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PROSPECTUS
[LOGO]
DECRANE AIRCRAFT HOLDINGS, INC.
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12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
We issued the notes in exchange for our old 12% Series A Senior Subordinated
Notes due 2008. The notes are identical to the old notes, except that certain
transfer restrictions and registration rights relating to the old notes do not
apply to the new notes.
Interest on the notes is payable on March 30 and September 30 of each year,
beginning March 30, 1999. We have the right to redeem any new notes at any time
beginning September 30, 2003 at the redemption prices set forth on page 62, plus
accrued interest. In addition, before September 30, 2001, we may redeem up to
35% of the notes at a redemption price of 112% of their principal amount, plus
interest, using proceeds from certain sales of our stock; PROVIDED that at least
65% of the principal amount of notes ever issued under the indenture remains
outstanding immediately after such redemption. We will also have the right to
redeem, and you will have the right to require us to purchase, the notes upon
the occurrence of certain change of control events, at the price set forth on
page 63.
The notes rank junior to our senior indebtedness and secured debt, including
the debt owed under our bank credit facility. The notes rank equally with any
future unsecured, senior subordinated debt. The notes are unconditionally
guaranteed on a senior subordinated basis by all of our existing wholly-owned
domestic subsidiaries, and rank junior to such guarantors' senior and secured
debt and equally with their future unsecured, senior subordinated debt. The
notes will effectively rank junior to all liabilities of our subsidiaries that
are not guarantors. As of September 30, 1999, on a pro forma basis, DeCrane
Aircraft and its guarantor subsidiaries would have had outstanding approximately
$216.3 million of senior indebtedness, and the non-guarantor subsidiaries would
have had approximately $2.3 million of outstanding liabilities, including trade
payables.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
This prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation in connection with offers and sales in market-making transactions at
negotiated prices related to prevailing market prices. We do not intend to list
the notes on any securities exchange. DLJ Securities Corporation has advised us
that it intends to make a market in the notes; however, it is not obligated to
do so and may stop at any time. We will not receive the proceeds of the sale of
the notes but will bear the expenses of registration.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS
APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DONALDSON, LUFKIN & JENRETTE
The date of this prospectus is February 10, 2000
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SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT
LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY
UNDERSTAND THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE FINANCIAL STATEMENTS AND THEIR RELATED NOTES.
THE DEBT SECURITIES REGISTERED BY THIS PROSPECTUS ARE OBLIGATIONS ISSUED BY
DECRANE AIRCRAFT HOLDINGS, INC. DECRANE AIRCRAFT IS A HOLDING COMPANY WHICH
CONDUCTS ITS BUSINESS PRIMARILY THROUGH ITS SUBSIDIARIES, AS ILLUSTRATED BELOW.
AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, AND EXCEPT
WHEN USED IN THE SECTION "DESCRIPTION OF NOTES," "DECRANE AIRCRAFT" AND "WE,"
"US," "OUR" AND SIMILAR TERMS REFER TO THE COMBINED BUSINESS OF DECRANE AIRCRAFT
HOLDINGS, INC. (AND ITS PREDECESSOR) AND ALL OF ITS SUBSIDIARIES, COLLECTIVELY.
DECRANE AIRCRAFT'S PARENT COMPANY, DECRANE HOLDINGS CO., IS ALSO A HOLDING
COMPANY AND DOES NOT HAVE ANY MATERIAL OPERATIONS OR ASSETS OTHER THAN ITS
OWNERSHIP OF THE CAPITAL STOCK OF DECRANE AIRCRAFT. EXCEPT WHERE WE INDICATE
OTHERWISE, THIS PROSPECTUS PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS,
GIVING EFFECT TO ALL OF THE TRANSACTIONS REFERRED TO IN "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA," INCLUDING THE ACQUISITION OF DECRANE AIRCRAFT BY
DLJ MERCHANT BANK PARTNERS II, L.P. AND ITS AFFILIATES AND OUR ACQUISITIONS OF
AVTECH CORPORATION, DETTMERS INDUSTRIES, INC., PATS, INC., PPI HOLDINGS, INC.,
CUSTOM WOODWORK & PLASTICS, INC., PCI NEWCO, INC., INTERNATIONAL CUSTOM
INTERIORS, INC. AND THE INFINITY PARTNERS, LTD.
[GRAPHIC]
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OUR COMPANY
OVERVIEW
Since our founding in 1989, through acquisitions and internal growth, we
have become one of the premier suppliers to the general aviation market. We
offer a complete line of interior cabin furniture, galleys, seating, and
entertainment systems for corporate aircraft. In addition, we manufacture
aviation electronic components, referred to as avionics, and provide systems
integration services. We sell our products in the corporate, commercial
(including regional), retrofit, aftermarket and military aircraft markets.
Within these markets, our customers include original manufacturers of aircraft
and related avionics equipment, commonly referred to as OEM's, major components
suppliers, aircraft repair and modification centers and commercial airlines. For
the twelve months ended September 30, 1999, we generated pro forma revenues and
EBITDA (as defined) of $294.9 million and $67.1 million, respectively.
During 1998 and 1999, we completed and integrated eight acquisitions,
increasing our diversification within the aircraft industry and reducing our
reliance on the commercial aircraft market. We have built a leading position in
a number of niche markets in the aircraft industry. The substantial majority of
our revenue is generated by businesses in which we have a leading market share.
In order to take advantage of the complementary nature of our various product
offerings, to rationalize and consolidate the operations of each of our separate
companies and to provide even higher levels of customer service, in 1999 we
reorganized our related businesses into three separate operating groups: Cabin
Management, Specialty Avionics and Systems Integration.
THE CABIN MANAGEMENT GROUP. We are the leading independent provider of
cabin management products for the corporate aircraft market, serving major
manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault,
Gulfstream and Raytheon. We provide a full line of interior cabin components,
including seats, furniture, cabinetry, galleys, in-flight entertainment systems,
sidewalls and headliners, which are either sold separately or as a
pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers
customized, pre-engineered, pre-fit interior cabinetry and galley kits to
corporate jet OEM's and independent completion centers. We also have developed
and are currently marketing our "cabin-in-a-box" product, which is comprised of
a customized, pre-engineered, pre-fit cabin interior system, including
furniture, galleys, seats, audio-visual entertainment systems, lighting,
sidewalls, headliners and electrical control units. Our cabin-in-a-box product
will enable our customers to rely on us as the single source for cabin-related
products. We estimate that this product could decrease cycle times by 15% to
20%, offering significant cost reduction opportunities to our customers, and
could increase the dollar content per plane for us. The Cabin Management Group
contributed approximately 40% of our pro forma revenue for the twelve months
ended September 30, 1999.
THE SPECIALTY AVIONICS GROUP. This group designs, engineers and
manufactures electronic components, electronic display devices and interconnect
components and assemblies. Among the products offered by this group are flight
deck communications and audio power control equipment, harness assemblies and
connectors, power and signal contact products and liquid crystal display
devices, commonly referred to as LCD's. Customers of this group include Airbus,
Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics
Group contributed approximately 39% of our pro forma revenue for the twelve
months ended September 30, 1999.
THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks,
auxiliary power units and system integration services, including engineering,
kit manufacturing, installation and certification. Customers of this group
include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and
Rockwell Collins. The Systems Integration Group contributed approximately 21% of
our pro forma revenue for the twelve months ended September 30, 1999.
INDUSTRY OVERVIEW AND TRENDS
We believe the following characteristics of our markets have contributed to
our growth and profitability and should provide further opportunities for our
success:
- INCREASED DEMAND FOR NEW AIRCRAFT.
- CORPORATE AIRCRAFT. The growing popularity of fractional aircraft
ownership in the United States, the expansion of this program to Europe
and the Far East and the increased demand for more expedient travel
have significantly expanded demand for corporate aircraft. The Teal
Group Corporation, an industry-recognized aerospace research group,
projects delivery of 5,067
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corporate aircraft between 1999 and 2008, representing an increase of
approximately 52% over the 3,326 corporate aircraft that were delivered
between 1989 and 1998.
- COMMERCIAL AIRCRAFT. The 1999 CURRENT MARKET OUTLOOK, released by The
Boeing Company in June 1999, projects that between 1999 and 2008, the
commercial aircraft industry will require 8,900 new commercial
aircraft, and between 2009 and 2018, it will require an additional
11,250 aircraft.
- REGIONAL AIRCRAFT. As part of the total projected increase for the
commercial aircraft fleet, Boeing projects a compounded annual growth
rate of 9.4% for the regional aircraft fleet from 1999 to 2008 due to
new longer-range, state-of-the-art regional aircraft and the
integration of regional carrier services with major carriers to support
the "point-to-point" routing concept.
- INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become
increasingly dependent on new technology, passengers are demanding more
advanced in-flight services. These services include in-flight passenger
telecommunications systems and entertainment systems, such as video,
video-on-demand and other interactive systems. In corporate aircraft for
example, Honeywell's AIS-1000 OneView-TM-Airborne Information System
delivers more than 40 channels of live television programming and Internet
and e-mail access to the aircraft via direct broadcast satellite service
providers.
- SIGNIFICANT BARRIERS TO ENTRY. We believe that manufacturers' reluctance
to include new companies as additional approved vendors on their
engineering drawings, increasingly stringent Federal Aviation
Administration requirements for aircraft manufacturing and modification,
including extensive and lengthy qualification and certification programs,
and the initial capital investment and tooling requirements necessary for
the manufacture of aircraft components and systems all create significant
barriers to entry in a number of our markets.
- REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines
have come under increasing pressure to reduce operating and capital costs
associated with providing services. As a result, many OEM's are initiating
proactive programs to reduce cycle times, decrease inventory and reduce
costs. Boeing, for example, has announced that it intends to reduce its
number of suppliers by 19%, from 31,000 to 25,000, by the end of 2000 and
by 42% over the long term. Manufacturers can realize efficiencies by
purchasing a higher number of assemblies from a smaller number of
suppliers, each of whom has multiple related product capability.
- NEW SAFETY MANDATES. Historically, the FAA has taken a very proactive role
in promulgating new safety standards, such as collision avoidance systems,
wind shear detection systems, group proximity detection systems and smoke
detection and fire suppression systems. These safety mandates should
provide significant retrofit opportunities for the commercial fleet, which
today exceeds 12,000 aircraft.
COMPETITIVE STRENGTHS
We have used our strong market positions to compete more effectively, to
capitalize on industry consolidation trends and to cross-sell products to our
existing customer base. We believe that we are well-positioned to take advantage
of the foregoing trends and expected growth in the aircraft industry as a result
of the following competitive strengths:
- LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of
components within a number of the niche markets we serve. Our strategy has
been to combine complementary businesses in markets in which we have a
leading position. We believe our combination of component manufacturing
and integration and installation capabilities provides us with competitive
advantages. The combination of product lines we offer provides
opportunities for our customers to deal with a reduced number of vendors
and suppliers, to reduce the number of component parts through the
purchase of sub-assemblies and to reduce cycle times, all of which help
reduce costs and simplify the production process.
- STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of
our performance, we have enjoyed long-term relationships with leaders in
our primary markets, including Boeing and Boeing Business Jet, Bombardier,
Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins.
We believe we have been able to develop and solidify these relationships
by combining
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production and engineering capabilities, providing engineering support
services and enhancing our customers' in-house production processes.
- DIVERSIFIED REVENUE BASE. We sell our products in the corporate,
commercial, retrofit, aftermarket and military aircraft markets. Within
these markets, our customers include original manufacturers of aircraft
and related avionics equipment, aircraft repair and modification centers,
and airlines. Each of these markets has different demand drivers and
operates on different production cycles. Accordingly, our involvement in
these multiple markets reduces our exposure to cyclical product demand in
any one segment of the aircraft industry. Demand for new products in the
commercial aircraft market, for example, is driven largely by the age of
the existing commercial fleet, the growth in revenue passenger miles and
industry load factors, whereas demand in the corporate aircraft market is
driven largely by the growth in fractional ownership, competition from
commercial airlines and the growth in the global economy. Our aftermarket
sales are dependent in part upon the growing number of aircraft in the
existing fleet while technology advances and safety updates help drive
demand in the retrofit market.
- COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we
have completed seventeen acquisitions of businesses and assets. We believe
that our acquisitions complement each other and create a core of
interrelated products and services, which increases our cross-selling
opportunities to existing and new customers. The complementary nature of
our business lines should allow us to help our customers reduce their
production costs.
- LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations
through cost reduction programs, technological development and, where
appropriate, the use of vertical integration. Four of our facilities have
received a quality award from Boeing, and nine of our facilities are
currently certified according to the International Standards Organization
specifications ISO-9001 or ISO-9002.
- REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and
power-plant mechanics who are authorized to perform specified aircraft
modification functions provide us with a significant competitive
advantage. As of December 31, 1999, our operations include one of only 31
currently active FAA Designated Alteration Stations worldwide, and we hold
nine FAA domestic repair station certificates as well as numerous Parts
Manufacturer Approval authorizations from the FAA. These certifications
make us one of a few companies with the in-house capability to design,
engineer, produce, install and certify a part, which together help reduce
cycle times.
GROWTH STRATEGY
Our principal strategy is to establish and expand leading positions in
high-margin, niche markets. We also seek to maintain a balance of revenues among
the equipment manufacturer market, the retrofit market and the aftermarket. We
believe that this strategy positions us for future success by:
- BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with
virtually every major OEM and with fractional ownership programs, such as
Executive Jet. We plan to continue cross-selling our portfolio of products
to our existing customer base in order to increase our dollar content per
plane. For example, we originally entered the corporate aircraft market by
offering cabin management systems and entertainment systems. We then
expanded our product offering to include seating and in 1999, through four
separate acquisitions, we added cabinetry and galley products, which we
sell to OEM's. Finally, we developed pre-fabricated interior kits,
cabinet-in-a-box and cabin-in-a-box, to facilitate cross-selling and
further encourage OEM's to outsource their cabin engineering requirements
to us. We believe these products should reduce cycle times and costs for
manufacturers and increase our dollar content per plane. We currently
provide cabinet-in-a-box kits to several of our customers and are in
discussions with a number of corporate jet manufacturers regarding our
cabin-in-a-box product.
- STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen
our position in niche markets by providing engineering and customer
service support to our existing customer base through the integration of
our engineering services with the OEM's engineering capabilities. We also
plan to continue to examine new market niches and consolidate the
fragmented sectors in our markets to further service our customers. We
target for acquisition aircraft component manufacturers and systems
integration and installation providers that meet the following criteria:
- are complementary to our existing businesses;
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- have a leading market share in their own niches;
- leverage our existing strengths;
- add new expertise; and/or
- increase cross-selling opportunities.
In analyzing a potential acquisition's value, we focus on economies of
scale, product line extensions, new customer relationships, increased
manufacturing capacity and opportunities for increased cost reductions.
- CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of
areas of synergies across and within our three business segments by making
operational efficiency improvements in human resources, support,
procurement and cross-selling. For example, we recently formed the Systems
Integration Group to leverage the engineering capabilities of our
Hollingsead subsidiary with the manufacturing and systems integration and
installation capabilities of our PATS subsidiary. In addition, as part of
the Systems Integration Group's strategy, we are consolidating facilities,
reducing headcount and replacing relatively expensive manufacturing at
Hollingsead with more economical outsourced products. This will allow
Hollingsead to focus on its core engineering and systems integration
competencies. We are also standardizing processes and centralizing
procurement at our four recently acquired cabin furniture companies, and
we continue to evaluate our operations to streamline or increase
efficiencies.
- EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features
increases demand for many of our products and provides attractive
cross-selling opportunities. For example, our newly introduced
e-CABIN, an "office in the sky," provides leading-edge business and
entertainment services for the corporate jet cabin and its passengers. Our
e-CABIN provides each passenger with on-demand audio and video
entertainment, including live television and Internet and e-mail access
via Honeywell's OneView system. We will continue considering strategic
partnerships with leading technology companies to keep our product
offerings on the cutting edge, as we have done with Honeywell and its
OneView system.
RECENT DEVELOPMENTS
Continuing our acquisition strategy, subsequent to September 30, 1999 we
acquired:
- PCI NewCo, Inc., a Kansas-based manufacturer of composite material and
components for middle-and high-end corporate aircraft, on October 6, 1999;
- International Custom Interiors, Inc., a Florida-based provider of
upholstery services and manufacturer of furniture for middle- and high-end
corporate aircraft, on October 8, 1999; and
- The Infinity Partners, Ltd., a Texas-based designer and manufacturer of
interior furniture components for middle- and high-end corporate aircraft,
on December 17, 1999.
The historical consolidated financial data included in this prospectus does
not reflect these acquisitions because they were acquired subsequent to
September 30, 1999. However, all information in this prospectus presented on a
pro forma basis gives effect to these acquisitions as described in "Unaudited
Pro Forma Consolidated Financial Data." See "Recent Developments--Acquisitions
Subsequent to September 30, 1999."
In addition, in December 1999, we announced a plan to reorganize and
restructure the operations of two of our subsidiaries. In conjunction with this
restructuring, we expect to record a nonrecurring pre-tax charge of
approximately $9.5 million in the fourth quarter of 1999, resulting in a net
loss for the quarter and year ending December 31, 1999. The historical and pro
forma consolidated financial data included in this prospectus does not reflect
this restructuring charge. See "Recent Developments--Reorganization and
Restructuring Charge."
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Our principal executive offices are located at 2361 Rosecrans Avenue, Suite
180, El Segundo, California 90245. Our telephone number is (310) 725-9123.
Further information is also available as noted under "Where You Can Get More
Information" at the end of the "Business" section.
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THE NOTES
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Maturity Date........................ September 30, 2008.
Interest Payment Dates............... Each March 30 and September 30, beginning March 30, 1999.
Optional Redemption.................. We may redeem:
- all or some of the notes, on or after September 30, 2003,
- up to 35% of the notes, on or before September 30, 2001,
with the net cash proceeds of any public equity offerings,
and
- 100% of the notes, before September 30, 2003, if the
change of control events which are described herein occur,
at the redemption prices specified on pages 62 and 63.
Change of Control.................... You can require that we repurchase your notes, if the change
of control events which are described herein occur, at 101%
of the principal amount plus accrued interest. See "Risk
Factors--Repurchase upon Change of Control" and "Description
of Notes--Repurchase of the Option of Holders Upon Change of
Control."
Ranking.............................. The notes rank junior to all of our senior indebtedness and
secured debt, including the debt owed under our bank credit
facility. The notes rank equally with any of our future
unsecured, senior subordinated debt. The terms of the
indenture do not fully prohibit us or our subsidiaries from
incurring substantial additional indebtedness in the future.
In addition to senior debt which we might incur, we may
issue an unlimited amount of additional senior subordinated
notes under the indenture, so long as the total amount of
debt is permitted by our financial covenants.
