delivered a Covenant Not to
Compete to DAH in the form of Exhibit 5.1.3(B).
5.1.4 DELIVERY OF STOCK AND RECEIPT OF PAYMENT THEREFOR.
The Shareholders shall deliver the stock certificates of AI duly endorsed for
transfer by assignments separate from certificates, endorsed in blank with
signatures guaranteed by a national bank or member firm of the New York Stock
Exchange.
5.1.5 TRADE SECRETS AND CONFIDENTIAL INFORMATION. At the
Closing, the Shareholders shall deliver to DAH, reduced to writing as
reasonably practical, all trade secret information or other know how of a
business or technical nature, which is currently used for the present or then
anticipated future business of AI.
5.1.6 EARNOUT AGREEMENT. The Shareholders shall each
execute and deliver the Earnout Agreement to DAH.
5.2 CONDITIONS TO OBLIGATIONS OF AI AND THE SHAREHOLDERS. Each
and every obligation of the Shareholders, to be performed on or before the
Closing Date shall be subject to the satisfaction as of or before such time
of the following conditions (unless waived in writing by the Shareholders).
5.2.1 OPINION OF COUNSEL. DAH shall have delivered or
caused to be delivered to the Shareholders an opinion of counsel for DAH,
addressed to the Shareholders and dated the Closing Date, in form of Exhibit
H attached hereto.
5.2.2 DELIVERY OF CERTAIN AGREEMENTS BY DAH. DAH shall
cause AI to have executed and delivered Employment Agreements to Robert S.
Brown and Rick Marsh in the form to be agreed upon between DAH and Robert S.
Brown and DAH and Rick Marsh. DAH shall and shall cause AI to have executed
and delivered Covenants Not to Compete in the form of Exhibit 4.1.3(a) to
Robert S. Brown and Rick Marsh and the form of Exhibit 4.1.3(b) to Wayne
Richie.
5.2.3 PAYMENT. DAH shall have made the payment required
pursuant to Section 1.2.1.
5.2.4 EARNOUT AGREEMENT. DAH shall have executed and
delivered the Earnout Agreement to each of the Shareholders.
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6. MISCELLANEOUS PROVISIONS.
6.1 NOTICE. All notices and other communications required or
permitted under this Agreement shall be deemed to have been duly given and
made, if in writing, and (i) if served by personal delivery to the party for
whom intended (which shall include overnight delivery by Federal Express or
similar service), (ii) or 3 business days after being deposited, postage
prepaid, certified or registered mail, return receipt requested, in the
United States mail bearing the address shown in this Agreement for, or such
other address as may be designated by writing hereafter by, such party, or
(iii) if sent by telecopy to the number showing in this Agreement for, or
such other number as may be designated in writing hereafter by, such party
and immediately confirmed by sending a copy of such notice by either method
described in clause (i) or (ii) above.
If to Shareholders: Robert S. Brown
14 Longfellow
Little Rock, Arkansas 72207
Telephone: (501) 664-8668
Rick Marsh
4149 Pangeburn Road
Heber Springs, Arkansas 72543
Telephone: (501) 362-0029
Wayne Richie
15 Ridgehaven Court
Little Rock, Arkansas 72211
Telephone: (501) 224-5252
Fax Number: (501) 228-7311
with copies to: Joseph S. Mowery
Giroir, Gregory, Holmes and
Hoover, PLC
111 Center Street, Suite 1900
Little Rock, AR 72201
Tel: (501) 372-3000
Fax: (501) 374-2380
If to DAH: DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Telephone: (310) 725-9123
Fax: (310) 643-0746
27
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and a copy to: Spolin & Silverman
100 Wilshire Boulevard, Suite 940
Santa Monica, California 90401
Attention: Stephen A. Silverman, Esq.
Telephone: (310) 576-1221
Fax Number: (310) 576-4844
6.2 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, and the documents referred to herein and therein embody the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, oral or written, relative to said subject matter.
6.3 BINDING EFFECT; ASSIGNMENT. This Agreement and the rights and
obligations arising hereunder shall inure to the benefit of and be binding
upon AI, its DAH, its successors and permitted assigns, and the Shareholders,
their heirs, legal representative and permitted assigns. Neither this
Agreement nor any of the rights, interest or obligations hereunder shall be
transferred or assigned (by operation of law or otherwise) by any of the
parties hereto without the prior written consent of the other party or
parties except that DAH shall have the right to assign, in whole or in part,
its rights hereunder to one or more affiliates of DAH, which in each case
shall be a wholly-owned subsidiary of DAH. Any transfer or assignment of any
of the rights, interests or obligations hereunder in violation of the terms
hereof shall be void and of no force or effect.
6.4 CAPTIONS. This Agreement and Section headings of this
Agreement are inserted for convenience only and shall not constitute a part
of this Agreement in construing or interpreting any provision hereof.
6.5 WAIVER; CONSENT. This Agreement may not be changed,
amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by a writing executed by the
parties hereto, and no waiver of any of the provisions or conditions of this
Agreement or any of the rights of a party hereto shall be effective or
binding unless such waiver shall be in writing and signed by the party
claimed to have given or consented thereto. Except to the extent that a
party hereto may have otherwise agreed in writing, no waiver by that party of
any condition of this Agreement or breach by the other party of any of its
obligations or representations hereunder or thereunder shall be deemed to be
a waiver of any other condition or subsequent or prior breach of the same or
any other obligation or representation by the other party, nor shall any
forbearance by the first party to seek a remedy for any noncompliance or
breach by the other party be deemed to be a waiver by the first party of its
rights and remedies with respect to such noncompliance or breach.
28
<PAGE>
6.6 NO THIRD PARTY BENEFICIARIES. Nothing herein, expressed or
implied, is intended or shall be construed to confer upon or give to any
person, firm, corporation or legal entity, other than the parties hereto, any
rights, remedies or other benefits under or by reason of this Agreement.
6.7 COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be
executed simultaneously in multiple counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and
the same instrument. The signature page of this Agreement when transmitted
by facsimile shall be effective execution and delivery of this Agreement.
6.8 GENDER. Whenever the context requires, words used in the
singular shall be construed to mean or include the plural and vice versa, and
pronouns of any gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
6.9 GOVERNING LAW. This Agreement shall in all respects be
constructed in accordance with and governed by the laws of the State of
Delaware.
7. TERMINATION. This Agreement may be terminated by the parties and
the contemplated transactions abandoned at any time prior to closing, as
follows:
(a) By the written consent of DAH and a majority of the
Shareholders;
(b) By either DAH or a majority of the Shareholders, upon written
notice of all other parties of this Agreement, at any time after December 15,
1997 if the Closing Date shall not have occurred by such date; provided,
however, that the right to terminate this Agreement under this paragraph (b)
shall not be available to any party which has intentionally breached this
Agreement or whose failure to comply with its covenants and agreements set
forth in this Agreement shall have been the primary cause of the Closing not
occurring.
/s/
- -------------------------------
Robert S. Brown
/s/
- -------------------------------
Rick Marsh
/s/
- -------------------------------
Wayne Richie
29
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DeCrane Aircraft Holdings, Inc.
/s/
- -------------------------------
By:
30
<PAGE>
SCHEDULE A
TO STOCK PURCHASE AND SALE AGREEMENT
DEFINITIONS
"Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble
"AI Common Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2
"AI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble
"AI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble
"Bid". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29
"CERCLA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15
"COBRA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20
"Commitment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.28
"DAH". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble
"Employee Benefit Plan". . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20
"ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20
"Government" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29
"Hazardous substance". . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15
"Material Adverse Effect". . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5
"Non-Restricted Employees" . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5
"Permits". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.8
"Principal Shareholders" . . . . . . . . . . . . . . . . . . . . . . . .Preamble
"Real Property Leases" . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.13
"Real Property". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2.13
"Release". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15
"Restricted Employee". . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29
"Financial Statements" . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4
"Government Contract". . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29
34
<PAGE>
Exhibit 10.38
KILROY REALTY, L.P.
MODIFIED NET
INDUSTRIAL BUILDING LEASE
THIS MODIFIED NET INDUSTRIAL BUILDING LEASE (this "Lease") is executed
this ____ day of ____________, 1997, between KILROY REALTY, L.P., a Delaware
Limited Partnership, KILROY REALTY CORPORATION, a Maryland Corporation, General
Partner (hereafter called "Lessor") and HOLLINGSEAD INTERNATIONAL, a California
Corporation (hereinafter called "Lessee").
W I T N E S S E T H:
Lessor hereby leases to Lessee, and Lessee hires from Lessor, that certain
real property ("Real Property") with the improvements comprising approximately
fifty-eight thousand three hundred three (58,303) rentable square feet,
structures, buildings and fixtures located therein or thereon and all
appurtenances thereto (the "Improvements"), with the street address of 12442
Knott Avenue, City of Garden Grove, State of California and more particularly
described on Exhibit "A" attached hereto and by this reference made a part
hereof, subject to governmental regulations and matters of record, for and
during the term of seven (7) years, commencing on November 1, 1997 ("the
Commencement Date") and ending on October 31, 2004. The Real Property and the
Improvements shall sometimes hereinafter be collectively referred to as the
"Premises."
