<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
November 14, 1997
Date of Report
(Date of earliest event reported)
----------------------
DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22371 34-1645569
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245
(Address, including zip code, of principal executive offices)
(310) 725-9123
(Registrant's telephone number, including area code)
----------------------
155 Montrose West Avenue, Suite 210, Copley, OH 44321
(330) 668-3061
(Former address and telephone number of principal executive offices, if changed
since last report)
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<PAGE>
DeCrane Aircraft Holdings, Inc. (the "Company") hereby amends Item 7 of
its Current Report on Form 8-K dated November 14, 1997 (filed with the
Securities and Exchange Commission on November 25, 1997) to file the
financial statements and exhibits relating to the acquisition of Audio
International, Inc. ("Audio International").
The following Item 7 amends, in its entirety, Item 7 of the Form 8-K
previously filed on November 25, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial statements of businesses acquired.
Audited consolidated financial statements of Audio International,
Inc. and subsidiary, including notes thereto and auditors' report thereon, as
of December 31, 1996 and 1995 and for each of the two years in the period
ended December 31, 1996 are filed herewith as Exhibit 99.3 and are
incorporated herein by reference.
b. Pro forma financial information.
Unaudited pro forma consolidated financial information, including
explanatory notes thereto, as of September 30, 1997 and for the nine months
ended September 30, 1997 and twelve months ended December 31, 1996 are filed
herewith as Exhibit 99.4 and are incorporated herein by reference.
c. Exhibits.
Exhibit
No. Exhibit Description
------- ---------------------------------------------------------------
2.1 Stock Purchase and Sale Agreement by and among Robert S. Brown,
Rick Marsh and Wayne Richie, the shareholders of Audio
International, Inc. and DeCrane Aircraft Holdings, Inc.,
including Exhibit 1.2.2, Form of the Earnout Agreement **
10.1 Consent and Amendment No. 1 to Loan and Security Agreement dated
as of October 21, 1997 among DeCrane Aircraft Holdings, Inc.,
Bank of America National Trust and Savings Association,
successor-by-merger to Bank of America Illinois, as agent and
lender, and Comerica Bank - California, Mellon Bank, N.A. and
Sumitomo Bank of California, as lenders **
10.2 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Robert S. Brown **
10.3 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Rick Marsh **
10.4 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Wayne Richie **
10.5 Employment Agreement dated November 14, 1997 between Audio
International, Inc. and Robert S. Brown **
10.6 Employment Agreement dated November 14, 1997 between Audio
International, Inc. and Rick Marsh **
99.1 Press release issued by DeCrane Aircraft Holdings, Inc. on
November 3, 1997 ***
99.2 Press release issued by DeCrane Aircraft Holdings, Inc. on
November 14, 1997 **
-2-
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99.3 Audited consolidated financial statements of Audio International,
Inc. and subsidiary, including notes thereto and auditors' report
thereon, as of December 31, 1996 and 1995 and for each of the two
years in the period ended December 31, 1996 incorporated by
reference in Item 7(a) of this report *
99.4 Unaudited pro forma consolidated financial information, including
explanatory notes thereto, as of September 30, 1997 and for the
nine months ended September 30, 1997 and the twelve months ended
December 31, 1996 incorporated by reference in Item 7(b) of this
report *
- -----------------
* - Filed herewith
** - Previously filed November 25, 1997 on Form 8-K dated November 14, 1997.
*** - Previously filed November 4, 1997 on Form 8-K dated November 3, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECRANE AIRCRAFT HOLDINGS, INC.