The notes also will effectively rank junior to all
liabilities of our subsidiaries that are not guarantors. See
"Description of Notes--Note Guarantees." As of
September 30, 1999, on a pro forma basis, DeCrane Aircraft
and its subsidiary guarantors would have had approximately
$216.3 million of senior indebtedness outstanding, and the
non-guarantor subsidiaries would have had approximately
$2.3 million of liabilities outstanding, including trade
payables.
Guarantors........................... The notes are fully and unconditionally guaranteed jointly
and severally by all of our existing wholly-owned domestic
subsidiaries. The notes are senior subordinated obligations
of the guarantors, and rank junior to their senior and
secured debt and equally with their future unsecured, senior
subordinated debt.
Covenants............................ The indenture which governs the notes includes covenants
that, among other things, limit our ability, and that of our
subsidiaries defined as "Restricted Subsidiaries," to:
- incur debt,
- issue preferred stock,
- repurchase capital stock or subordinated debt,
- enter into transactions with affiliates,
- enter into sale and leaseback transactions,
- create liens or allow them to exist,
- pay dividends or other distributions,
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- make investments,
- sell assets, and
- enter into mergers or consolidations.
See "Description of Notes--Covenants."
The Warrants; the Units.............. The old notes were originally sold as "units," paired with
warrants for the common stock of DeCrane Aircraft's parent
company, DeCrane Holdings. The warrants may be traded
separately from the notes and are subject to a separate
"shelf" registration statement. This prospectus does not
cover the warrants or the shares of common stock of DeCrane
Holdings to be issued pursuant to the warrants.
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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary unaudited pro forma financial data were derived from our
historical financial data and give pro forma effect to the transactions
described in our pro forma financial data and related notes included elsewhere
in this prospectus as if they occurred on January 1, 1998. The pro forma
adjustments are based upon available information and assumptions management
believes are reasonable under the circumstances. The pro forma financial data do
not purport to represent what our actual results of operations or actual
financial position would have been if such transactions had actually occurred on
such date or to project our future results of operations or financial position.
The information in this table should be read in conjunction with "Recent
Developments," "Selected Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Data" and our consolidated financial statements and
related notes included elsewhere in this prospectus.
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<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
DECEMBER 31, --------------------- SEPTEMBER 30,
1998(1) 1998(1) 1999(1) 1999(1)
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(DOLLARS IN THOUSANDS)
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PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 268,470 $ 196,903 $ 223,326 $ 294,893
Gross profit(2)........................................... 83,595 58,337 75,431 100,689
Operating income(3)....................................... 30,706 18,542 32,980 45,144
Provision (benefit) for income taxes...................... 387 (1,513) 5,304 7,204
Income (loss) before extraordinary item................... (5,379) (6,943) 3,138 4,702
OTHER PRO FORMA FINANCIAL DATA:
Cash flows from operating acitivities..................... $ $2,667 $ (3,624) $ 18,508 $ 24,799
Cash flows from investing activities...................... (237,409) (235,275) (9,100) (11,234)
Cash flows from financing activities...................... 237,118 237,944 (14,440) (15,266)
EBITDA(4)................................................. 57,491 39,905 49,465 67,051
EBITDA margin(5).......................................... 21.4% 20.3% 22.1% 22.7%
Adjusted EBITDA(6)........................................ $ 60,684 $ 42,490 $ 49,465 $ 67,659
Adjusted EBITDA margin(7)................................. 22.6% 21.6% 22.1% 22.9%
Depreciation and amortization(8).......................... $ 20,284 $ 15,066 $ 15,655 $ 20,873
Capital expenditures:
Paid in cash............................................ 7,212 5,028 5,511 7,695
Financed with capital lease obligations................. 224 176 1,467 1,515
Cash interest expense..................................... 33,239 25,175 23,452 31,516
Adjusted EBITDA to cash interest expense(9)............... 1.8x 1.7x 2.1x 2.1x
Ratio of earnings to fixed charges(10).................... -- -- 1.3x 1.3x
OTHER OPERATING DATA:
Bookings(11).............................................. $ 266,952 $ 195,385 $ 230,299 $ 301,866
Backlog at end of period(12).............................. 143,851 149,586 150,824 150,824
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AS OF
SEPTEMBER 30,
1999 (13)
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(DOLLARS IN
THOUSANDS)
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PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,530
Working capital............................................. 63,356
Total assets................................................ 492,848
Total debt (14)............................................. 316,804
Stockholder's equity........................................ 110,033
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See accompanying Notes to Summary Unaudited Pro Forma Consolidated Financial
Data.
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NOTES TO SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects DLJ's acquisition of us and our acquisition of the following
companies (on the dates indicated) as if each had occurred as of January 1,
1998:
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- -Avtech (June 26, 1998); -PPI (April 23, 1999); -International Custom Interiors
(October 8, 1999); and
- -Dettmers (June 30, 1998); -Custom Woodwork (August 5, 1999); -Infinity (December 17, 1999).
- -PATS (January 22, 1999); -PCI NewCo (October 6, 1999);
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(2) Net of $6.2 million of non-cash acquisition related charges to reflect cost
of sales based on the fair value of inventory acquired in connection with
the DLJ acquisition and our PPI, Custom Woodwork and PCI NewCo acquisitions
for the year ended December 31, 1998 and the nine months ended September
30, 1998.
(3) Excludes an approximate $9.5 million pre-tax charge we will incur in the
fourth quarter of 1999 in connection with the Hollingsead and Elsinore
Engineering restructuring.
(4) EBITDA equals operating income plus depreciation, amortization, parent
company management fees, non-cash acquisition related charges described in
Note 2 above and other acquisition related costs. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles. EBITDA is not intended to represent cash flow from operations
and should not be considered as an alternative to income from operations or
net income computed in accordance with generally accepted accounting
principles, as an indicator of our operating performance, as an alternative
to cash flow from operating activities or as a measure of liquidity. The
funds depicted by EBITDA are not available for our discretionary use due to
funding requirements for working capital, capital expenditures, debt
service, income taxes and other commitments and contingencies. We believe
that EBITDA is a standard measure of liquidity commonly reported and widely
used by analysts, investors and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method,
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(5) EBITDA margin is computed by dividing EBITDA by revenues.
(6) Adjusted EBITDA equals EBITDA plus the following nonrecurring charges:
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NINE MONTHS
YEAR ENDED TWELVE MONTHS
ENDED SEPTEMBER 30, ENDED
DECEMBER 31, ------------------- SEPTEMBER 30,
1998 1998 1999 1999
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(DOLLARS IN THOUSANDS)
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EBITDA as described in Note 4 above.................... $57,491 $39,905 $49,465 $67,051
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Adjustments for nonrecurring charges
Workforce reductions................................. 2,430 1,822 -- 608
Engineering costs.................................... 350 350 -- --
Reduction of corporate expenses...................... 310 310 -- --
Non-cash stock option compensation expense........... 73 73 -- --
Expiration of employment contract of a former
stockholder of a previously acquired company....... 30 30 -- --
------- ------- ------- -------
Total adjustments.................................. 3,193 2,585 -- 608
------- ------- ------- -------
Adjusted EBITDA........................................ $60,684 $42,490 $49,465 $67,659
======= ======= ======= =======
</TABLE>
(7) Adjusted EBITDA margin is computed by dividing Adjusted EBITDA by revenues.
(8) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts that are classified as a component of interest
expense.
(9) Adjusted EBITDA to cash interest expense is computed by dividing Adjusted
EBITDA by cash interest expense.
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interests in
the income of majority-owned subsidiaries, cumulative effect of an
accounting change, extraordinary items and fixed charges. Fixed charges
consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to fixed charges of $4.9 million for
the year ended December 31, 1998 and $8.4 million for the nine months ended
September 30, 1998.
(11) Bookings represent the total invoice value of purchase orders received
during the period.
(12) 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 our receipt of orders and the
speed with which those orders are filled.
(13 Reflects our PCI NewCo, International Custom Interiors and Infinity
acquisitions as if each had occurred as of September 30, 1999. Excludes the
effect of an approximate $9.5 million pre-tax charge we will incur in the
fourth quarter of 1999 in connection with the Hollingsead and Elsinore
Engineering restructuring.