It is further mutually agreed between the parties as follows:
1. RENT. Lessee agrees to pay to Lessor as rent for the Premises, payable at
such place as may be designated by Lessor in writing, in lawful money of the
United States of America, the sum of Thirty-One Thousand Four Hundred
Eighty-Three and 62/100 ($31,483.62) Dollars ($0.54 per rentable square foot)
per month, in advance, on the lst day of each calendar month occurring after the
Commencement Date through April 30, 2001 and the sum of Thirty-Seven Thousand
Six Hundred Five and 44/100 ($37,605.44) per month ($0.645 per rentable square
foot) from May 1, 2001 through October 31, 2004, as said term is fixed under the
preceding paragraph hereof. Lessee's obligation hereunder for the first and last
month shall be prorated on the basis of the commencement and expiration,
respectively, of Lessee's right of occupancy.
2. SECURITY DEPOSIT. Lessee further agrees to pay to Lessor Thirty-One
Thousand Four Hundred Eighty-Three and 62/100 ($31,483.62) Dollars as a security
deposit to be held by Lessor as security for the faithful performance by Lessee
of all the terms, covenants and conditions of this Lease to be kept and
performed by Lessee during the term hereof. If Lessee defaults with respect to
any provision of this Lease, including, but not limited to the provisions
relating to the payment of rent, Lessor may (but shall not be required to) use,
apply or retain all or any part of this security deposit for the payment of rent
or any other sum in default, or for the payment of any amount which Lessor may
spend or become obligated to spend by reason of Lessee's default, or to
compensate Lessor for any other loss or damage which Lessor may suffer by reason
of Lessee's default. If any portion of said deposit is so used or applied,
Lessee shall within ten (10) days after written demand therefor, deposit cash
with Lessor in an amount sufficient to restore the security deposit to its
original amount and Lessee's failure to do so shall be a material breach of
this Lease. Lessor shall not be required to keep this security deposit separate
from its general funds, and Lessee shall not be entitled to interest on such
deposit. If Lessee shall fully and faithfully perform every provision of this
Lease to be performed by it, the security deposit or any balance thereof shall
be
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<PAGE>
returned to Lessee or, at Lessee's option, to the last assignee of Lessee's
interest hereunder at the expiration of the Lease term. In the event of
termination of Lessor's interest in this Lease, Lessor shall transfer said
deposit to Lessor's successor-in-interest.
If the monthly rent shall, from time to time, increase during the term of
this Lease, Lessee shall thereupon deposit with Lessor additional security so
that the amount of deposit held by Lessor shall at all times bear the same
proportion to the then current rent as the original security deposit bears to
the original monthly rent set forth in paragraph 1, hereof.
3. USE. The Premises are leased to Lessee for the purpose of conducting
therein light manufacturing, assembly and distribution of avionic equipment and
for any other use which is reasonably comparable and for no other purpose.
Lessee covenants and agrees that it shall not use the Premises in a manner which
would constitute a nuisance or cause an unreasonable annoyance to any other
lessee of Lessor or to Lessor, and that if Lessee violates this covenant, Lessee
shall immediately cease and refrain from engaging in such use upon notice from
Lessor.
4. EARLY/DELAY IN POSSESSION. Lessee shall be permitted early access to the
Premises on October 1, 1997 for the purposes of preparing the building located
thereon for occupancy and use by Lessee, including without limitation the
installation and electrical hookup of machinery and equipment used in Tenant's
business; provided, however, that Lessee's preparation for occupancy and use
shall not unreasonably interfere with any ongoing construction of tenant
improvements in, and/or the refurbishing of, the building comprising a portion
of the Premises. If Lessee occupies the Premises prior to said Commencement
Date, such occupancy shall be subject to all provisions hereof but such
occupancy shall not advance the Commencement Date or the termination date, and
Lessee shall not be required to pay rent for such period of early occupancy.
Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver
possession of the Premises to Lessee on said date, Lessor shall not be subject
to any liability therefor, nor shall such failure affect the validity of this
Lease or the obligations of Lessee hereunder or extend the term hereof, but in
such case, Lessee shall not be obligated to pay rent until possession of the
Premises is tendered to Lessee; provided, however, that if Lessor shall not have
delivered possession of the Premises within one hundred twenty (120) days from
said Commencement Date, Lessee may, at Lessee's option, by notice in writing to
Lessor within thirty (30) days thereafter, but not subsequent to the date
possession of the Premises is tendered to Lessee, cancel this Lease, in which
event the parties shall be discharged from all obligations hereunder; provided
further, however, that if such written notice of Lessee is not received by
Lessor within said thirty (30) day period, Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect.
5. WASTE. Lessee shall not commit, or suffer to be committed, any waste upon
said Premises, or any nuisance, or other act or thing which may disturb the
quiet enjoyment of any other lessee in the building in which the Premises may be
located.
6. COMPLIANCE WITH LAW. Lessor warrants to Lessee that the Premises, in its
state existing on the date that the Lease term commences, but without regard to
the use for which Lessee will use the Premises, does not violate any covenants
or restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term Commencement Date. In the event it is
determined that this warranty has been violated, then after written notice from
Lessee, Lessor's sole obligation with regard to such warranty is to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event Lessee
does not
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<PAGE>
give to Lessor written notice of the violation of this warranty within six (6)
months from the later of (a) Lease Commencement Date, or (b) the date Lessee
takes actual possession of the Premises, the correction of same shall be the
obligation of Lessee at Lessee's sole cost. The warranty contained in this
paragraph shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, in such event, Lessee
shall correct any such violation at Lessee's sole cost.
Lessee shall at its sole cost, comply with all covenants, conditions and
restrictions of record or later recorded, and all ordinances, statutes, rules
and regulations of any lawful authority (including without limitation the
Americans With Disabilities Act) having jurisdiction over Lessee or the Premises
now in force or which may thereafter be in force, relating to the use, condition
or occupancy of said Premises, and with the requirements of any board of fire
insurance underwriters or other similar bodies now or hereafter constituted,
relating to, or affecting the condition, use or occupancy of the Premises. If
Lessor gives Lessee notice of Lessee's noncompliance with any of the matters or
requirements set forth in this paragraph, Lessee shall within a reasonable time
period cause said Premises to comply. In the event Lessee does not bring its
use, occupancy or the condition of the Premises into compliance within such
reasonable time period, Lessor reserves the right, at its option, to do so, and
charge the cost and expense thereof to Lessee together with the maximum
permissible interest from the date of Lessor's payments, and Lessee promises to
and agrees to pay the cost and expense thereof.
7. ALTERATIONS. Except in the event of an emergency, Lessee shall not make
or suffer to be made, any alterations, additions or utility installations
("an Alteration") on or about said Premises which violate any ordinance,
statute law, rule or regulation (including without limitation the Americans
With Disabilities Act). Further, any Alteration on or to the Premises shall
not be made without the prior written consent of Lessor. Lessor's prior
written consent shall not be necessary for emergency repairs. Unless
otherwise agreed in writing by Lessor and Lessee, any Alterations of said
Premises, except movable furniture and trade fixtures, shall become at once a
part of the realty and belong to Lessor. Lessor shall have the right to
increase the security deposit under paragraph 2 hereof in an amount
reasonably calculated in good faith by Lessor to cover the cost to repair the
altered portion of the Premises to its original condition, and Lessee
covenants to immediately remit to Lessor such increased security deposit.
Lessee shall furnish Lessor with plans and specifications or other detailed
information covering such work, and, upon Lessor's written request, furnish
Lessor with a lien and completion bond to insure payment of the costs
thereof. Any and all costs of such Alterations, additions or installation
shall be borne and paid, on or before the due date, by Lessee. Upon the
termination of this Lease for any reason, Lessee shall be required at
Lessor's option (to be exercised at any time) to remove said Alterations from
the Premises and to restore said Premises to their original condition at the
sole cost of Lessee. Upon the failure of Lessee to restore the Premises to
their original condition, Lessor may utilize the security deposit or any
portion thereof to restore the Premises or correct any loss or damage to the
Premises at the sole cost of Lessee. Notwithstanding the foregoing sentence,
if Lessee anticipates that it would prefer to leave in place as a part of the
Premises any Alteration, then concurrently with Lessee's request for approval
of such Alteration, Lessee shall request of Lessor that Lessor consent to
such Alteration remaining as a part of the Premises upon the termination of
this Lease. Lessor may give or withhold such consent, in whole or part,
acting in a commercially reasonable manner. If Lessor does not so consent
then Lessee shall comply with the preceding provisions of this paragraph 7.
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<PAGE>
8. FIXTURES. All signs and all trade fixtures and trade equipment which
have been or may be installed, placed or attached in or about the Premises by
Lessee shall always remain the property of Lessee and upon termination by
expiration of time or otherwise of this Lease, or at any prior time, Lessee
shall remove all or any of said signs, trade fixtures and trade equipment so
installed, placed or attached provided, however, that any damage caused to
the Premises by reason of such removal shall be repaired and paid by Lessee.