(Registrant)
January 28, 1998 By: /s/ Robert A. Rankin
-------------------------------------------
Name: Robert A. Rankin
Title: Chief Financial Officer and Secretary
-3-
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EXHIBIT INDEX
Exhibit
No. Exhibit Description
------- ---------------------------------------------------------------
2.1 Stock Purchase and Sale Agreement by and among Robert S. Brown,
Rick Marsh and Wayne Richie, the shareholders of Audio
International, Inc. and DeCrane Aircraft Holdings, Inc.,
including Exhibit 1.2.2, Form of the Earnout Agreement **
10.1 Consent and Amendment No. 1 to Loan and Security Agreement dated
as of October 21, 1997 among DeCrane Aircraft Holdings, Inc.,
Bank of America National Trust and Savings Association,
successor-by-merger to Bank of America Illinois, as agent and
lender, and Comerica Bank - California, Mellon Bank, N.A. and
Sumitomo Bank of California, as lenders **
10.2 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Robert S. Brown **
10.3 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Rick Marsh **
10.4 Covenant Not to Compete Agreement between DeCrane Aircraft
Holdings, Inc., Audio International, Inc. and Wayne Richie **
10.5 Employment Agreement dated November 14, 1997 between Audio
International, Inc. and Robert S. Brown **
10.6 Employment Agreement dated November 14, 1997 between Audio
International, Inc. and Rick Marsh **
99.1 Press release issued by DeCrane Aircraft Holdings, Inc. on
November 3, 1997 ***
99.2 Press release issued by DeCrane Aircraft Holdings, Inc. on
November 14, 1997 **
99.3 Audited consolidated financial statements of Audio International,
Inc. and subsidiary, including notes thereto and auditors' report
thereon, as of December 31, 1996 and 1995 and for each of the two
years in the period ended December 31, 1996 incorporated by
reference in Item 7(a) of this report *
99.4 Unaudited pro forma consolidated financial information, including
explanatory notes thereto, as of September 30, 1997 and for the
nine months ended September 30, 1997 and the twelve months ended
December 31, 1996 incorporated by reference in Item 7(b) of this
report *
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* - Filed herewith
** - Previously filed November 25, 1997 on Form 8-K dated November 14, 1997.
*** - Previously filed November 4, 1997 on Form 8-K dated November 3, 1997.
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AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995 2
Consolidated Statements of Earnings and Retained Earnings for the
years ended December 31, 1996 and 1995 3
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENTS
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, 1996 and 1995, and the
related consolidated statements of earnings and retained earnings and
consolidated statements of 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
statement of earnings and retained earnings, or the consolidated statement of
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 earnings and retained earnings and the
consolidated statement of 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, 1996 and 1995,
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
Certified Public Accountants
Little Rock, Arkansas
February 21, 1997
(Except for paragraph 3 above, as to
which the date is December 17, 1997)
1
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---------- -----------
CURRENT ASSETS
Cash in financial institutions $ 46,140 $ 2,868
Repurchase agreements 1,543,200 470,862
Receivables:
Trade, net 1,206,764 633,258
Employees and other 13,471 28,668
Inventories 1,503,346 830,660
Prepaid income taxes -- 55,368
Deferred income taxes 37,898 30,135
---------- -----------
Total current assets 4,350,819 2,051,819
PROPERTY AND EQUIPMENT, NET 1,298,834 1,243,160
OTHER ASSETS
Other investments 100,000 --
Utility deposits 1,013 1,050
---------- -----------
TOTAL ASSETS $5,750,666 $3,296,029
---------- -----------
---------- -----------
CURRENT LIABILITIES
Construction contract payable $ -- $ 268,587
Accounts payable, trade 426,182 438,456
Accrued expenses 312,842 154,070
Income taxes payable 817,257 --
Current portion of long-term debt 43,699 38,826
---------- -----------
Total current liabilities 1,599,980 899,939
DEFERRED INCOME TAXES 22,605 31,220
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 723,841 578,809
---------- -----------
TOTAL LIABILITIES 2,346,426 1,509,968
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 1,000 shares
authorized, 129 shares issued and outstanding 129 129
Additional paid-in capital 600,887 600,887
Contributed capital 90,000 90,000
Retained earnings 2,713,224 1,095,045
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,404,240 1,786,061
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,750,666 $3,296,029
---------- -----------
---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
SALES AND SERVICE REVENUES, NET $10,134,263 $5,182,046
COST OF SALES AND SERVICE 4,666,917 2,710,253
----------- -----------
Gross Profit 5,467,346 2,471,793
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,925,873 2,174,280
----------- -----------
Operating Income 2,541,473 297,513
OTHER INCOME (EXPENSE)
Investment income 32,228 14,769
Interest expense (45,346) (28,400)
Gain (loss) on disposal of assets, net 11,278 (38,224)
Other 4,625 788
----------- -----------
Earnings Before Income Taxes 2,544,258 246,446
PROVISION FOR INCOME TAXES 926,079 66,000
----------- -----------
NET EARNINGS 1,618,179 180,446
RETAINED EARNINGS, BEGINNING OF YEAR 1,095,045 914,599
----------- -----------
RETAINED EARNINGS, END OF YEAR $ 2,713,224 $1,095,045
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