(14) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
9
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present a summary of our historical consolidated
financial data. The data as of and for each of the two years in the period ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998 were derived from our audited financial statements. The
data as of September 30, 1998 and 1999 and for the one month ended
September 30, 1998 and the nine months ended September 30, 1999 were derived
from our unaudited historical financial statements for such periods, which, in
the opinion of management, reflect normal and recurring adjustments necessary to
present fairly the financial position and results of operations for the periods
presented. The results of operations for interim periods are not necessarily
indicative of results of operations for the full year. The information in this
table should be read in conjunction with "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) NINE MONTHS ENDED SEPTEMBER 30,(1)
---------------------------------------------------- ---------------------------------------------
1998 1998
------------------------------ ---------------------------------
EIGHT MONTHS FOUR MONTHS EIGHT MONTHS ONE MONTH
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, AUGUST 31, SEPTEMBER 30,
1996 1997 1998 1998 1998 1998 1999
-------- -------- ------------- -------------- ---------------- -------------- ---------
(PREDECESSOR)(2) (SUCCESSOR)(2) (PREDECESSOR)(2) (SUCCESSOR)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 65,099 $108,903 $ 90,077 $60,356 $ 90,077 $16,012 $ 177,836
Gross profit(3)............ 15,707 28,656 29,976 17,617 29,976 4,932 59,755
Operating income(4)........ 4,251 11,995 9,278 4,195 9,278 960 22,742
Interest expense........... 4,248 3,154 2,350 6,852 2,350 1,765 19,884
Provision for income taxes
(benefit)(5)............. 712 3,344 2,892 (2,668) 2,892 (506) 2,669
Income (loss) before
extraordinary item....... (817) 5,254 3,189 (324) 3,189 (480) 500
Extraordinary loss from
debt refinancing(6)...... -- (2,078) -- (2,229) -- (296) --
Net income (loss).......... (817) 3,176 3,189 (2,553) 3,189 (776) 500
OTHER FINANCIAL DATA:
Cash flows from:
Operating activities..... $ 2,958 $ 4,641 $ 3,014 $ 1,008 $ 3,014 $(1,506) $ 10,222
Investing activities..... (24,016) (27,809) (87,378) (1,813) (87,378) (307) (121,431)
Financing activities..... 21,051 22,957 89,871 (1,597) 89,871 358 110,929
EBITDA(7).................. 7,602 16,915 13,743 13,476 13,743 3,310 38,821
EBITDA margin(8)........... 11.7% 15.5% 15.3% 22.3% 15.3% 20.7% 21.8%
Depreciation and
amortization(9).......... $ 3,351 $ 4,920 $ 4,358 $ 4,604 $ 4,358 $ 1,166 $ 4,219
Capital expenditures:
Paid in cash (10)........ 5,821 3,842 1,745 1,813 1,745 307 4,752
Financed with capital
lease obligations...... 414 182 116 48 116 -- 1,323
Ratio of earnings to fixed
charges(11).............. 1.0x 3.3x 3.0x -- 3.0x -- 1.2x
OTHER OPERATING DATA:
Bookings(12)............... $ 81,914 $112,082 $ 94,439 $54,021 $ 94,439 $16,890 $ 226,468
Backlog at end of
period(13)............... 44,433 49,005 84,184 75,388 84,184 84,607 139,758
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999(14)
BALANCE SHEET DATA: --------------
(SUCCESSOR)
<S> <C>
Cash and cash equivalents................................... $ 3,139
Working capital............................................. 59,056
Total assets................................................ 458,763
Total debt(15).............................................. 285,177
Stockholders' equity........................................ 110,033
</TABLE>
See accompanying Notes to Summary Historical Consolidated Financial Data.
10
<PAGE>
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) Reflects the results of operations and financial position of companies
acquired for all periods subsequent to their respective acquisition dates
as follows:
- the remaining 25% minority interest in Cory Components beginning on
February 20, 1996;
- Aerospace Display Systems beginning on September 18, 1996;
- Elsinore Engineering beginning on December 5, 1996;
- Audio International beginning on November 14, 1997;
- Avtech beginning on June 26, 1998;
- Dettmers beginning on June 30, 1998;
- PATS beginning on January 22, 1999;
- PPI beginning on April 23, 1999; and
- Custom Woodwork beginning on August 5, 1999.
Excludes the results of operations and financial position of PCI NewCo,
International Custom Interiors and Infinity because they were acquired
subsequent to September 30, 1999.
(2) Reflects our results of operations and financial position prior to
(predecessor) and subsequent to (successor) our acquisition by DLJ.
(3) Net of non-cash charges to reflect cost of sales based on the fair value of
inventory acquired as follows:
- $4.4 million for the four months ended December 31, 1998 and
$1.2 million for the one month ended September 30, 1998 in connection
with the DLJ acquisition; and
- $1.6 million for the nine months ended September 30, 1999 in connection
with our PPI and Custom Woodworks acquisitions.
(4) Net of $3.6 million of non-capitalizable transaction costs associated with
the DLJ acquisition in August 1998. Excludes an approximate $9.5 million
pre-tax charge we will incur in the fourth quarter of 1999 in connection
with the Hollingsead and Elsinore Engineering restructuring.
(5) For the four months ended December 31, 1998, includes a $2.6 million
benefit from the reduction of the deferred tax valuation allowance.
(6) Represents:
- the write-offs, net of an income tax benefit, of deferred financing
costs, unamortized original issue discounts, a prepayment penalty and
other related expenses incurred as a result of the repayment of debt by
DeCrane Aircraft with the net proceeds from its initial public offering
in April 1997; and
- the write-offs, net of an income tax benefit, of deferred financing
costs as a result of the repayment of our then existing indebtedness in
connection with the DLJ acquisition and the refinancing of the bridge
notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization, parent
company management fees, non-cash acquisition related charges described in
Note 3 above and other acquisition related costs. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles. EBITDA is not intended to represent cash flow from operations
and should not be considered as an alternative to income from operations or
net income computed in accordance with generally accepted accounting
principles, as an indicator of our operating performance, as an alternative
to cash flow from operating activities or as a measure of liquidity. The
funds depicted by EBITDA are not available for our discretionary use due to
funding requirements for working capital, capital expenditures, debt
service, income taxes and other commitments and contingencies. We believe
that EBITDA is a standard measure of liquidity commonly reported and widely
used by analysts, investors and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method,
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(8) EBITDA margin is computed by dividing EBITDA by revenues.
(9) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts that are classified as a component of interest
expense.
(10) Includes $4.4 million for the year ended December 31, 1996 related to our
acquisition of a manufacturing facility.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interests in
the income of majority-owned subsidiaries, cumulative effect of an
accounting change, extraordinary items and fixed charges. Fixed charges
consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to cover fixed charges for the years
ended December 31, 1994 and 1995, the four months ended December 31, 1998
and the one month ended September 30, 1998 of $1.8 million, $2.3 million,
$2.9 million and $1.0 million, respectively.
(12) Bookings represent the total invoice value of purchase orders received
during the period.
(13) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of our receipt of orders and the
speed with which those orders are filled.
(14) Excludes the effect of an approximate $9.5 million pre-tax charge we will
incur in the fourth quarter of 1999 in connection with the Hollingsead and
Elsinore Engineering restructuring.
(15) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
11
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION AS PART OF YOUR
EVALUATION OF OUR COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
OFFERED SECURITIES.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus discuss future expectations,
beliefs or strategies, projections or other "forward-looking" information. These
statements are subject to known and unknown risks. Many factors could cause
actual company results, performance or achievements, or industry results, to be
materially different from the projections expressed or implied by this
prospectus. Some of those risks are specifically described below, but we are
also vulnerable to a variety of elements that affect many businesses, such as:
- fuel prices and general economic conditions that affect demand for
aircraft and air travel, which in turn affect demand for our products and
services;
- changes in prevailing interest rates and the availability of financing to
fund our plans for continued growth;
- inflation, and other general changes in costs of goods and services;
- liability and other claims asserted against us;
- the ability to attract and retain qualified personnel;
- labor disturbances; and
- changes in operating strategy, or our acquisition and capital expenditure
plans.
We cannot predict any of the foregoing with certainty, so our
forward-looking statements are not necessarily accurate predictions. Also, we
are not obligated to update any of these statements, to reflect actual results
or report later developments. You should not rely on our forward-looking
statements as if they were certainties.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL LEVELS OF DEBT COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We incurred significant debt as part of our acquisition by DLJ in August
1998 and in connection with companies we have acquired. As of September 30,
1999, on a pro forma basis, we would have had total consolidated indebtedness of
approximately $316.8 million, and we would have had available $50.0 million of
additional revolving borrowings under the DeCrane Aircraft bank credit facility.
In order to borrow those funds, we will have to satisfy funding conditions of
the kind usually imposed in similar agreements. The bank credit facility and the
indenture under which DeCrane Aircraft's senior subordinated notes are issued
each also permit us to incur significant amounts of additional debt and to
secure that debt with some of our assets.
The amount of debt we carry could have important consequences:
- It may limit the cash flow available for general corporate purposes and
acquisitions. Interest payments on our debt for the twelve months ended
September 30, 1999 would have been $31.5 million on a pro forma basis. We
had deficiencies of earnings to cover fixed charges for the years ended
December 31, 1994 and 1995, the four months ended December 31, 1998 and
the one month ended September 30, 1998 of $1.8 million, $2.3 million,
$2.9 million and $1.0 million, respectively.
- It may limit our ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions.
- It may limit our flexibility in reacting to competitive and other changes
in the industry and economic conditions generally.
- It may expose us to increased interest expenses, when interest rates
fluctuate, because some of our borrowing may be, and in recent years most
of it has been, at variable "floating" rates.
- It may limit our ability to respond to changes in our markets or exploit
business opportunities.
12
<PAGE>
RESTRICTIVE COVENANTS--OUR OPERATIONS AND THOSE OF OUR SUBSIDIARIES ARE
RESTRICTED BY THE TERMS OF THE NOTES AND OUR BANK CREDIT FACILITY.
The indenture under which the notes were issued and our bank credit facility
limit our flexibility in operating our businesses, including our ability and the
ability of our subsidiaries to:
- incur debt;
- issue preferred stock;
- repurchase capital stock or subordinated debt;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- create liens or allow them to exist;
- pay dividends or other distributions;
- make investments;
- sell assets; and
- enter into mergers and consolidations.
In addition, our bank credit facility requires that we satisfy several tests
of financial condition. Our ability to do so can be affected by events beyond
our control, and we cannot assure you that we will meet those tests. Our failure
to do so could result in a default under our bank credit facility or the notes.
ADDITIONAL BORROWINGS--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR
SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
INTENSIFY THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of our debt do not fully prohibit us or
our subsidiaries from doing so. In addition to senior debt which we might incur,
we may issue an unlimited amount of additional senior subordinated notes under
the existing indenture, so long as the total amount of debt is permitted by our
financial covenants. See "Description of Notes--Incurrence of Indebtedness and
Issuance of Preferred Stock." If new debt is added to our and our subsidiaries'
current debt levels, the related risks that we and they now face could
intensify.