Lessor may at the termination of this Lease at its option require the removal
by Lessee at the expense of Lessee of any signs, trade fixtures, trade
equipment or other property installed, placed or attached to, in or about the
Premises by Lessee. Any property of Lessee not removed from the said Premises
upon the termination of this Lease or within a reasonable time thereafter
shall at the option of Lessor be deemed abandoned by Lessee and become the
property of Lessor. Any consents to the filing of UCC Financing Statements or
similar security instruments may be unreasonably withheld by Lessor in its
sole discretion. In the event Lessor consents to any such security instrument
being filed with the applicable governmental entity, Lessee shall pay all of
Lessor's legal fees incurred in connection therewith.
9. TAXES AND ASSESSMENTS. In addition to the rental hereinbefore provided to
be paid, Lessee covenants and agrees to timely reimburse Lessor for all taxes
which may be imposed upon the Premises, including the land and improvements
constituting the same. Such payment shall be made by Lessee within thirty (30)
days after receipt of Lessor's written statement setting forth the amount and
the reasonable computation thereof but in no event shall Lessee be required to
tender payment for taxes more than thirty (30) days prior to the due date
therefor. Lessee's obligation hereunder for the first year and the last year
shall be prorated on the basis of the commencement and expiration, respectively,
of Lessee's right of occupancy.
a. The term "real property tax" shall mean and include any form of
assessment, license fee, license tax, business license fee, business license
tax, commercial rental tax, levy, charge, penalty, tax or similar imposition,
imposed by any authority having the direct or indirect power to tax, including
any city, county, state or federal government, or any school, agricultural,
lighting, drainage or other improvement or special assessment district thereof,
as against any legal or equitable interest of Lessor in the Premises, including,
but not limited to, the following: (i) any tax on Lessor's right to rent or
other income from the Premises or against Lessor's business of leasing the
Premises; (ii) any assessment, tax, fee, levy or charge in substitution,
partially or totally of any assessments tax, fee, levy or charge previously
included within the definition of real property tax, it being recognized by
Lessee and Lessor that several modifications of the property law enacted by the
voters of the State of California have restricted revenues raised through the
property tax and that assessments, taxes, fees, levies and charges may be
imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants. It is
the intention of Lessee and Lessor that all new and increased assessments,
taxes, fees, levies and charges and all similar assessments, taxes, fees, levies
and charges be included within the definition of "real property tax" for the
purpose of this Lease; (iii) any assessment, tax, fee, levy or charge allocable
to or measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any tax on Lessor's right to receive, or the
receipt of, rent or income from the Premises or against Lessor's business of
leasing the Premises levied by the state, city or federal government, or any
political subdivision thereof, with respect to the receipt of such rent, or upon
or with respect to the possession, leasing, operating, management, maintenance,
alteration, repair, use or occupancy by
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<PAGE>
Lessor or Lessee of the Premises, or any portion thereof; and (iv) any
assessment, tax, fee, levy or charge upon this transaction or any document to
which Lessee is a party, creating or transferring an interest or an estate in
the Premises. "Real Property tax" shall not include Lessor's federal or state
income, franchise, inheritance, gift or estate taxes.
b. If the Premises are not separately assessed, Lessee's liability
shall be an equitable proportion of the real property taxes for all of the land
and improvements included within the tax parcel or other basis assessed, tax
levied or charged, such proportion to be reasonably determined in good faith by
Lessor from the respective valuations assigned in the taxing entity's work
sheets or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
c. Lessee shall pay prior to delinquency or reimburse Lessor for all
taxes assessed against and levied upon trade fixtures, furnishings, equipment
and all other personal property of Lessee contained in the Premises or
elsewhere, which taxes shall include taxes of every kind and nature levied and
assessed in lieu of, in substitution in whole or in part for, or in addition
to, existing or additional personal property taxes, whether or not now customary
or within the contemplation of the Lessor or the Lessee. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's personal property.
10. UTILITIES. Lessee shall pay for all sewer, water, gas, heat, light, power,
telephone and other utilities and services of every kind supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion (to be
determined by Lessor) of all charges jointly metered with other Premises.
11. ACCEPTANCE OF PREMISES. Subject to subparagraphs 37a and 37b below, by
entry hereunder, Lessee hereby accepts the Premises in their condition existing
as of the Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any covenants or restrictions of record, and accepts
this Lease subject thereto and to all matters disclosed thereby and by any
exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's
agent has made any representation or warranty as to the present or future
suitability of the Premises for the conduct of Lessee's business.
12. MAINTENANCE. Lessee shall at its sole cost keep and maintain the Premises
and appurtenances and every part thereof (except foundations which Lessor agrees
to repair), including windows and skylights, if any, sidewalks adjacent to said
Premises, the exterior roof and exterior walls, and any storefront and interior
of the Premises in good, safe and sanitary order, condition and repair, hereby
waiving all right to make repairs at the expense of Lessor whether or not such
right arises by operation of law or otherwise. In the event it becomes necessary
to repair or replace the exterior roof, any such work shall be performed in
accordance with Lessor's specifications then in effect. Lessor shall have the
responsibility to paint the exterior walls of the Premises, at Lessee's sole
cost and expense, no more often than every five (5) years from the date of the
last such painting. Lessee agrees to promptly reimburse Lessor for all
reasonable costs incurred in connection with such painting activity after Lessor
shall have
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given within notice of such costs to Lessee but in no event shall such
reimbursement be later than the due date of Lessee's next installment of rent.
Except as expressly provided in this Lease, Lessor shall have no duty,
obligation or liability whatsoever to care for or maintain the Premises or
the building of which the Premises may be a portion, including but not
limited to structural or nonstructural portions of the Premises and all
adjacent sidewalks, landscaping maintenance, driveways, parking lots, fences
and signs located in the areas which are adjacent to and included with the
Premises. In the event that by any express provision of this Lease, Lessor
agrees to care for, repair or maintain all, or any part of the Premises or
the building of which it is a part, such agreement on the part of Lessor
shall constitute a covenant only, and no obligation or liability whatsoever
shall exist on the part of Lessor to Lessee or any other person by reason
thereof unless and until Lessee shall have first served upon Lessor
personally a prior thirty (30) day notice in writing specifying with
particularity the provision of this Lease whereunder said duty on the part of
Lessor is claimed to exist, together with the repairs required to be made by
Lessor in the performance of such duty.
In the event Lessor fails to make the repairs required to be made by Lessor
under the terms of this Lease, Lessee may (but shall be under no obligation to
do so) make said repairs and offset the cost thereof against the next
installment of rent together with interest at the rate set forth in paragraph 34
below, from the date of Lessee's payments.
In the event Lessee fails to make the repairs required to be made by Lessee
under the terms of this Lease, Lessor may (but shall be under no obligation to
do so) enter upon the Premises and make said repairs and charge the cost thereof
to Lessee as part of the next installment of rent together with interest at the
rate set forth in paragraph 34 below, from the date of Lessor's payments, and
Lessee promises and agrees to pay the cost thereof.
13. CONDITION UPON TERMINATION. On the last day of the term hereof, or on any
sooner termination, Lessee shall surrender the Premises to Lessor in the same
condition as when received, ordinary wear and tear excepted, clean and free of
debris. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and fencing on the
Premises in good operating condition.
In the event Lessee terminates this Lease for any reason whatsoever prior
to the expiration of the term hereof, Lessee shall pay Lessor the full cost it
would incur in order to return the Premises to its original condition, including
repainting, replacement of carpeting and other floor surfaces, replacement of
ceiling tile and plumbing fixtures, replacement of landscaping, and any and all
additional replacement costs it would incur in restoring the Premises to its
original condition, ordinary wear and tear excepted. Any decision to replace or
repair any item referenced above shall be made solely at Lessor's reasonable,
good faith discretion.
14. LIENS. Lessee shall keep said Premises free of all liens arising out of
work done for or debts or taxes incurred by or assessed to Lessee and agrees to
hold Lessor harmless therefrom. If Lessor discharges any such lien, Lessee
agrees to save Lessor harmless therefrom and to pay Lessor thereon the cost of
discharging such lien together with interest at the rate set forth in paragraph
34 below, from the date Lessor discharges such lien together with Lessor's costs
and reasonable attorney's fees in
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connection with the settlement, trial or appeal of any such lien matter, which
sum shall be payable with the next installation of rent due.