NET EARNINGS $1,618,179 $ 180,446
---------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
(Gain) loss on disposal of assets, net (11,278) 38,224
Depreciation 151,055 93,963
Increase (decrease) in operating assets:
Accounts receivable, trade (573,506) (102,793)
Accounts receivable, employee and other 15,197 (22,312)
Inventories (672,686) (472,191)
Prepaid income taxes 55,368 (55,368)
Deferred income taxes (7,763) --
Increase (decrease) in operating
liabilities:
Accounts payable (12,274) 352,522
Accrued expenses 158,772 22,079
Construction contract payable (268,587) 268,588
Income taxes payable 817,257 (137,119)
Deferred income taxes (8,615) 4,045
---------- -----------
Total adjustments, net (357,060) (10,362)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,261,119 170,084
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of property and equipment,
net (195,451) (992,087)
Other investments (100,000) --
Repayments of stockholder loans -- (240,000)
Other assets 37 (1,050)
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NET CASH USED BY INVESTING ACTIVITIES (295,414) (1,233,137)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock issuance -- 600,000
Payments on long-term debt (18,160) (14,867)
Proceeds from issuance of long-term debt 168,065 596,942
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 149,905 1,182,075
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,115,610 119,022
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 473,730 354,708
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,589,340 $ 473,730
---------- -----------
---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) 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 6.9% and 7.2% of total revenues for the
years ended December 31, 1996 and 1995, respectively.
B) 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.
C) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
D) 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, 1996 and 1995, was $20,000.
E) 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.
F) 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.
G) 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.
H) RESEARCH AND DEVELOPMENT
Current operations are charged with all research, engineering, and product
development expenses which amounted to approximately $640,000 and $376,000
for the years ended December 31, 1996 and 1995.
I) WARRANTY RESERVE
The financial statements include product warranty reserves of approximately
$62,000 and $25,000 at December 31, 1996 and 1995, respectively. The
reserve, which is classified as a current liability for
5
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financial statement purposes, is based upon estimates of future costs
associated with fulfilling warranty obligations.
6
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J) ADVERTISING EXPENSE
Advertising expenditures, including production cost related to various
units utilized for demonstrations and display, are expensed as incurred.
K) 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.
L) 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.
M) 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, 1996 or 1995.
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 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 at December 31, 1996 and 1995 consist of the following:
1996 1995
---------- --------
Raw materials $ 863,373 $546,078
Work-in-process 403,193 147,187
Finished goods 236,780 137,395
---------- --------
Total inventories $1,503,346 $830,660
---------- --------
---------- --------
7
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AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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 as of December 31:
Cost
----------------------- Estimated
1996 1995 Useful Lives
---------- ---------- ------------
Land, contributed $ 90,000 $ 90,000 --
Building and improvements 785,740 727,295 40 years
Machinery and equipment 657,974 536,166 3-7 years
Office furniture and equipment 96,303 70,407 3-7 years
Motor vehicles 95,230 110,498 5 years
---------- ----------
1,725,247 1,534,366
Accumulated depreciation (426,413) (291,206)
---------- ----------
Net property and equipment $1,298,834 $1,243,160
---------- ----------
---------- ----------
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.
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, 1996 or 1995.
8
<PAGE>
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7: ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1995:
1996 1995
-------- --------
Payroll $106,746 $ 52,471
Vacation 54,239 36,139
Payroll taxes withheld and accrued 74,983 32,808
Reserve for warranties 61,568 25,000
Other 15,306 7,652
-------- --------
Total accrued expenses $312,842 $154,070
-------- --------
NOTE 8: LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the following:
1996 1995
-------- --------
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. $750,000 $596,942
Notes payable to bank; secured by vehicles;
payable in monthly installments including
interest at 7.3%, through February, 2000. 17,540 20,693
-------- --------
767,540 617,635
Current portion (43,699) (38,826)
-------- --------
Long-term debt, excluding current portion $723,841 $578,809
-------- --------
-------- --------
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, 1996 and
1995, 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 $42,490 and $-0- at
December 31, 1996 and 1995, respectively, 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,
1996 and 1995.
Cash payments for interest on all debt amounted to $46,210 and $22,640 for
the years ended December 31, 1996 and 1995, respectively.