SUBORDINATION--YOUR RIGHTS UNDER THE NOTES ARE SUBORDINATED TO SUBSTANTIALLY ALL
OUR EXISTING DEBT.
The notes and the subsidiary guarantees are general unsecured obligations of
DeCrane Aircraft and its subsidiaries which have provided note guarantees. The
notes and the subsidiary guarantees rank lower in right of payment than most of
the debt of those companies, including the amounts owed under the bank credit
facility. The senior creditors have rights that might reduce the payments made
to you as a holder of the notes. Among other things:
- As of September 30, 1999, on a pro forma basis, DeCrane Aircraft and the
guarantor subsidiaries would have had outstanding about $216.3 million of
senior debt. We would be required to pay the applicable holders of this
senior debt in full before paying the holders of the notes if DeCrane
Aircraft or one of the guarantor subsidiaries, as applicable, suffers a
bankruptcy filing, insolvency, liquidation or similar event, or if such
senior debt is accelerated.
- We are blocked from paying holders of the notes whenever there is a
payment default on specified senior debt, and principal and premium
payments may also be blocked for up to 179 days while there is a
non-payment default on such senior debt. See "Description of
Notes--Subordination" for the terms of this subordination.
- The bank credit facility is secured by our key assets, excluding assets of
our foreign subsidiaries. If we default under our senior debt agreements,
the lenders could choose to declare all outstanding amounts immediately
due and payable, and seek foreclosure of the assets we granted to them as
collateral. We cannot assure you that, if our bank credit facility were
accelerated, our assets would be sufficient to repay all of our debt,
including the notes, in full.
13
<PAGE>
HOLDING COMPANY--OUR ABILITY TO REPAY THE NOTES AND OUR OTHER DEBT DEPENDS ON
CASH FLOW FROM OUR SUBSIDIARIES; OUR NON-GUARANTOR SUBSIDIARIES' LIABILITIES
WILL BE EFFECTIVELY SENIOR TO THE NOTES.
We conduct all of our operations through subsidiaries. We have no material
operations or assets other than the capital stock of our operating subsidiaries.
Consequently, we depend on distributions or other intercompany transfers of
funds from our subsidiaries to meet our debt service and other obligations. We
cannot assure you that the operating results of our subsidiaries will be
sufficient to enable us to make payments on the notes. Our non-guarantor
subsidiaries are not obligated to make funds available to us for payment on the
notes, and state law also may limit the amount of the dividends that any of our
subsidiaries are permitted to pay to us.
In addition, our non-guarantor subsidiaries' liabilities will be effectively
senior to the notes. Our rights and the rights of our creditors, including
holders of the notes, to participate in the assets of any of our non-guarantor
subsidiaries upon their liquidation or recapitalization will generally be
subject to the prior claims of those subsidiaries' creditors. As of
September 30, 1999, on a pro forma basis, our non-guarantor subsidiaries would
have had $2.3 million of outstanding liabilities, including trade payables.
POTENTIAL INABILITY TO SERVICE DEBT--WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH TO SERVICE OUR DEBT. OUR ABILITY TO GENERATE CASH DEPENDS ON CASH FLOWS
FROM OUR SUBSIDIARIES AND MANY FACTORS BEYOND OUR CONTROL.
Our ability to satisfy our debt obligations, including these notes, and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. This, to an extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our operating cash flow will be sufficient to meet
our anticipated future operating and capital expenditures and debt payments as
they become due or that future borrowings will be available to us for such
purposes. If our cash flow is lower than we expect, we might be forced to reduce
or delay acquisitions or capital expenditures, sell assets and/or reduce
operating expenses in order to make all required debt service payments.
Alternatively, we may have to refinance all or a portion of our debt on or
before maturity. A reduction in our operating expenses might reduce important
efforts, such as selling and marketing programs, management information system
upgrades and new product development. In addition, we may not be able to
refinance our debt on commerciably reasonable terms or at all.
On a pro forma basis, we would have had income before extraordinary item of
$4.7 million for the twelve months ended September 30, 1999. However, we expect
to record a pre-tax charge of approximately $9.5 million in the fourth quarter
of 1999, resulting in a net loss for the year ending December 31, 1999. See
"Recent Developments--Reorganization and Restructuring Change." In the past, our
acquisitions resulted in increased interest and amortization expenses. As a
result we incurred historical net losses in each year from our inception through
1996, despite positive operating income. The first historical net profit we
reported occurred in 1997, in part because of the repayment of a significant
part of our outstanding debt with the net proceeds of our initial public
offering.
AIRCRAFT INDUSTRY RISKS--THE AIRCRAFT INDUSTRY IS CYCLICAL AND AFFECTED BY MANY
FACTORS BEYOND OUR CONTROL, INCLUDING MILITARY SPENDING TRENDS AND REGIONAL
ECONOMIC INSTABILITY IN ASIA.
A downturn in the aircraft market could adversely affect our business.
- The principal markets for corporate aircraft manufacturers are
corporations, fractional ownership programs and wealthy individuals. The
corporate aircraft market is cyclical and has been adversely affected by a
number of factors, including the general state of the U.S. economy,
corporate profits, interest rates and commercial airline fares. A downturn
in any of these factors could depress the demand for corporate aircraft.
- The principal markets for manufacturers of commercial aircraft are the
commercial and regional airline industries, which are cyclical and have
been adversely affected by a number of factors, including increased fuel
and labor costs and intense price competition. Commercial aircraft
production may increase and decrease in response to changes in customer
demand caused by general economic conditions. For example, new commercial
aircraft deliveries declined from a peak of approximately 767 aircraft in
1991 to approximately 367 aircraft in 1995, according to AEROSPACE AND
AIRTRANSPORT CURRENT ANALYSIS published by Standard and Poor's Industry
Surveys, and the Boeing Company also has announced reductions in 2000 and
2001 from its 1999 delivery levels.
14
<PAGE>
- The Asian markets are important for manufacturers of commercial aircraft
and components for those aircraft. Boeing has reported a large backlog of
aircraft sales to customers in Asia, and some deliveries have been
deferred or canceled. Boeing has characterized the economic situation in
Asia as a risk to its deliveries over the next few years. It has
previously announced scheduled production slowdowns in its 747, 767 and
777 aircraft lines, among others, during 2000 and 2001. That situation
could, if it continues or worsens, result in additional significant
cancellations or deferrals of deliveries for new aircraft.
- The military aircraft industry is dependent upon the level of equipment
expenditures by the armed forces of countries throughout the world, and
especially those of the United States. In recent years, this industry has
been adversely affected by a number of factors, including the reduction in
military spending since the end of the Cold War. Further decreases in
military spending could further depress demand for military aircraft.
Any decrease in demand for new aircraft will likely result in a decrease in
demand for our products and services, and, correspondingly, our revenues,
thereby adversely affecting our financial condition.
CONCENTRATION OF KEY CUSTOMERS--WE RECEIVE A SIGNIFICANT SHARE OF OUR REVENUES
FROM A SMALL GROUP OF KEY CUSTOMERS, AND WE ARE VULNERABLE TO CHANGES IN THEIR
ECONOMIC CONDITION AND PURCHASING PLANS.
A significant decline in business from any one of our key customers could
have a material adverse effect on our business. Our three largest customers for
the twelve months ended September 30, 1999 were Boeing, Textron (which includes
Cessna), and Bombardier. On a pro forma basis, Boeing accounted for
approximately 18.3% of our consolidated revenues for that twelve month period,
Textron for approximately 14.6% and Bombardier for approximately 11.4%. Some of
our customers have the in-house capabilities to perform the services and provide
many of the products we offer and, accordingly, could discontinue outsourcing
their business to us.
In addition to the percentage of revenues directly earned from Boeing, a
significant part of our revenues are earned indirectly from Boeing through sales
of components to Boeing's suppliers. Most of our contracts with Boeing allow
Boeing to stop purchasing or terminate the contract at any time. In addition,
under some circumstances, those contracts may allow Boeing to enforce
alternative economic terms, which would make the contracts less commercially
favorable to us. During October 1997, Boeing announced that parts shortages
adversely affected its production and delivery rates. Boeing shut down its 737
and 747 production lines for approximately one month and did not resume normal
production rates until late November 1997. In late 1998, among other things,
Boeing announced reductions in its previously scheduled production for the 747,
767 and 777 programs in 2000 and 2001, as described in "--Aircraft Industry
Risks" above. Boeing might suffer further production schedule reductions.
COMPETITION--WE COMPETE WITH LARGER COMPANIES IN A FRAGMENTED INDUSTRY.
We operate in a highly competitive industry. Some of our competitors include
corporate aircraft manufacturers and independent completion and modification
companies, major airlines and other independent services organizations,
including some of our customers, many of whom may have significantly greater
financial, technological, manufacturing and marketing resources than we do. The
niche markets within the aircraft industry that we serve are relatively
fragmented, with several competitors offering the same products and services we
provide. Due to the global nature of the aircraft industry, competition comes
from both U.S. and foreign companies. See "Business--Competition" for a list of
some of our competitors.
GROWTH STRATEGY--OUR ACQUISITION OF OTHER COMPANIES MAY POSE CERTAIN RISKS.
We consider and take advantage of selected opportunities to grow by
acquiring other businesses whose operations or product lines complement our
existing businesses. Our ability to implement this growth strategy will depend
on finding suitable acquisition candidates at acceptable valuations and
obtaining the required financing. Any acquisition we may make in the future
could be subject to a number of risks, including:
- our ability to integrate the operations and personnel of the acquired
company;
- our failure to identify liabilities of the acquired company for which we
may be responsible as a successor owner or operator;
- the loss of key personnel in the acquired company; and
15
<PAGE>
- the impact on our financial position, results of operations and cash flows
resulting from additional acquisition indebtedness.