15. LIABILITY AND INDEMNITY. Lessee covenants and agrees to indemnify, hold
harmless, save and defend Lessor from and against any and all loss, damage,
claim, cost, charge or expense arising or resulting from: (i) Lessee's use of
the Premises; (ii) the conduct of Lessee's business or anything else done or
permitted by Lessee to be done in or about the Premises; (iii) any breach or
default in the performance of Lessee's obligations under this Lease; or (iv)
other acts or omissions of Lessee. Lessee shall defend Lessor against any such
loss, damage, claim, cost, charge or expense at Lessee's sole cost and expense
with counsel reasonably acceptable to Lessor or, at Lessor's election, Lessee
shall reimburse Lessor for any legal fees or costs incurred by Lessor in
connection with any such claim. As a material part of the consideration to be
rendered to Lessor, Lessee hereby assumes all risk of damage to property or
injury to persons in or about the Premises from any cause other than Lessor's
negligence or willful misconduct and Lessee hereby waives all claims against
Lessor and agrees to indemnify Lessor against all claims in respect thereof,
except for any claim arising out of Lessor's negligence or willful misconduct.
Lessee further covenants and agrees to indemnify, hold harmless, save and
defend Lessor from and against any and all claims, liens, liability, loss or
damage, including, but not limited to, costs, expenses, and attorneys' fees
arising out of Lessee's obligations under the California Occupational Safety and
Health Act or any similar laws or statutes pertaining to the provision of a safe
place or safe equipment to employees.
Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's
business or any loss of income therefrom or for damage to the goods, wares,
merchandise or other property of Lessee, Lessee's employees, invitees,
customers, or any other person in or about the Premises, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether the said
damage or injury results from conditions arising upon the Premises or upon other
portions of the building of which the Premises are a part, or from other sources
or places and regardless of whether the cause of such damage or injury or the
means of repairing the same is inaccessible to Lessee. Lessor shall not be
liable for any damages arising from any act or neglect of any other lessee, if
any, of the building in which the Premises are located.
16. INSURANCE. No use shall be made or permitted to be made of said Premises,
nor acts done, which will increase the existing rate of insurance upon the
building in which said Premises may be located, or cause a cancellation of any
insurance policy covering said building, or any part thereof, nor shall Lessee
sell, or permit to be kept, used or sold, in or about said Premises, any article
which may be prohibited by standard form of fire insurance policies. Lessee
shall at its sole cost assume any increase of fire insurance premiums on the
entire building necessitated by reason of the Lessee's occupancy. Lessee shall,
at its sole cost, comply with any and all requirements pertaining to the use of
said Premises of any insurance organization or company necessary for maintenance
of reasonable fire and public liability insurance, covering said building and
appurtenances.
Lessee hereby waives any and all rights of action or recovery against
Lessor for loss of, damage to or destruction of property of Lessee or property
of others in custody of Lessee on the Premises occasioned by perils insured in
standard fire and extended coverage insurance policies.
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Lessee shall procure and supply to Lessor a written waiver of subrogation
for the benefit of Lessor on all fire and extended coverage insurance policies
carried by Lessee insuring Lessee's property at the Premises.
Lessee agrees to maintain at its sole cost during the term hereof the
following insurance with respect to the Premises and the use thereof, namely:
a. Comprehensive public liability and property damage liability
insurance (including contractual liability insurance for liabilities assumed
under this Lease, and including products and completed operations insurance)
with limits of not less than $1,000,000.00 for injuries to or death to any one
person and $1,000,000.00 for injuries to or deaths arising out of any one
occurrence, and $1,000,000.00 for injury to or destruction of property arising
out of any one occurrence, and $3,000,000.00 cumulative from all events. If such
insurance coverage has a deductible clause, the deductible amount shall not
exceed $10,000.00 per occurrence, and the Lessee shall be liable for such
deductible amount.
b. Fire and extended coverage insurance covering the Premises in the
principal amount of $1,000,000.00. Lessor shall have the option of procuring and
providing this fire and extended coverage insurance by written notification to
Lessee at the time of execution of this Lease or of execution of any extension
thereof in which event Lessee agrees to pay the cost of such insurance in
addition to the rental and other costs and considerations set forth elsewhere in
this Lease. If such insurance coverage has a deductible clause, the deductible
amount shall not exceed $10,000.00 per occurrence, and Lessee shall be liable
for such deductible amount.
c. Rental value insurance with loss payable to Lessor and any
lender(s), insuring the loss of the full rental and other charges payable by
Lessee to Lessor for one (1) year (including all real property taxes, insurance
costs and any scheduled rental increases). Said insurance shall provide for one
(1) full year's loss of rental revenues from the date of any such loss, and the
amount of coverage shall be adjusted annually to reflect the projected rental
income, real property taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next twelve (12) month period.
d. Boiler and Machinery Insurance in the event pressure vessels are
used on the Premises which do not fall within the scope of the extended coverage
provisions of the fire insurance policy.
Lessor shall have the right to review the amount of insurance coverage
annually and to require a higher principal amount of insurance if such a higher
limit is recommended by the insurance company or required by a lender whose loan
is secured by the Premises.
If Lessee fails to procure or maintain the insurance required of Lessee,
Lessor may obtain such insurance at Lessor's option and charge Lessee the costs
thereof.
Each policy of insurance to be obtained by Lessee shall be placed with a
company reasonably acceptable to Lessor and shall provide that Lessor is a named
insured, and no such policy may be cancelled or coverage reduced without thirty
(30) days prior written notice to Lessor and Lessee. Lessee shall furnish
Lessor with written evidence satisfactory to Lessor of such insurance prior to
occupancy of the Premises and shall deliver to Lessor a renewal certificate of
such insurance on or before fifteen (15) days prior to its expiration.
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17. WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve
the other, and waive their entire right of recovery against the other for loss
or damage arising out of or incident to the perils insured against under this
Agreement, which perils occur in, on or about the Premises, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. Lessee and Lessor shall, upon obtaining the policies of insurance
required hereunder, give notice to the insurance carrier or carriers that the
foregoing mutual waiver of subrogation is contained in this Lease.
18. LESSOR'S RIGHT OF ENTRY. Lessee shall permit Lessor and its agents to enter
into and upon said Premises at all reasonable times to show said Premises to
prospective purchasers, lenders or lessees or for the purpose of inspecting the
same or for the purpose of maintaining the building in which said Premises are
situated, or for the purpose of making repairs, alterations or additions to any
other portion of said building, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required, or for the purpose
of posting notices of non-liability for alterations, additions, or repairs, or
for the purpose of placing upon the property in which the said Premises are
located any usual or ordinary "for sale" signs, without any abatement of rent
and without any liability to Lessee for any loss of occupation or quiet
enjoyment of the Premises thereby occasioned; and shall permit Lessor, at any
time within one hundred eighty (180) days prior to the expiration of this Lease,
to place upon said Premises any usual or ordinary "to let" or "to lease" signs,
also without abatement of rent or liability to Lessee.
19. SIGNS. Lessor has reserved the exclusive right to the exterior front walls,
sidewalls, rear walls, and roof of said Premises, and Lessee shall not place or
permit to be placed upon said sidewalls, real wall, or roof, any sign,
advertisement, or notice without the prior written consent of Lessor, in its
sole but reasonable discretion.
20. ABANDONMENT. Lessee shall not vacate or abandon the Premises at any time
during the term hereof.
21. PARTIAL AND TOTAL DESTRUCTION. In the event of (i) a partial destruction of
said Premises or the building containing same during said term which requires
repairs to either said Premises or said building, or (ii) said Premises or said
building being declared unsafe or unfit for occupancy by any authorized public
authority for any reason other than Lessee's act, use or occupation, which
declaration requires repairs to either said Premises or said building, Lessor
shall forthwith make such repairs required, provided such repairs can be made
within one hundred twenty (120) days under the laws and regulations of
authorized public authorities, but such partial destruction (including any
destruction necessary in order to make repairs required by any such declaration)
shall in no way annul or void this Lease, except that Lessee shall be entitled
to a proportionate reduction of the rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which the making of such
repairs shall reasonably interfere with the business carried on by Lessee in
said Premises. If such repairs cannot be made within one hundred twenty (120)
days, Lessor may, at its option, make same within a reasonable time, this Lease
continuing in full force and effect and the rent to be proportionately abated,
as in this paragraph provided. In the event that Lessor does not so elect to
make such repairs which cannot be made within one hundred twenty (120) days, or
such repairs cannot be made under such laws and regulations, this Lease may be
terminated at the option of either party. In respect to any partial destruction
(including any destruction necessary in order to make repairs required by any
such declaration) which Lessor is obligated to repair or may elect to repair
under the terms of this paragraph, the provision of Section 1932,
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Subdivision (2), and Section 1933, Subdivision (4) of the Civil Code of the
State of California are waived by Lessee. In the event said destruction or
damage is substantial and occurs during the last six (6) months of the term of
this Lease, Lessor, at its option, may terminate and cancel this Lease. A total
destruction (including any destruction required by an authorized public
authority) of either said Premises or said building shall terminate this Lease.