9
<PAGE>
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: LONG-TERM DEBT (Continued)
Maturities of long-term debt, based upon the Company's monthly sinking fund
and other debt requirements, is as follows at December 31, 1996:
1997 $ 43,699
1998 38,851
1999 44,242
2000 40,748
2001 40,000
Thereafter 560,000
--------
$767,540
--------
--------
NOTE 9: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996 and
1995, is summarized as follows:
1996 1995
-------- -------
Current:
Federal $793,693 $61,262
State 148,764 693
-------- -------
942,457 61,955
-------- -------
Deferred:
Federal $(13,750) $ 3,780
State (2,628) 265
-------- -------
(16,378) 4,045
-------- -------
Total provision for income taxes $926,079 $66,000
-------- -------
-------- -------
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 $87,617 and $259,147 for the
years ended December 31, 1996 and 1995, respectively.
The Company's deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are as follows:
1996 1995
-------- -------
Current deferred tax assets, net $37,898 $30,135
Noncurrent deferred tax liabilities, net 22,605 31,220
-------- -------
Net deferred tax asset (liability) $15,293 $(1,085)
-------- -------
-------- -------
10
<PAGE>
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9: INCOME TAXES (Continued)
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 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 $39,900 and $24,700 for the years ended December 31,
1996 and 1995, 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 63% and 58% of net sales for the
years ended December 31, 1996 and 1995, 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:
January 1, 1995 balance, as previously reported $853,765
Adjustments for expense accruals and reserves (70,000)
Adjustments for inventory, property and equipment valuations 130,834
--------
January 1, 1995 balance, as restated $914,599
--------
--------
11
<PAGE>
AUDIO INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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 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, 1996 and 1995, 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.
12
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Pro Forma Condensed Consolidated Financial Information should be read
in conjunction with: (i) the Company's audited consolidated financial statements
and notes thereto, and the unaudited pro forma financial data for the year ended
December 31, 1996, which are included in the Company's Prospectus dated April
16, 1997 issued in connection with its initial public offering of common stock
(as previously filed as Exhibit 20.1 to the Form 10-Q for the quarter ended
March 31, 1997); and (ii) the Company's Form 10-Q for the quarter ended
September 30, 1997.
The following Unaudited Pro Forma Condensed Consolidated Financial
Information is based on the historical consolidated financial statements of the
Company, adjusted to present the unaudited pro forma condensed consolidated
results of operations of the Company as if the following transactions had
occurred on January 1, 1996: (i) the acquisition of Audio International, Inc.
("Audio International") for $24,726,000 in cash, including $726,000 of
acquisition related expenses; (ii) the Minority Interest and ADS Acquisitions,
as described in the Company's Prospectus; (iii) the Recapitalization, as
described in the Company's Prospectus; and (iv) the sale by the Company of
2,700,000 shares of Common Stock in the Offering and the application of the net
proceeds therefrom as set forth under "Use of Proceeds" in the Prospectus. The
unaudited pro forma condensed consolidated balance sheet reflects the
acquisition of Audio International on a pro forma basis as if the acquisition
had occurred on September 30, 1997.
The unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 1997 reflects the unaudited historical
consolidated financial statements of the Company, adjusted to reflect: (i) the
pro forma effect of the Recapitalization and the Offering; and (ii) the
combination, with appropriate adjustments, of the unaudited consolidated
financial statements of Audio International nine months ended September 30, 1997
(the "1997 Acquisition").
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 1996 reflects the audited historical consolidated
financial statements of the Company, adjusted to reflect: (i) the combination,
with appropriate adjustments, of the unaudited financial statements of ADS for
the period from January 1 through September 18, 1996, the date on which it was
acquired and the Minority Interest Acquisition (the "1996 Acquisitions"); (ii)
the pro forma effect of the Recapitalization and the Offering; and (iii) the
combination, with appropriate adjustments, of the audited consolidated financial
statements of Audio International for the year ended December 31, 1996 (the
"1997 Acquisition").
The Company believes the Unaudited Pro Forma Condensed Consolidated
Financial Information contains all adjustments necessary for a fair presentation
of the above described transactions. The pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable. With respect to the Audio International pro forma acquisition
adjustments described in the accompanying notes, the allocation of the purchase
price is preliminary and subject to final determination by the Company. The pro
forma acquisition adjustments also exclude the effect of contingent
consideration aggregating a maximum $6,000,000 payable over two years based on
future attainment of defined performance criteria. The Unaudited Pro Forma
Condensed Consolidated Financial Information is presented for illustrative
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the transactions been consummated on the dates
indicated, or that may be obtained in future periods.