Our inability to adequately manage these or other risks could have an
adverse effect on our business.
REGULATION--THE FAA CLOSELY REGULATES MANY OF OUR OPERATIONS. IF WE FAIL TO
COMPLY WITH ITS MANY STANDARDS, OR IF THOSE STANDARDS CHANGE, WE COULD LOSE
INSTALLATION OR CERTIFICATION CAPABILITIES, WHICH ARE IMPORTANT TO OUR BUSINESS.
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, licenses private repair stations and
issues Designated Alteration Station approvals, which give the holder the right
to certify some aircraft design modifications on behalf of the FAA. Our ability
to arrange for rapid government certification of the systems integration
services we perform is important to our business. It depends on our continuing
access to, or use of, these FAA certifications and approvals, and our employment
of, or access to, FAA-certified individual engineering professionals. We cannot
assure you that we will continue to have adequate access to those
certifications, approvals and certified professionals. The FAA curtailed our
subsidiary's use of a Designated Alteration Station certification for new
projects for several months during 1997, until the facility was brought into
compliance with the FAA's regulations governing FAA-certified repair stations as
further described in "Business--Industry Regulation." The loss of a required
license or certificate, or its unavailability, could adversely affect our
operations. The FAA could also change its policies regarding the delegation of
inspection and certification responsibilities to private companies, which could
adversely affect our business.
EXCESS LOSS RISKS--WE COULD SUSTAIN LOSSES IN EXCESS OF OUR INSURANCE FOR
LIABILITY CLAIMS.
Our business exposes us to possible claims for damages resulting from the
manufacture, installation and use of our products. Many factors beyond our
control could lead to such claims, such as the failure of an aircraft on which
our products have been installed, the reliability and skill of the operators of
such aircraft and the maintenance performed on such aircraft. We carry aircraft
products and grounding liability insurance for this purpose, but we cannot
assure you that our insurance coverage will be adequate to cover claims that may
arise or that we will be able to renew our coverage in the future at
commercially reasonable rates. See "Business--Legal Proceedings."
GOLD AND COPPER PRICES--A SIGNIFICANT INCREASE IN THE PRICE OF GOLD OR COPPER
COULD REDUCE OUR GROSS PROFIT.
A significant portion of the cost of the materials used in our contacts is
comprised of the cost of gold, and to a lesser extent, the cost of copper. We
cannot always recover raw material price increases by increasing our product
selling prices. Accordingly, a significant increase in the price of gold or
copper could adversely affect our results of operations. We have not purchased
commodities contracts for gold or copper and do not anticipate doing so.
ENVIRONMENTAL RISKS AND REGULATION--SOME OF OUR OPERATIONS AND FACILITIES
GENERATE WASTE OR HAVE DONE SO IN THE PAST, WHICH MAY RESULT IN UNKNOWN FUTURE
LIABILITIES FOR ENVIRONMENTAL REMEDIATION.
Federal and state laws, particularly the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), impose strict, retroactive
and joint and several liability upon persons responsible for releases or
potential releases of hazardous substances and other parties who have some
relationship to a site or a source of waste. We have sent waste to treatment,
storage or disposal facilities that have been designated as National Priority
List sites under CERCLA or equivalent listings under state laws. We have
received requests for information or allegations of potential responsibility
from the U.S. Environmental Protection Agency regarding our use of several of
these sites. Given the potentially retroactive nature of environmental
liability, it is possible that we will receive additional notices of potential
liability relating to current or former activities. We may incur costs in the
future for prior waste disposal by us or former owners of our subsidiaries or
our facilities. Some of our operations are located on properties which are
contaminated to varying degrees. In addition, some of our manufacturing
processes create wastewater which requires chemical treatment, and one of our
facilities has been cited for excessive quantity and strength of its wastewater.
We may incur costs in the future to address existing or future contamination. If
we incur significant costs in connection with these or other environmental
issues, our business and financial condition could be adversely affected.
16
<PAGE>
REPURCHASE UPON CHANGE OF CONTROL--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FUND A CHANGE OF CONTROL OFFER IF IT IS REQUIRED BY THE
INDENTURE.
If we experience a change of control of the types described in "Description
of Notes--Repurchase at the Option of Holders," you will have the right to
require us to repurchase all or any part of your notes at an offer price in cash
equal to 101% of their aggregate principal amount, plus accrued interest to the
date of repurchase. We cannot assure you that we will have sufficient resources
to satisfy our repurchase obligation to every note holder following a change of
control.
Our bank credit facility prohibits us from purchasing the notes, and makes
change of control events a default. The terms of any other future senior debt
may contain similar restrictions. If a change of control occurs while any senior
debt prohibits us from purchasing the notes, we could seek the consent of the
senior lenders to the purchase, or attempt to refinance the debt which prohibits
it. However, we can not assure you that those attempts would be successful. If
they are not, we would still be prohibited from repurchasing the notes. Our
failure to do so would result in a default under the indenture, which could also
result in a default in the senior debt, and therefore block any payments to you
under the "blocking" covenants described in "--Subordination."
CONTROL BY PRINCIPAL SHAREHOLDERS--WE ARE CONTROLLED BY PRINCIPAL SHAREHOLDERS
WHO ARE AFFILIATED WITH OUR LENDERS AND MAY HAVE ECONOMIC INTERESTS WHICH DIFFER
OR CONFLICT WITH YOURS.
DeCrane Aircraft is wholly owned by DeCrane Holdings, and a significant
amount of the outstanding shares of common stock of DeCrane Holdings are held by
DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. Those
DLJ affiliates own approximately 83.7% of the common stock of DeCrane Holdings,
on a fully diluted basis assuming exercise of all outstanding warrants and
options. As a result of their stock ownership, the DLJ affiliates control
DeCrane Holdings and DeCrane Aircraft and have the power to approve all matters
requiring approval of the common stockholders, including electing all of their
directors, appointing new management, and approving sales of all or
substantially all of the assets of the companies. The directors elected by the
DLJ affiliates will have the ability to control decisions affecting our capital
structure, including issuing additional capital stock, establishing stock
purchase programs and declaring dividends.
DLJ Capital Funding, Inc., which is an agent and lender under our bank
credit facility, DLJ Bridge Finance, Inc., which purchased the original bridge
notes refinanced by the old notes, and Donaldson, Lufkin & Jenrette Securities
Corporation, which was the initial purchaser of the old notes, are also DLJ
affiliates, but they do not own any equity securities of DeCrane Aircraft or
DeCrane Holdings.
The interests of the principal shareholders could conflict with your
interests as a holder of the notes. For example, those shareholders may have an
interest in pursuing transactions that they believe enhance the value of their
equity investment in DeCrane Aircraft or DeCrane Holdings, even though the
transactions involve risks to your investment in the notes.
FRAUDULENT TRANSFERS--FEDERAL AND STATE "FRAUDULENT TRANSFER" STATUTES ALLOW
COURTS TO ORDER NOTEHOLDERS TO RETURN PAYMENTS ALREADY MADE, OR VOID GUARANTEES,
IF THE ISSUER'S OR GUARANTOR'S FINANCIAL CONDITION MEETS SPECIFIC TESTS.
Your rights to repayment of the notes, and to retain amounts already paid
under the notes, could be affected by the application of federal or state
"fraudulent transfer" laws. These statutes permit obligations to be undone or
rescinded if tests having to do with the obligation, the person's intent and the
person's financial condition are satisfied. Our repayment obligations to you
under the notes could be impaired by those laws if a court determined that, when
we issued or exchanged the notes, or, in some states, when payments become due
on the notes, we either:
- had the actual intent to hinder, delay or defraud current or future
creditors, or
- received less than fair consideration or reasonably equivalent value for
incurring the debt represented by the notes, AND we either:
- were insolvent or were rendered insolvent by reason of the incurrence,
or
- were engaged, or about to engage, in a business or transaction for
which our remaining unencumbered assets were unreasonably small, or
- intended to incur, or believed or should have believed we would incur,
debts beyond our ability to pay as such debts mature.
17
<PAGE>
Based on such a finding, a court could void all or a portion of our
obligations to you, subordinate your right to repayment to our other existing
and future senior debt, in which case those other creditors would be paid in
full before any payment could be made on the notes, and take other action
detrimental to your rights, including invalidating the notes. A court would
likely find that we received less than fair consideration or reasonably
equivalent value for our obligations under the notes to the extent that we used
the proceeds from the original issuance of the notes for the acquisition of
DeCrane Aircraft by DLJ Merchant Banking. We cannot assure you that, if that
occurred, you would ever recover any repayment on your notes.
In addition, the obligations of our subsidiary guarantors under their
subsidiary guarantees may be subject to review under the same laws. In that
event, if a court were to find that when a subsidiary guarantor issued its
subsidiary guarantee (or, in some jurisdictions, when it became obligated to
make payments thereunder), the factors set forth above applied to that
subsidiary guarantor, a court could avoid the subsidiary guarantee and the
subsidiary guarantor's obligations thereunder and direct the return of any
amount paid to you pursuant to that subsidiary guarantee. A court would likely
find that a subsidiary guarantor received less than fair consideration or
reasonably equivalent value for its obligations under the subsidiary guarantee
to the extent that it did not receive direct or indirect benefit from the
issuance of the notes. If a court were to avoid a subsidiary guarantee of any
subsidiary guarantor, holders of notes would retain their rights against us and
the other subsidiary guarantors, although those entities' assets may be
insufficient to pay the notes in full.