22. CONDEMNATION. If said Premises or any part thereof are taken under the
power of eminent domain, this Lease shall terminate as to the part so taken as
of the date the condemning authority takes possession thereof. In such event the
rent shall be reduced in the proportion that the floor area taken relates to the
total floor area prior to the taking. If more than ten (10%) percent of the
floor area of the building located on said Premises or more than fifteen (15%)
percent of the area leased hereunder but not occupied by any building is taken
by condemnation only then, may Lessee, at Lessee's option, terminate this Lease
as of the date the condemning authority takes possession of said condemned
portion by giving written notice of termination to Lessor within ten (10) days
after receiving notice from Lessor that the condemning authority is taking such
possession. If Lessee does not terminate this Lease as hereinabove immediately
provided, then the rent payable shall be reduced as set forth above. Any
compensation awarded as damages for the taking of said Premises or the
appurtenances thereto together with any severance damages shall be the sole
property of Lessor, except to the extent that any award is made for trade
fixtures or equipment of Lessee which are not part of said real property and
except to the extent that Lessee may be paid for moving costs.
23. ASSIGNMENT OR SUBLETTING. Lessee shall not, voluntarily or by operation of
law, assign, transfer, mortgage, sublet, or otherwise transfer or encumber all
or any part of Lessee's interest in this Lease or in the Premises, or suffer any
other person (with the exception of the agents, employees and business invitees
of Lessee) to occupy or use the Premises, or any portion thereof, without the
prior written consent of Lessor, which consent Lessor may not unreasonably
withhold. Any attempted assignment, transfer, mortgage, encumbrance, subletting,
occupation or use without such consent first had and obtained, shall be void and
shall, at the option of Lessor, terminate this Lease. Any cumulative transfer
of, in excess of twenty percent (20%) of interests in the partnership, if Lessee
is a partnership, or in excess of fifty percent (50%) of the voting power of the
corporation, if Lessee is a corporation, shall constitute a transfer for the
purpose of this paragraph. Except that in the event that the assignee under an
assignment approved by Lessor and/or such assignee's guarantor, is equally
financially responsible as Lessee and the Guarantor of this Lease, and such
assignee assumes the covenants and conditions of Lessee pursuant to this Lease,
then Lessor shall release Lessee and the Guarantor of Lessee's obligations
hereunder of their obligations hereunder and under such guaranty. Lessee shall
remain obligated under the covenants and conditions of this Lease
notwithstanding any such assignment or subletting.
A consent to one assignment, transfer, encumbrance, or subletting to, or
occupation or use by one person, is not deemed to be a consent to any subsequent
assignment, transfer, encumbrance, subletting, occupation or use.
Any assignment, transfer, mortgage, encumbrance, or subletting, occupation
or use, whether with or without the consent of Lessor, shall automatically
terminate any option to extend this Lease, whether or not such option shall have
been exercised at the date of such assignment, transfer, mortgage, encumbrance,
subletting, occupation or use, provided the extended term resulting from the
exercise of such option shall not already have commenced.
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Lessor and Lessee hereby acknowledge that this Lease shall only confer
upon Lessee the right to possess the Premises in accordance with the terms and
conditions of this Lease and that Lessee shall not be entitled to any extra
rents, charges, profits or other compensation for the assignment upon an
assignment or subletting of Lessee's interest in the Premises. Any extra rents,
charges, profits, or other compensation for the assignment payable by an
assignee or subtenant of Lessee, or of Lessee's successor, shall become the
property of, and be payable to, Lessor; but only in the event that the
obligations of Lessee hereunder are released by Lessor and Lessee shall no
longer be obligated under the covenants and conditions of this Lease.
If Lessee shall request the consent of Lessor for any assignment,
encumbrance, or subletting or any act Lessee proposes to do, and Lessor in its
sole discretion deems it necessary to consult legal counsel in connection
therewith, then Lessee shall pay all of Lessor's reasonable attorney's fees
actually incurred and paid in connection therewith.
24. LESSEE'S BREACH. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
a. The abandonment of the Premises by Lessee;
b. The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of ten (10) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph;
c. The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph b above, where such failure shall continue for
a period of thirty (30) days after written notice hereof from Lessor to Lessee;
provided, however that if the nature of Lessee's default is such that more than
thirty (30) days are reasonably required for its cure, then Lessee shall not
deemed to be in default if Lessee commenced such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion;
d. (i) the making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. Provided, however, in the event that any provision of this paragraph is
contrary to any applicable law, such provision shall be of no force or effect.
e. The discovery by Lessor that any financial statement given to
Lessor by Lessee, or any guarantor of Lessee's obligation hereunder was
materially false.
In the event of any breach by Lessee in the payment of rent or any material
breach of any other covenant or condition of this Lease by Lessee not cured
prior to the expiration of any applicable cure period, then Lessor besides other
rights or remedies it may have, shall have the immediate right of reentry
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and may remove all personal property from the Premises; such property to be
removed and stored in a public warehouse or elsewhere at the cost of, and for
the account of, Lessee. Should Lessor elect to reenter, as herein provided, or
should it take possession pursuant to legal proceedings or pursuant to any
notice provided for by law, it may either terminate this Lease or it may from
time to time, without terminating this Lease, relet said Premises or any part
thereof for such term or terms and at such rental or rentals and upon such other
terms and conditions as Lessor in its sole discretion may deem advisable with
the right to make alterations and repairs to said Premises. Rental received by
Lessor from such reletting shall be applied: first, to the payment of any cost
of such reletting; second, to the payment of the cost of any necessary
alterations and repairs to the Premises; third, to the payment of any
indebtedness other than rent due hereunder from Lessee to Lessor; fourth, to the
payment of any rent due and unpaid hereunder; and the residue, if any, shall be
held by Lessor and applied in payment of future rent as the same may become due
and payable hereunder. Should such rentals received from such reletting during
any month be less than that agreed to be paid during that month by Lessee
hereunder, then Lessee shall pay such deficiency to Lessor. Such deficiency
shall be calculated and paid monthly. Lessee shall also pay to Lessor, as soon
as ascertained, the costs and expenses incurred by Lessor in such reletting or
in making such alterations and repairs. No such reentry or taking possession of
said Premises by Lessor shall be construed as an election on its part to
terminate this Lease unless a written notice of such intention be given to
Lessee or unless a termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without termination, Lessor may
at any time thereafter elect to terminate this Lease for any breach in the
payment of rent and any material breach of any other covenant or condition of
this Lease which is not cured prior to the expiration of any applicable cure
period. In addition to any other remedy Lessor may have, if Lessee breaches this
Lease and abandons the Premises before the end of the term, or if Lessee's right
to possession is terminated by Lessor because of a breach in the payment of rent
and any material breach of any other covenant or condition of this Lease which
is not cured prior to the expiration of any applicable cure period, then in
either such case Lessor may recover from Lessee all damages suffered by Lessor
as the result of Lessee's failure to perform its obligations hereunder,
including but not limited to the cost of recovering the Premises, and the worth
at the time of the award (computed in accordance with paragraph (b) of Section
1951.2 of the California Civil Code) of the amount by which the rent then unpaid
hereunder for the balance of the Lease term exceeds the amount of such rental
loss for the same period which Lessee proves, could be reasonably avoided by
Lessor. The remedies given Lessor under the terms of this Lease shall be
cumulative and in addition to any other rights or remedies which Lessor may have
at law or otherwise.
Lessor reserves the right to continue this Lease in effect for so long as
Lessor does not terminate Lessee's right to possession and to enforce all its
rights and remedies under this Lease including the right to recover the rent as
it becomes due under this Lease in accordance with the provisions of Section
1951.4 of the Civil Code.
25. SUBORDINATION, NONDISTURBANCE AND ATTORNMENT. This Lease is subject and
subordinate to:
a. The lien of any mortgages, deeds of trust, or other encumbrances
("Encumbrances") of the Improvements and Property;
b. All renewals, extensions, modifications, consolidations and
replacements of the Encumbrances; and
c. All advances made or hereafter to be made on the security of the
Encumbrances.
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Despite any other provision of this paragraph 25, any Encumbrance
holder may elect that this Lease shall be senior to and have priority over that
Encumbrance whether this Lease is dated before or after the date of the
Encumbrance. However, no such subordination shall be effective unless and until
Lessor obtains from the holder of the Encumbrance placed against the Premises a
nondisturbance agreement in recordable form, providing that in the event of any
foreclosure, sale under a power of sale, ground or master lease termination, or
transfer in lieu of any of the foregoing, or the exercise of any other remedy
under any such Encumbrance:
(i) Lessee's use, possession and enjoyment of the Premises shall
not be disturbed and this Lease shall continue in full force and effect as long
as Lessee is not in default; and
(ii) this Lease shall automatically become a lease directly
between any successor to Lessor's interest, as Lessor, and Lessee, as if that
successor were the Lessor originally named in the Lease.
d. If Lessee has received the nondisturbance agreement referred to
in the paragraph immediately following 25c, above, Lessee shall, within ten (10)
business days after Lessor's request, execute any further instruments or
assurances in recordable form that Lessor reasonably considers necessary to
evidence or confirm the subordination or superiority of this Lease to any such
Encumbrances. Such subordination instrument(s) shall be strictly limited to
matters contained in the nondisturbance agreement, and no such instrument may
materially increase any of Lessee's obligations or materially decrease any
Lessee's rights under this Lease. Lessee's failure to execute and deliver such
instrument(s) shall constitute a default under this Lease only if Lessor has
first delivered the nondisturbance agreement to Lessee. Lessee covenants and
agrees to attorn to the transferee of Lessor's interest in the Premises by
foreclosure, deed in lieu of foreclosure, exercise of any remedy provided in any
Encumbrance, or operation of law (without any deductions or setoffs) except as
expressly provided in this Lease or in any nondisturbance agreement, if
requested to do so by the transferee, and to recognize the transferee as the
Lessor under this Lease. The transferee shall not be liable for:
(i) any acts, omissions, or defaults of Lessor that occurred
before the sale or conveyance; or
(ii) the return of any security deposit except for deposits
actually paid to the transferee and except as expressly provided in this Lease
or in any nondisturbance agreement.
f. Lessee agrees to give written notice of any default by Lessor to
the holder of any Encumbrance. Lessee agrees that, before it exercises any
rights or remedies under the Lease, the lienholder or successorlessor shall have
the right, but not the obligation, to cure the default within the same time, if
any, given to Lessor to cure the default, plus an additional thirty (30) days.