1
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 Acquisition
DeCrane ----------------------------
Aircraft Audio
Holdings, Offering International, Acquisition Pro Forma
Inc. Adjustments Pro Forma Inc. Adjustments as Adjusted
------------ ------------ ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 80,887 $ -- $ 80,887 $ 11,162 $ -- $ 92,049
Cost of sales 60,518 -- 60,518 6,180 54 (6) 66,752
--------- --------- --------- --------- --------- ---------
Gross profit (loss) 20,369 -- 20,369 4,982 (54) 25,297
Selling, general and
administrative expenses 11,012 100 (2) 11,112 3,230 (76) (7) 14,266
Amortization of intangible assets 616 -- 616 -- 492 (8) 1,108
--------- --------- --------- --------- --------- ---------
Operating income (loss) 8,741 (100) 8,641 1,752 (470) 9,923
Interest expense 2,598 (1,528)(3) 1,070 -- 1,463 (9) 2,533
Other expenses 388 -- 388 2 -- 390
--------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes 5,755 1,428 7,183 1,750 (1,933) 7,000
Provision (benefit) for income taxes 2,191 528 (4) 2,719 624 (606) (10) 2,737
--------- --------- --------- --------- --------- ---------
Income (loss) (1) $ 3,564 $ 900 $ 4,464 $ 1,126 $ (1,327) $ 4,263
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Income (loss) applicable to
common stockholders (1) $ 919 $ 3,545 (5)$ 4,464 $ 1,126 $ (1,327) $ 4,263
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Income (loss) per share (1)
Pro forma for the Recapitalization $ 0.77 (11) $ -- $ --
Pro forma for the Recapitalization
and the Offering -- 0.79 (12) --
Pro forma as adjusted -- -- 0.75 (13)
Weighted average number of
common shares outstanding
Pro forma for the Recapitalization 4,617 (11) -- --
Pro forma for the Recapitalization
and the Offering -- 5,648 (12) --
Pro forma as adjusted -- -- 5,648 (13)
</TABLE>
The accompanying notes are an integral part of the Unaudited
Pro Forma Condensed Consolidated Financial Information.
2
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 Acquisitions
DeCrane ---------------------------------
Aircraft Aerospace
Holdings, Display Acquisition Offering
Inc. Systems Adjustments Adjustments
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 65,099 $ 7,706 $ -- $ --
Cost of sales 49,392 4,855 284 (14) --
---------- ---------- ---------- ----------
Gross profit (loss) 15,707 2,851 (284) --
Selling, general and
administrative expenses 10,904 1,286 (203) (14) 200 (14)
Amortization of
intangible assets 709 -- 214 (14) --
Gain on litigation settlement (157) -- -- --
---------- ---------- ---------- ----------
Operating income (loss) 4,251 1,565 (295) (200)
Interest expense 4,248 52 1,125 (14) (4,639) (14)
Other expenses (income) 108 -- (89) (14) --
---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes (105) 1,513 (1,331) 4,439
Provision (benefit) for
income taxes 712 615 (777) (14) 1,377 (15)
---------- ---------- ---------- ----------
Income (loss) (1) $ (817) $ 898 $ (554) $ 3,062
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) applicable to
common stockholders (1) $ (6,357) $ 898 $ (554) $ 8,602 (5)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per share (1)
Pro forma for the
Recapitalization $ (0.31) (14)
Pro forma for the
Recapitalization,
1996 Acquisitions and
the Offering --
Pro forma as adjusted --
Weighted average number of
common shares outstanding
Pro forma for the
Recapitalization 2,659 (14)
Pro forma for the
Recapitalization,
1996 Acquisitions and
the Offering --
Pro forma as adjusted --
</TABLE>
<TABLE>
<CAPTION>
1997 Acquisition
---------------------------------
Audio
International, Acquisition Pro Forma
Pro Forma Inc. Adjustments as Adjusted
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 72,805 $ 10,134 $ -- $ 82,939
Cost of sales 54,531 4,667 141 (6) 59,339
---------- ---------- ---------- ----------
Gross profit (loss) 18,274 5,467 (141) 23,600
Selling, general and
administrative expenses 12,187 2,926 45 (7) 15,158
Amortization of
intangible assets 923 -- 657 (8) 1,580
Gain on litigation settlement (157) -- -- (157)
---------- ---------- ---------- ----------
Operating income (loss) 5,321 2,541 (843) 7,019
Interest expense 786 13 1,850 (9) 2,649
Other expenses (income) 19 (16) -- 3
---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes 4,516 2,544 (2,693) 4,367
Provision (benefit) for
income taxes 1,927 926 (734) (10) 2,119
---------- ---------- ---------- ----------
Income (loss) (1) $ 2,589 $ 1,618 $ (1,959) $ 2,248
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) applicable to
common stockholders (1) $ 2,589 $ 1,618 $ (1,959) $ 2,248
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per share (1)
Pro forma for the
Recapitalization $ -- $ --
Pro forma for the
Recapitalization,
1996 Acquisitions and
the Offering 0.46 (12) --
Pro forma as adjusted -- 0.40 (13)
Weighted average number of
common shares outstanding
Pro forma for the
Recapitalization -- --
Pro forma for the
Recapitalization,
1996 Acquisitions and
the Offering 5,613 (12) --
Pro forma as adjusted -- 5,613 (13)
</TABLE>
The accompanying notes are an integral part of the Unaudited
Pro Forma Condensed Consolidated Financial Information.