The definition of insolvency used in the foregoing tests varies among
jurisdictions, depending upon the court and the law that is being applied. A
given court might apply different standards in determining whether we were
insolvent on a particular date, or regarding other grounds that might lead it to
take the actions noted above. Generally, however, an entity would be considered
insolvent if:
- the sum of its debts, including contingent and unliquidated liabilities,
were greater than the fair saleable value of all of its assets; or
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent and unliquidated liabilities, as they become
absolute and mature.
INDUSTRY AND MARKET DATA--WE CANNOT GUARANTEE THE ACCURACY AND COMPLETENESS OF
THE INDUSTRY AND MARKET DATA INCLUDED IN THIS PROSPECTUS.
Industry and market data used throughout this prospectus is based on the
good faith estimates of our management, which estimates are based primarily upon
internal management information and, to the extent available, independent
industry publications and other publicly available information. However, the
nature of the aircraft industry and competition in our markets results in
limited availability of reliable, independent data. Although we believe that the
sources we have used are reliable, we do not guarantee, and have not
independently verified, the accuracy and completeness of the information.
TRADING MARKET FOR THE NOTES--WE CANNOT ASSURE YOU THAT A MARKET FOR THE NOTES
WILL CONTINUE.
We cannot assure you about your ability to sell the notes or the price at
which you may be able to sell them. The notes may trade at prices that may be
higher or lower, and have recently traded at prices lower than their initial
offering price. The trading price depends on many factors, including prevailing
interest rates, our operating results and the market for similar securities. DLJ
Securities Corporation currently makes a market in the notes. However, DLJ
Securities Corporation is not obligated to do so and it may discontinue or
interrupt any such market-making at any time without notice.
Because DLJ Securities Corporation may be deemed to be our "affiliate" (as
defined in the Securities Act), we maintain a registration statement that allows
DLJ to engage in market-making transactions in the notes and DLJ delivers a
prospectus in connection with its market-marking activities. If at any time the
market-making prospectus is not in compliance with the disclosure obligations of
the Securities Act, DLJ Securities Corporation may be unable to engage in
market-making activities until the prospectus is brought into compliance. There
are no other market-makers in the notes.
DEPENDENCE ON KEY PERSONNEL--WE NEED TO RETAIN THE SERVICES OF OUR KEY
EMPLOYEES.
Our success and growth depends in large part on the skills and efforts of
our management team and on our ability to attract and retain qualified personnel
experienced in the various operations of our business. The loss of key
personnel, including our founder, R. Jack DeCrane, combined with the failure to
attract
18
<PAGE>
additional qualified personnel for whatever reason, could delay implementation
of our business plan or otherwise adversely affect our operations. We do not
carry key man life insurance on any members of our management team.
YEAR 2000--SOME OF THE ADMINISTRATIVE AND MANUFACTURING SYSTEMS ON WHICH WE RELY
MAY NOT OPERATE CORRECTLY DUE TO THE DATE CHANGES THAT OCCURRED ON OR AROUND
JANUARY 1, 2000.
Many existing computer programs use only two digits to identify a year in
the date field. These programs, if not corrected, could fail or create erroneous
results when dealing with dates later than December 31, 1999. This "Year 2000"
issue is believed to affect virtually all companies and organizations, including
DeCrane Aircraft. We are dependent in part on computer- and date-controlled
systems for some internal functions, particularly inventory control, purchasing,
customer billing and payroll. Similarly, suppliers of components and services on
which we rely, and our customers, may have Year 2000 compliance risks which
would affect their operations and their transactions with us. Other parties with
whom we have commercial relationships rely heavily on computer-based technology.
Any problems related to these or other Year 2000 issues could adversely affect
our business.
As of the date of this prospectus, the January 1, 2000 date has passed and
we are not aware of any significant internal-, customer- or vendor-related Year
2000 issues or computer-related failures. However, as of this date we have not
performed all of the month-, quarter- and year-end update and closing procedures
for our computer and date-controlled systems. We cannot assure you that our
efforts to address Year 2000 issues were fully effective, or that Year 2000
issues will not have a material adverse effect on our business, financial
condition or results of operations.
19
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS SUBSEQUENT TO SEPTEMBER 30, 1999
Continuing our acquisition strategy, subsequent to September 30, 1999 we
acquired:
- substantially all of the assets of PCI NewCo, Inc., a Kansas-based
manufacturer of composite material and components for middle- and high-end
corporate aircraft, on October 6, 1999;
- all of the common stock of International Custom Interiors, Inc., a
Florida-based provider of upholstery services and manufacturer of
furniture for middle- and high-end corporate aircraft, on October 8, 1999;
and
- substantially all of the assets of The Infinity Partners, LLC, a
Texas-based designer and manufacturer of interior furniture components for
middle- and high-end corporate aircraft, on December 17, 1999.
The total purchase price was $29.6 million, plus contingent consideration
totaling a maximum of $29.7 million payable over five years based on future
attainment of defined performance criteria. Our historical consolidated
financial statements for periods after September 30, 1999 will reflect the
financial position and results of operations of the companies acquired for
periods subsequent to their respective acquisition dates. The acquisitions were
funded with borrowings under our senior credit facility. For additional
information on these acquisitions, see our unaudited financial statements
included elsewhere in this prospectus.
REORGANIZATION AND RESTRUCTURING CHARGE
In December 1999, we announced a plan to reorganize and restructure the
operations of two of our subsidiaries, Hollingsead and Elsinore Engineering. In
conjunction with this restructuring, we expect to record a nonrecurring pre-tax
charge of approximately $9.5 million in the fourth quarter of 1999, resulting in
a net loss for the quarter and year ending December 31, 1999. The historical and
pro forma consolidated financial data included in this prospectus does not
reflect this restructuring charge. For additional information, see our unaudited
financial statements included elsewhere in this prospectus.
20
<PAGE>
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the notes by DLJ
Securities Corporation in market-making transactions. We have not received and
will not receive any of the proceeds from such transactions.
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and total capitalization as of September 30, 1999 on a historical and pro forma
basis. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," our "Unaudited
Pro Forma Consolidated Financial Statements" and related notes, and our
consolidated financial statements and related notes included elsewhere in the
prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
-----------------------
ACTUAL PRO FORMA(1)
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 3,139 $ 4,530
======== ========
Total debt:
Bank credit facility:
Term facility........................................... $169,050 $214,050
Revolving credit facility............................... 13,500 --
Senior Subordinated Notes due 2008........................ 100,000 100,000
Other debt................................................ 2,627 2,754
-------- --------
Total debt.................................................. 285,177 316,804
Stockholder's equity........................................ 110,033 110,033
-------- --------
Total capitalization........................................ $395,210 $426,837
======== ========
</TABLE>
- ------------------------
(1) Pro forma reflects the additional borrowings required to fund the PCI NewCo,
International Custom Interiors and Infinity acquisitions.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our selected historical consolidated financial
data. The data as of and for each of the four years in the period ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998 were derived from our audited financial statements. The
data as of September 30, 1998 and 1999 and for the one month ended
September 30, 1998 and the nine months ended September 30, 1999 were derived
from our unaudited historical financial statements for such periods, which, in
the opinion of management, reflect normal and recurring adjustments necessary to
present fairly the financial position and results of operations for the periods
presented. The results of operations for interim periods are not necessarily
indicative of results of operations for the full year. The information in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this prospectus. All dollar
amounts are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------------------------
1998
-------------------------------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(PREDECESSOR)(2) (SUCCESSOR)(2)
<CAPTION>
STATEMENT OF OPERATIONS DATA:
Revenues. $ 47,092 90,077,83$ $ 6516,012 $1$8177,836$ 90,077 $ 60,356
<S> <C> <C> <C> <C> <C> <C>
Cost of sales(3)..................... 36,407 43,463 49,392 80,247 60,101 42,739
------- ------- ------- -------- ------- -------
Gross profit......................... 10,685 12,376 15,707 28,656 29,976 17,617
Selling, general and administrative
expenses........................... 7,716 9,426 10,747 15,756 15,719 10,274
Nonrecurring charges(4).............. -- -- -- -- 3,632 --
Amortization of intangible assets.... 1,209 1,115 709 905 1,347 3,148
------- ------- ------- -------- ------- -------
Operating income..................... 1,760 1,835 4,251 11,995 9,278 4,195
Interest expense..................... 3,244 3,821 4,248 3,154 2,350 6,852
Terminated debt offering expenses.... -- -- -- -- 600 --
Other expenses, net.................. 332 382 108 243 247 335
------- ------- ------- -------- ------- -------
Income (loss) before provision for
income taxes and
extraordinary item................. (1,816) (2,368) (105) 8,598 6,081 (2,992)
Provision for income taxes
(benefit)(5)....................... 613 1,078 712 3,344 2,892 (2,668)
------- ------- ------- -------- ------- -------
Income (loss) before extraordinary
item............................... (2,429) (3,446) (817) 5,254 3,189 (324)
Extraordinary loss from debt
refinancing(6)..................... (264) -- -- (2,078) -- (2,229)
------- ------- ------- -------- ------- -------
Net income (loss).................... $(2,693) $(3,446) $ (817) $ 3,176 $ 3,189 $(2,553)