Lessee agrees that this cure period shall be extended by the time necessary for
the lienholder to begin foreclosure proceedings and to obtain possession of the
building or Premises, as applicable.
26. SURRENDER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, shall not work a merger, and shall, at the option
of Lessor, terminate all or any existing sublease or subtenancies or may, at the
option of Lessor, operate as an assignment to Lessor of any or all of such
subleases or subtenancies.
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27. ATTORNEYS' FEES. If either party to this Lease brings an action to enforce
the terms hereof or declare rights hereunder the prevailing party in any such
action shall be entitled to reasonable attorneys' fees as fixed by the Court
incurred in the trial or appeal of such matter.
28. NOTICES. All notices shall be in writing. Notice shall be sufficiently
given for all purposes as follows:
a. When personally delivered to the recipient, notice is effective
on delivery.
b. When mailed by certified mail with return receipt requested,
notice is effective on receipt if delivery is confirmed by a return receipt.
c. When delivered by overnight delivery Federal
Express/Airborne/United Parcel Service/DHL Worldwide Express or other commercial
delivery service, with charges prepaid or charged to the sender's account,
notice is effective on delivery if delivery is confirmed by the delivery
service.
d. When sent by telex or fax or electronic mail (also known as
E-mail, and only available if the recipient has an E-mail address) to the last
telex or fax or E-mail number of the recipient known to the party giving notice,
notice is effective on receipt as long as (i) a duplicate copy of the notice is
promptly given by certified mail or by overnight delivery or (ii) the receiving
party or the sending equipment delivers a written confirmation of receipt. Any
notice given by telex, fax number or E-mail shall be considered to have been
received on the next business day if it is received after 5:00 p.m. (recipient's
time) or on a nonbusiness day.
e. Any correctly addressed notice that is refused, unclaimed or
undeliverable because of an act or omission of the party to be notified shall be
considered to be effective as of the first date that the notice was refused,
unclaimed or considered undeliverable by the postal authorities, messenger or
overnight delivery service.
f. Addresses for purposes of giving notice are set forth at the end
of this Lease opposite the signatories of the parties hereto. Either party may
change its address or telex, fax number, or E-mail address by giving the other
party notice of the change in any manner permitted by this paragraph 28.
29. SECURITY. If any security be given by Lessee to secure the faithful
performance Of all or any of the covenants of this Lease on the part of Lessee,
Lessor may transfer and/or deliver the security, as such, to the purchaser of
the reversion, in the event that the reversion be sold, and Lessor shall be
discharged from any further liability in reference there to upon such
transferees written assumption of liability therefor.
30. WAIVER. The waiver by Lessor or Lessee of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained.
31. AUCTIONS. Lessee shall not conduct or cause to be conducted any auction,
fire, closing out, going out of, business or bankruptcy sale on said Premises or
the appurtenances thereto without the prior written consent of Lessor.
32. BINDING, MODIFICATION, ETC. This Lease shall inure to the benefit of and be
binding upon the parties hereto, their heirs, executors, administrators,
successors and assigns; provided that no assignee for the benefit of creditors,
trustee, receiver or
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referee in bankruptcy shall acquire any rights under this Lease by virtue of
this paragraph; this Lease may be modified in writing only. This Lease
constitutes the entire agreement of the parties who acknowledge that no oral or
other representations have been made by themselves or any agent of either of
them with respect to the condition of said Premises or any obligation of the
Lessor hereunder or otherwise. The parties agree to execute any documents
necessary to carry this Lease into effect.
33. OVERDUE RENT. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Lessor by the
term of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to six percent (6%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Lessor will incur by reason of late payment by Lessee. Acceptance of such
late charge by Lessor shall in no event constitute a waiver of Lessee's default
with respect to such overdue amount, nor prevent Lessor from exercising any of
the other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding any other provision
of this Lease to the contrary.
34. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Lessee to Lessor which
is not paid when due shall bear interest at the rate of twelve percent (12%) per
annum from the due date of such amount. However, interest shall not be payable
on late charges to be paid by Lessee under this Lease. The payment of interest
on such past due obligations shall not excuse or cure any default by Lessee
under this Lease. In the event the interest rate specified in this Lease is
greater than the rate permitted by law, then the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
35. ESTOPPEL CERTIFICATE.
a. Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessee or Lessor hereunder, or specifying such defaults if any are
claimed; and (iii) such other information reasonably requested by Lessor or a
lender to or purchaser from Lessor. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
b. If Lessee fails to deliver such statement within such time, such
failure shall be conclusive upon Lessee (i) that this Lease is in full force and
effect, without modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii) that not more
than one (1) month's rent has been paid in advance.
-15-
<PAGE>
c. If Lessor desires to finance, refinance or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three (3) years' financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
d. Lessee shall be responsible for any and all damages Lessor can
reasonably show were caused by or related to Lessee's failure to comply with the
time periods set forth in this paragraph 35.
36. UNDERGROUND TANKS. Lessor represents to Lessee that to the best of Lessor's
actual knowledge without independent investigation or inquiry, as of the date of
this Lease, there are no underground storage tanks upon the Property.
Notwithstanding anything to the contrary set forth herein, Lessee shall not
install underground or above ground storage tanks as defined by any and all
applicable laws of any size or shape in the Premises without the prior consent
of Lessor. Lessor shall have the right to condition its consent upon Lessee
giving Lessor such assurances that Lessor, in its absolute discretion, deems
reasonably necessary to protect itself against potential problems concerning the
installation, use, removal and contamination of the Premises as a result of the
installation and/or use of said tanks. Upon termination of this Lease, Lessee
shall at its sole cost and expenses, remove the tanks from the Premises, remove
and replace any contaminated soil (and compact the same as then required by law)
and repair any damage to the Premises caused by said installation and/or
removal, pursuant to all applicable laws, and the supervisions and approval of
Lessor.
37. HAZARDOUS WASTE; ENVIRONMENTAL AND RELATED MATTERS.
a. Lessor shall promptly furnish or shall have furnished to Lessee
prior to the date hereof copies of any and all environmental site assessments or
hazardous substance reports of the Premises prepared by or for Lessor or others
within the possession of control of Lessor (the "Reports"). Notwithstanding any
of the foregoing, Lessee's obligations hereunder shall be contingent upon
Lessee's satisfaction with and approval of the Reports and the environmental
condition of the Premises as described in the Reports. If Lessee shall fail to
disapprove the Reports and the Premises in writing to be delivered to Lessor
within the latter to occur of ten (10) days of the receipt by Lessee of the
Reports, or July 11, 1997, then Lessee conclusively shall have been deemed to
have approved the Reports and the Premises, and this Lease shall be and remain
in full force and effect. If Lessee shall, within the latter of said time
periods to disapprove the Reports or the environmental condition of the Premises
as described in the Reports, by notice in writing to Lessor, then this Lease
shall immediately terminate and neither party shall have any further obligation
or liability to the other party hereunder.
b. During Lessee's inspection of the Premises prior to the date of
execution of this Lease, an objectionable odor existed near the street in front
of the building. Representatives of the City of Garden Grove performed
maintenance work to the storm drain in front of the building and within the
street right of way and a missing cover to a sewer line was installed. Lessee
shall have until on or before July 11, 1997 within which to satisfy itself that
the objectionable odor problem has been corrected to the satisfaction of Lessee.