3
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 Acquisition
DeCrane ---------------------------------
Aircraft Audio
Holdings, International, Acquisition Pro Forma
Inc. Inc. Adjustments as Adjusted
---------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 339 $ 778 $ -- $ 1,117
Accounts receivable, net 15,368 2,526 -- 17,894
Inventories 22,046 1,538 -- 23,584
Prepaid expenses and other current assets 874 360 -- 1,234
---------- ---------- ---------- ----------
Total current assets 38,627 5,202 -- 43,829
Property and equipment, net 12,245 1,538 499 (16) 14,282
Other assets, principally intangibles, net 19,773 101 19,697 (17) 39,571
---------- ---------- ---------- ----------
Total assets $ 70,645 $ 6,841 $ 20,196 $ 97,682
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 723 $ -- $ -- $ 723
Current portion of long-term debt 946 -- -- 946
Accounts payable 8,053 272 -- 8,325
Accrued expenses 5,666 785 -- 6,451
Income taxes payable 910 471 -- 1,381
---------- ---------- ---------- ----------
Total current liabilities 16,298 1,528 -- 17,826
Long-term liabilities
Long-term obligations 12,667 747 24,726(18) 38,140
Deferred income taxes 3,826 36 -- 3,862
Minority interest 65 -- -- 65
---------- ---------- ---------- ----------
Total long-term liabilities 16,558 783 24,726 42,067
Stockholders' equity
Common stock 53 -- -- 53
Additional paid-in capital 50,390 691 (691)(19) 50,390
Retained earnings (deficit) (12,525) 3,839 (3,839)(19) (12,525)
Foreign currency translation adjustment (129) -- -- (129)
---------- ---------- ---------- ----------
Total stockholders' equity 37,789 4,530 (4,530) 37,789
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 70,645 $ 6,841 $ 20,196 $ 97,682
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the Unaudited
Pro Forma Condensed Consolidated Financial Information.
4
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(1) Reflects income (loss) before an extraordinary charge incurred as a
result of the debt repayment with the net proceeds from the Offering as
described in the Company's Form 10-Q for the quarter ended September 30,
1997.
(2) Represents incremental general and administrative expenses associated
with regulatory compliance requirements including listing, registrar and
transfer agent fees, quarterly and annual report and proxy statement
preparation and distribution expenses, legal and accounting fees and
director and officers' liability insurance premiums.
(3) Represents a decrease in interest expense to reflect the sale by the
Company of 2,700,000 shares of common stock in the Offering and the
application of the net proceeds therefrom as described in the Prospectus.
(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 of
redemption value of the mandatorily redeemable common stock warrants as a
result of the Recapitalization and the Offering as described in the
Company's Form 10-Q for the quarter ended September 30, 1997 and in
"Unaudited Pro Forma Consolidated Financial Data" in the Prospectus.
(6) For the nine months ended September 30, 1997, represents an increase in
depreciation expense to reflect a $499,000 increase in the fair value of
assets acquired.
For the year ended December 31, 1996, represents: (i) an increase of
$69,000 to conform the expense classification used in the December 31,
1996 audited financial statements to the expense classification used by
the Company in presenting the statement of operations for the nine months
ended September 30, 1997; and (ii) a $72,000 increase in depreciation
expense to reflect a $499,000 increase in the fair value of assets
acquired.