If Lessee shall fail to disapprove the status of the correction to the odor
problem in writing to be delivered to Lessor no later than July 11, 1997, then
Lessee conclusively shall have been deemed to have approved the status of the
correction of the odor problem, and this Lease shall be and
-16-
<PAGE>
remain in full force and effect. If Lessee shall, on or before July 11, 1997
disapprove the status of correction of the odor problem, by notice in writing to
Lessor, then this Lease shall immediately terminate and neither party shall have
any further obligation or liability to the other party hereunder. Lessee shall
cooperate with Lessor and Lessor shall use Lessor's commercially reasonable best
efforts to cause the City of Garden Grove to take such action as may be
necessary to correct the said odor problem.
c. Lessor warrants and represents to Lessee that, to the best of
Lessor's actual knowledge without independent investigation or inquiry, as of
the date of this Lease:
(i) there has been no release onto our under the Premises or
the building of any Hazardous Materials (as defined below) in violation of
any Environmental Law;
(ii) the Improvements contain no PCBs, PCB-contaminated
electrical equipment, or asbestos-containing materials;
(iii) Lessor has received no notice that the Premises or the
Improvements are in violation of any Environmental Law.
d. Lessee, at Lessee's sole cost and expense, shall comply with, and
shall not use the Premises or suffer or permit anything to be done in, on, or
about the Premises which will in any way conflict with any applicable federal,
state and local laws, regulations, ordinances, orders or requirements pertaining
to Hazardous Materials, waste disposal, air or water quality, and other
environmental and health and safety matters (collectively, "Hazardous Materials
Laws"). For purposes of this Lease, the term "Hazardous Materials" means any
substance, material, waste, contaminant or pollutant (i) determined by any
federal, state or local government agency, court, judicial or quasi-judicial
body or legislative or quasi-legislative body to be hazardous, toxic,
infectious, radioactive, persistent or bioaccumulative, or to require removal,
treatment or remediation; (ii) which results in liability to any person or
entity for exposure to or discharge of such substance; or (iii) which becomes
subject to any Hazardous Materials Law.
e. Lessee shall not cause, suffer or permit any Hazardous Materials
to be brought upon, stored, used, generated, released into the environment or
disposed of on, under, from, or about the Premises (which for purposes of the
Lease includes, but is not limited to, subsurface soil and groundwater), without
the prior written consent of Lessor. Excluded from the prohibition contained in
this subparagraph are such Hazardous Materials as are necessary or useful to
Lessee's business, provided that such Hazardous Materials are generated, stored,
used and disposed of in compliance with all applicable Hazardous Materials Laws.
f. Promptly upon request therefor, Lessee will provide Lessor with
true, correct, complete and legible copies of any environmental site assessments
pertaining to the Premises prepared by or on behalf of Lessee; reports filed
pursuant to self-reporting requirements under any Hazardous Materials Laws;
permits, permit applications, monitoring reports, workplace exposure and
community exposure warnings or notices reports, plans or documents in Lessee's
possession or control relating to Hazardous Materials on, under or about the
Premises.
g. Lessee shall notify Lessor in writing immediately upon becoming
aware of: (i) any enforcement, cleanup, remediation or other action threatened,
instituted or completed by anyone with respect to Hazardous Materials on, under
or about the Premises; (ii) any claim threatened or made by any person against
Lessee for
-17-
<PAGE>
personal injury, property damage, other losses, contribution, cost recovery,
compensation or any other matter relating to Hazardous Materials and the
Premises; or (iii) any spilling, leaking, dumping or releasing of Hazardous
Materials in, on, under or about the Premises that triggers reporting,
disclosure, investigation or cleanup obligations under any Hazardous Materials
Law. Lessee shall provide to Lessor as promptly as possible, and in any event
within five (5) business days after Lessee first receive or sends the same,
copies of all claims, reports, complaints, notices, warnings, correspondence or
other documents relating in any way to the foregoing.
h. If Hazardous Materials contamination caused, suffered or
permitted by Lessee is discovered on, under or about the Premises, Lessee shall,
as its sole cost and expense, promptly (i) notify Lessor; (ii) undertake site
investigation activities necessary to characterize the nature and extent of such
contamination; (iii) prepare and provide to Lessor a cleanup plan to remove or
remediate the contamination; and (iv) upon Lessor's approval (and upon the
approval of any governmental or regulatory agency overseeing the site
investigation or cleanup activities), promptly implement the cleanup plan in
accordance with applicable Hazardous Materials Laws. In the event that Lessee
fails, after reasonable notice and request therefor by Lessor, to take any of
the actions required hereunder Lessor may itself take such action and Lessee
shall promptly reimburse Lessor for all costs and expenses Lessor incurs in
connection with such action.
i. To the fullest extent permitted by law, Lessee will indemnify,
hold harmless, protect and defend (with attorneys acceptable to Lessor) Lessor
and Lessor's officers, directors, shareholders, employees and agents, and any
successors to all or any portion of Lessor's interest in the Premises and their
directors, officers, partners, employees, authorized agents, representatives,
affiliates and mortgagees, from and against any and all liabilities, losses,
damages (including, without limitation, damages for the loss or restriction on
use of rentable or usable space or any amenity of the Premises or damages
arising from any adverse impact on marketing of space in the Premises),
diminution in the value of the Premises, judgments, fines, demands, claims,
recoveries, deficiencies, costs and expenses (including, but not limited to,
reasonable attorneys' fees and disbursements and court costs and all other
professional or consultant's expenses), whether foreseeable or unforeseeable,
arising directly or indirectly out of the presence, use, generation, storage,
treatment, on or off-site disposal, or transportation of Hazardous Materials on,
into, from, under, or about the Premises by Lessee, its agents, employees,
contractors, licensees or invitees.
j. To the fullest extent permitted by law, Lessor will indemnify,
hold harmless, protect and defend (with attorneys acceptable to Lessee) Lessee
and Lessee's officers, directors, shareholders, employees and agents, and any
successors to all or any portion of Lessee's interest in the Premises and their
directors, officers, partners, employees, authorized agents, representatives,
affiliates and mortgagees, from and against any and all liabilities, losses,
damages, judgments, fines, demands, claims, recoveries, deficiencies, costs and
expenses (including, but not limited to, reasonable attorneys' fees and
disbursements and court costs and all other professional or consultants'
expenses), whether foreseeable or unforeseeable, arising directly or indirectly
out of the breach of the warranty and representation set forth in paragraph 37a,
above, or the presence, prior to the date of this Lease of hazardous substances
upon or under the Premises.
k. Upon the expiration or termination of this Lease, Lessee shall
cause to be removed from the Premises all Hazardous Materials brought upon,
used, kept or stored in, on, under or about the Premises by Lessee, as well as
all receptacles or
-18-
<PAGE>
containers therefor, and shall cause such Hazardous Materials and such
receptacles or containers to be stored, treated, transported and/or disposed of
in compliance with all applicable Hazardous Materials Laws. Lessee shall, at its
sole cost and expense, repair any damage to the Premises resulting from
Lessee's removal of such Hazardous Materials and receptacle or containers
therefor. Lessee's obligation to pay rent shall continue until such removal by
Lessee has been completed to Lessor's satisfaction, notwithstanding the
expiration or early termination or cancellation of the term of this Lease. To
ensure performance of Lessee's obligations hereunder, Lessor may, at any time
within one (1) year of the expiration of this Lease, or upon the occurrence of a
material default under this Lease by Lessee, require that Lessee promptly
commence and diligently prosecute to completion an environmental evaluation of
the Premises. In connection therewith, Lessor may require Lessee, at Lessee's
sole cost and expense, to hire an outside consultant satisfactory to Lessor to
perform a complete environmental audit of the Premises, an executed copy of
which audit shall be delivered to Lessor within thirty (30) days after Lessor's
request therefor. If Lessee or the environmental audit discloses the existence
of Hazardous Materials on, under, or about the Premises, Lessee will, at
Lessor's request, prepare and submit to Lessor within thirty (30) days after
such request a comprehensive clean-up plan, subject to Lessor's approval,
specifying the actions to be taken by Lessee to return the Premises to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Lessor's approval of such clean-up plan, Lessee will, at Lessee's sole cost and
expense, without limitation on any rights and remedies of Lessor under this
Lease, immediately implement such plan and proceed to clean up such Hazardous
Materials in accordance with all Hazardous Materials Laws as required by such
plan and this Lease.
l. The obligations in this paragraph 37 shall survive the expiration
or earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations hereunder unless it specifically states Lessor's intentions to
release Lessee with respect thereto.
38. RECORDATION OF SHORT FORM. Either party may record a short form of this
Lease stating only that the Premises have been leased on the date hereof and
that any subsequent purchaser of the Premises or any part thereof shall be bound
by all the terms hereof.
39. GOVERNING LAW. This Lease shall be governed by and enforced in accordance
with the laws of the State of California.
40. HEADINGS. Paragraph headings are not a part of this Lease.
41. LESSEE'S BUILDING IMPROVEMENTS PROVIDED BY LESSOR
a. Lessor agrees, at Lessor's expense, as soon as practical after
executing this Lease, to cause the preparation of construction drawings and
specifications, to secure requisite building permits, and to construct the
following tenant improvements:
(i) Enclosed and air-condition the warehouse area under and
above the mezzanine by constructing a dry wall at and above the
mezzanine line, across the entire width of the building. Said wall to
provide for appropriate man door access and interior windows at
mutually agreeable locations. Interior walls and t-bar ceiling of
these areas to be painted white. First floor area to be dust sealed
and second floor area to be covered with industrial grade tile.
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<PAGE>
(ii) Refurbish existing office area including:
1. New carpet and tile. (Lessee's choice of color)
2. New paint. (Lessee's choice of color)
3. Repair or replace damaged ceiling tiles and vents where
necessary; but the replacement or repair of individual
tiles will not result in a color mismatch between
existing and new or replaced tiles.
(iii) Duplicate existing restroom in warehouse area as shown on
the attached Exhibit "A."
b. Lessor agrees to pursue such construction diligently to
completion but shall be under no liability for damage, costs or expense
resulting from delays occasioned by acts of God, of the government, of the
elements, public enemy, or by fire, flood, storm, earthquake, freight embargoes,
inability to obtain labor or materials, strikes, boycotts, delays by contractors
or subcontractors for any of the above or any other causes, delays by Lessee in
approving either materials or colors which Lessee has the right to approve, or
by other causes beyond Lessor's control.
c. Upon the termination or cancellation of this Lease for any
reason, expiration, failure to extend or default by Lessee, the building
improvements shall remain the property of Lessor and Lessee shall not be
obligated or entitled to remove them unless notified, in writing prior to
construction, by Lessor to the contrary.
42. OPTION TO EXTEND LEASE. In the event that Lessee shall not be in default in
the performance of any term or condition of this Lease, then upon the expiration
of the Lease term, Lessee shall have the option to extend the Lease for an
additional term of five (5) years. Lessee's rights to exercise the option are
contingent upon Lessee not being in default in the performance of any term or
condition of this Lease or if in default, Lessee shall have cured the same prior
to the deadline for exercising the extension option. During the extension
period, all the terms and conditions of this Lease shall remain in effect except
that the base rental for the extension period will be determined as set forth in
paragraph 43, entitled "Rent Determination for Extended Period," and the rental
commencing on the thirty-first (31st) month of the extended period will be
adjusted as provided in paragraph 44, entitled "Rental Escalations."
The option must be exercised by Lessee, if at all, prior to a date which
shall be six (6) months prior to the expiration of the Lease term, by notice to
Lessor stating that Lessee is exercising its option to extend. Such exercise of
the option shall automatically extend the term of the Lease upon the terms and
conditions herein set forth, and no further writing need be executed by Lessee
or Lessor, except that no term extension shall occur or take effect if, prior to
its commencement, Lessee shall have assigned or sublet (by operation of law or
otherwise and with or without Lessor's consent) this Lease or the Premises. Once
exercised, Lessee shall not have the right to revoke its election to exercise
the option. In the event that the option is not exercised as provided for herein
within the time provided for, the option shall expire, and Lessee shall have no
further right to renew or extend the Lease.
43. REM DETERMINATION FOR EXTENDED PERIOD. Prior to the commencement of the
extended period, the base rental initially payable for such period shall be
determined as follows:
a. Lessee shall, not less than six (6) months nor more than one (1)
year before expiration of the initial term, give Lessor written notice of its
desire to determine Rent for the
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<PAGE>
extended period. Lessor and Lessee shall have thirty (30) days after Lessor
receives such notice to agree in writing to said Rent, which writing signed by
each party shall constitute an amendment to this Lease determining the Rent and
extending the term in conformity with this Lease.
b. If Lessor and Lessee shall fail to reach an agreement as provided
in subparagraph 43a, the option to extend shall terminate unless within ten (10)
business days after the expiration of the thirty (30) day notice specified in
paragraph 43a, Lessee shall give Lessor a notice of its desire to determine the
such Rent by appraisement, designating a qualified appraiser for the purpose.
Unless, within ten (10) business days after receipt of such notice, Lessor shall
designate a qualified appraiser, it shall be deemed to have accepted the
qualified appraiser designated by Lessee. For purposes hereof, the term
"qualified appraiser" shall mean a Member of the Appraisal Institute with not
less than five (5) years' experience in appraising commercial rental properties
in Orange County in the State of California and without financial, family, or
business connections with either Lessor or Lessee, or any affiliate of Lessor or
Lessee, or the officers, directors or employees of any of them.
The appraiser or appraisers so appointed shall, within forty-five (45) days
of his appointment or of the later of the appointments, submit to Lessor and
Lessee appraisal(s) of the Rent for the Extended Term, expressed in terms of a
fair monthly rental value in the context of a five (5) year lease, on
substantially the terms made herein applicable to the extended term for the then
use of the Premises.
The Rent for the Extended Term shall be either (i) the amount of the
appraisal of the single appraiser; or (ii) where there are two appraisers, the
agreed appraisal, if both appraisers are in agreement, or, if they are not in
agreement, the average of the two appraisals if the higher does not exceed the
lower by more than five percentage (5%) of the lower. If the appraisals
determined by the two appraisers hereinbefore appointed differ by more than five
percent (5%), then the two appraisers shall appoint a third qualified appraiser
who shall submit to Lessor and Lessee within the next ensuing forty-five (45)
days an appraisal of the fair rental value of the Premises. The Rent for the
Extended Term shall be the average of all three appraisals, unless one appraisal
exceeds or is less than an average of the two closer appraisals by more than ten
percent (10%), in which case such appraisal will be discarded and the Rent for
the Extended Term shall be the average of the two closer appraisals.
c. When the Rent for the Extended Term shall have been determined as
aforesaid, the Lease shall be amended to reflect said monthly rent payable for
the extended term.
d. The cost of the appraisal procedure shall be divided equally
between the parties.
e. Time is of the essence as to the exercise of the extension option
by Lessee and of the appraisal procedures specified in this paragraph 43; any
failure by Lessee to meet the deadlines herein specified, unless the delay shall
have been contributed to by Lessor's actions or omissions, shall terminate this
option to extend.
f. In no event shall such adjusted monthly rent be less than the
rent payable for the month immediately preceding the date of such rent
adjustment.
44. RENTAL ESCALATIONS. The amount of the rental payable during the extension
period of this Lease shall be subject to adjustment effective the first day of
the thirty-first (31st) month of the
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<PAGE>
extension period. Such adjustment will be made by dividing the amount of monthly
rental payable on the first day of the extension period by the figure shown in
the Consumer's Price Index for All Urban Consumers for the Los
Angeles-Anaheim-Riverside area (1982-84 = 100), published monthly in the Monthly
Labor Review of the Bureau of Labor Statistics of the United States Department
of Labor (or the successor which most closely resemble such Index) for the third
month prior to the month in which the extension period commenced, and
multiplying the result by the corresponding Index figure for the third month
prior to the thirty-first (31st) month of such term or period; provided,
however, no reduction in the amount of rent then in effect resulting from such
calculation shall occur; provided, however, that the excalated rent shall not be
less than four percent (4%) and not greater than eight percent (8%) more than
the rent for the first thirty (30) months of the extended term, determined in
accordance with paragraph 43, above.
45. HOLDING OVER. Any holding over after the expiration of the initial term,
with the consent of Lessor, shall be construed to be a tenancy from month to
month, at a rental of Fifty-Six Thousand Four Hundred Eight and 16/100
($56,408.16) Dollars per month and shall otherwise be on the terms and
conditions herein specified so far as applicable. Any holding over at the end of
the extended term, if applicable, shall be subject to the same provisions,
except that the hold over rental shall be increased by twenty-five percent (25%)
over the rent immediately prior to the hold over.
46. COUNTERPARTS. This Lease may be executed in multiple counterparts, each of
which shall be an original and all of which, taken together, shall constitute
one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date
set forth opposite their signatures.
Dated: 20 June 1997 KILROY REALTY, L.P.,
----------------------- A Delaware Limited Partnership
ADDRESS FOR NOTICES: By: KILROY REALTY CORPORATION,
A Maryland Corporation,
2250 E. Imperial Highway General Partner
Suite 1200
El Segundo, CA 90245
Telex: By: /s/ Illegible
----------------------- --------------------------
Fax: (310) 322-5981
-----------------------
E-mail: Title: EVP-COO
----------------------- -----------------------
with a copy to: "LESSOR"
- ------------------------------
- ------------------------------
- ------------------------------
Dated: HOLLINGSEAD INTERNATIONAL,
----------------------- A California Corporation
Address for Notices:
2361 Rosecrans Avenue By: /s/ RJ MacDonald
Suite 180 ------------------------
El Segundo, CA 90245 Title: Vice-Chairman
Telex: ----------------------
------------------------
Fax: (310) 643-0746 "LESSEE"
-------------------------
E-mail:
----------------------
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<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 report dated February 24, 1998,
relating to the consolidated financial statements of DeCrane Aircraft Holdings,
Inc. ("DeCrane"), which appears 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, 1997 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 audit 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
Los Angeles, California
March 6, 1998
<PAGE>
EXHIBIT 23.3
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 (dual dated) report dated February 21,
1997 and December 17, 1997, relating to the consolidated financial statements of
Audio International, Inc. and subsidiary ("Audio"), which appear in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
Thomas & Thomas
Little Rock, Arkansas
March 5, 1998
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