(7) For the nine months ended September 30, 1997, represents: (i) a $18,000
increase in depreciation expense to reflect a $499,000 increase in the
fair value of assets acquired; and (ii) a $94,000 net decrease in
compensation expense attributable to the resignation of one former
stockholder of Audio International as of the acquisition date, offset by
an increase in compensation for the two remaining former shareholders of
Audio International pursuant to employment agreements entered into with
the Company.
For the year ended December 31, 1996, represents: (i) an decrease of
$69,000 to conform the expense classification used in the December 31,
1996 audited financial statements to the expense classification used by
the Company in presenting the statement of operations for the nine months
ended September 30, 1997; (ii) a $24,000 increase in depreciation expense
to reflect a $499,000 increase in the fair value of assets acquired; and
(iii) a $90,000 net increase in compensation expense attributable to an
increase in compensation for two former shareholders of Audio
International pursuant to employment agreements entered into with the
Company, offset by a decrease in compensation attributable to the
resignation of the third former stockholder of Audio International as of
the acquisition date.
(8) Represents increases in amortization expense resulting from the
amortization of $19,967,000 of goodwill related to the acquisition on a
straight-line basis over 30 years.
(9) Represents increases in interest expense resulting from the revolving
line of credit indebtedness incurred to finance the acquisition.
(10) Represents decreases in the provision for income taxes as a result of
decreases in pro forma taxable income.
5
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION (CONTINUED)
(11) Reflects the Recapitalization as described in the Company's Form 10-Q for
the quarter ended September 30, 1997.
(12) For the nine months ended September 30, 1997, reflects the
Recapitalization, adjusted on a pro forma basis for the Offering.
For the year ended December 31, 1996, reflects the Recapitalization,
adjusted on a pro forma basis for 1996 Acquisitions and the Offering.
Both periods also reflect 50,743 additional common shares issued to two
stockholders during the fourth quarter of 1997 to settle their asserted
claim that they were entitled to additional shares pursuant to certain
anti-dilution provisions as described in the Company's Form 10-Q for the
quarter ended September 30, 1997.
(13) For the nine months ended September 30, 1997, reflects the
Recapitalization, adjusted on a pro forma basis for the Offering as
described in the Company's Form 10-Q for the quarter ended September 30,
1997 and the acquisition of Audio International.
For the year ended December 31, 1996, reflects the Recapitalization,
adjusted on a pro forma basis for the 1996 Acquisitions and the Offering
as described in the Company's Form 10-Q for the quarter ended September
30, 1997 and the acquisition of Audio International.
Both periods also reflect 50,743 additional common shares issued to two
stockholders during the fourth quarter of 1997 to settle their asserted
claim that they were entitled to additional shares pursuant to certain
anti-dilution provisions as described in the Company's Form 10-Q for the
quarter ended September 30, 1997.
(14) As described in "Unaudited Pro Forma Consolidated Financial Data" in the
Prospectus.
(15) Represents an increase in the provision for income taxes resulting from
an increase in pro forma taxable income, net of a partial utilization of
net operating loss carryforwards.
Subsequent to consummation of the Offering, the Company determined that
the amount of loss carryforwards that may be utilized in each period is
subject to limitations because of the occurrence of a change in control
of the Company, as defined in the Internal Revenue Code. A change of
control occurred during 1996 as a result of certain equity transactions
and upon consummation of the Offering in 1997. The tax provision in
this pro forma reflects the limitation of the utilization of net
operating loss carryforwards.
(16) Represents an increase to fair value of the assets acquired.
(17) The total purchase price paid at closing was $24,726,000 in cash,
including and estimated $726,000 in acquisition related costs. The
acquisition is accounted for as a purchase and the difference between the
purchase price and the fair value of the net assets acquired is recorded
as goodwill and will be amortized over 30 years. Goodwill excludes
contingent consideration aggregating a maximum of $6,000,000 payable over
two years based on future attainment of defined performance criteria. The
amount of contingent consideration paid in the future, if any, will
increase goodwill and will be amortized prospectively over the remaining
period of the initial 30-year term.
(18) Represents borrowings under the Company's revolving line of credit to
fund the acquisition.
(19) Represents the elimination of net equity as of the acquisition date.
6