======= ======= ======= ======== ======= =======
OTHER FINANCIAL DATA:
Cash flows from operating
activities......................... $(2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,014 $ 1,008
Cash flows from investing
activities......................... (993) (1,462) (24,016) (27,809) (87,378) (1,813)
Cash flows from financing
activities......................... 3,028 41 21,051 22,957 89,871 (1,597)
EBITDA(7)............................ 5,196 5,471 7,602 16,915 13,743 13,476
EBITDA margin(8)..................... 11.0% 9.8% 11.7% 15.5% 15.3% 22.3%
Depreciation and amortization(9)..... $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604
Capital expenditures:
Paid in cash(10) 1,016 1,203 5,821 3,842 1,745 1,813
Financed with capital lease
obligations...................... 276 33 414 182 116 48
Ratio of earnings to fixed
charges(11)........................ -- -- 1.0x 3.3x 3.0x --
OTHER OPERATING DATA:
Bookings(12)......................... $47,896 $50,785 $81,914 $112,082 $94,439 $54,021
Backlog at end of period(13)......... 24,493 19,761 44,433 49,005 84,184 75,388
<CAPTION>
<S> <C> <C> <C>
(PREDECESSOR)(2) (SUCCESSOR)(2)
Cost of sales(3)..................... 60,101 11,080 118,081
-------- ------- ---------
Gross profit......................... 29,976 4,932 59,755
Selling, general and administrative
expenses........................... 15,719 3,170 27,507
Nonrecurring charges(4).............. 3,632 -- --
Amortization of intangible assets.... 1,347 802 9,506
-------- ------- ---------
Operating income..................... 9,278 960 22,742
Interest expense..................... 2,350 1,765 19,884
Terminated debt offering expenses.... 600 -- --
Other expenses, net.................. 247 181 (311)
-------- ------- ---------
Income (loss) before provision for
income taxes and
extraordinary item................. 6,081 (986) 3,169
Provision for income taxes
(benefit)(5)....................... 2,892 (506) 2,669
-------- ------- ---------
Income (loss) before extraordinary
item............................... 3,189 (480) 500
Extraordinary loss from debt
refinancing(6)..................... -- (296) --
-------- ------- ---------
Net income (loss).................... $ 3,189 $ (776) $ 500
======== ======= =========
OTHER FINANCIAL DATA:
Cash flows from operating
activities......................... $ 3,014 $(1,506) $ 10,222
Cash flows from investing
activities......................... (87,378) (307) (121,431)
Cash flows from financing
activities......................... 89,871 358 110,929
EBITDA(7)............................ 13,743 3,310 38,821
EBITDA margin(8)..................... 15.3% 20.7% 21.8%
Depreciation and amortization(9)..... $ 4,358 $ 1,166 $ 4,219
Capital expenditures:
Paid in cash(10) 1,745 307 4,752
Financed with capital lease
obligations...................... 116 -- 1,323
Ratio of earnings to fixed
charges(11)........................ 3.0x -- 1.2x
OTHER OPERATING DATA:
Bookings(12)......................... $ 94,439 $16,890 $ 226,468
Backlog at end of period(13)......... 84,184 84,607 139,758
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31,(1) SEPTEMBER 30,(1)
--------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
1994 1995 1996 1997 1998 1998 1999(14)
-------- -------- -------- ---- ---- ---- --------
(PREDECESSOR)(2) (SUCCESSOR)(2) (SUCCESSOR)(2)
BALANCE SHEET DATA:
Cash and cash equivalents. $ 236 $ 305 $ 320 $ 206 $ 3,518 $ 4,267 $ 3,139
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital................................ 11,459 12,583 10,486 24,772 46,033 46,683 59,056
Total assets................................... 37,685 36,329 69,266 99,137 330,927 333,300 458,763
Total debt(15)................................. 23,874 24,672 42,250 38,838 186,765 184,893 285,177
Mandatorily redeemable preferred stock and
common stock warrants........................ 2,329 1,633 6,879 -- -- -- --
Stockholders' equity (deficit)................. 766 (1,697) 1,236 39,527 97,921 98,362 110,033
</TABLE>
See accompanying Notes to Selected Consolidated Financial Data.
22
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Reflects the results of operations and financial position of companies
acquired for all periods subsequent to their respective acquisition dates
as follows:
- the remaining 25% minority interest in Cory Components beginning on
February 20, 1996;
- Aerospace Display Systems beginning on September 18, 1996;
- Elsinore Engineering beginning on December 5, 1996;
- Audio International beginning on November 14, 1997;
- Avtech beginning on June 26, 1998;
- Dettmers beginning on June 30, 1998;
- PATS beginning on January 22, 1999;
- PPI beginning on April 23, 1999; and
- Custom Woodwork beginning on August 5, 1999.
Excludes the results of operations and financial position of PCI NewCo,
International Custom Interiors and Infinity because they were acquired
subsequent to September 30, 1999.
(2) Reflects our results of operations and financial position prior to
(predecessor) and subsequent to (successor) our acquisition by DLJ.
(3) Includes non-cash charges to reflect cost of sales based on the fair value
of inventory acquired as follows:
- $4.4 million for the four months ended December 31, 1998 and $1.2 million
for the one month ended September 30, 1998 in connection with the DLJ
acquisition; and
- $1.6 million for the nine months ended September 30, 1999 in connection
with our PPI and Custom Woodworks acquisitions.
(4) Reflects $3.6 million of non-capitalizable transaction costs associated
with the DLJ acquisition in August 1998. Excludes an approximate $9.5
million pre-tax charge we will incur in the fourth quarter of 1999 in
connection with the Hollingsead and Elsinore Engineering restructuring.
(5) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, DeCrane Aircraft did not consolidate the earnings of
Cory Components for tax purposes. As such, despite a consolidated pre-tax
loss in each of the years, DeCrane Aircraft recorded a provision for income
taxes from 1993 up to the date of the acquisition in 1996 which primarily
relates to Cory Components. For the four months ended December 31, 1998,
includes a $2.6 million benefit from the reduction of the deferred tax
valuation allowance.
(6) Represents:
- the write-offs of unamortized deferred financing costs, unamortized
original issue discounts and a prepayment penalty incurred as a result
of the refinancing by DeCrane Aircraft of a substantial portion of our
debt in November 1994;
- the write-offs, net of an income tax benefit, of deferred financing
costs, unamortized original issue discounts, a prepayment penalty and
other related expenses incurred as a result of the repayment of debt by
DeCrane Aircraft with the net proceeds from its initial public offering
in April 1997; and
- the write-offs, net of an income tax benefit, of deferred financing
costs as a result of the repayment of our then existing indebtedness in
connection with the DLJ acquisition and the refinancing of the bridge
notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization, parent
company management fees, non-cash acquisition related charges described in
Note 3 above and other acquisition related costs. EBITDA is not a measure
of performance or financial condition under generally accepted accounting
principles. EBITDA is not intended to represent cash flow from operations
and should not be considered as an alternative to income from operations or
net income computed in accordance with generally accepted accounting
principles, as an indicator of our operating performance, as an alternative
to cash flow from operating activities or as a measure of liquidity. The
funds depicted by EBITDA are not available for our discretionary use due to
funding requirements for working capital, capital expenditures, debt
service, income taxes and other commitments and contingencies. We believe
that EBITDA is a standard measure of liquidity commonly reported and widely
used by analysts, investors and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method,
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(8) EBITDA margin is computed by dividing EBITDA by revenues.
(9) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts that are classified as a component of interest
expense.
(10) Includes $4.4 million for the year ended December 31, 1996 related to our
acquisition of a manufacturing facility.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interests in
the income of majority-owned subsidiaries, cumulative effect of an
accounting change, extraordinary items and fixed charges. Fixed charges
consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to cover fixed charges for the years
ended December 31, 1994 and 1995, the four months ended December 31, 1998
and the one month ended September 30, 1998 of $1.8 million, $2.3 million,
$2.9 million and $1.0 million, respectively.
(12) Bookings represent the total invoice value of purchase orders received
during the period.
(13) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of our receipt of orders and the
speed with which those orders are filled.
(14) Excludes the effect of an approximate $9.5 million pre-tax charge we will
incur in the fourth quarter of 1999 in connection with the Hollingsead and
Elsinore Engineering restructuring.
(15) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Our financial position and results of operations have been affected by our
history of acquisitions. Since our formation in 1989, we have completed
seventeen acquisitions of businesses or assets. As a result, our historical
financial statements do not reflect the financial position and results of
operations of our current businesses. Our most recent acquisitions, which affect
the comparability of the historical financial statements included herein,
consist of:
- the remaining 25% minority interest in Cory Components, acquired on
February 20, 1996;
- Aerospace Display Systems, acquired on September 18, 1996;
- Elsinore Engineering, acquired on December 5, 1996;
- Audio International, acquired on November 14, 1997;
- Avtech, acquired on June 26, 1998;
- Dettmers, acquired on June 30, 1998;
- PATS, acquired on January 22, 1999;
- PPI, acquired on April 23, 1999; and
- Custom Woodwork on August 5, 1999.
Our historical financial statements included in this prospectus reflect the
financial position and results of operations of the acquired businesses
subsequent to their respective acquisition dates. Additionally, our capital
structure was significantly altered in August 1998 by the financing obtained to
fund the tender offer for our stock in conjunction with our acquisition by DLJ.
In October 1999, we acquired PCI NewCo and International Custom Interiors
and in December 1999 we acquired Infinity. Our historical financial statements
do not reflect these acquisitions because they were acquired subsequent to
September 30, 1999.
THE DLJ ACQUISITION AND FINANCING
In August 1998, DeCrane Holdings and its two subsidiaries, an acquisition
subsidiary and a financing subsidiary, completed a successful $186.3 million
cash tender offer for all of the shares of DeCrane Aircraft. DeCrane Holdings
was organized by DLJ Merchant Banking II, L.P. and several of its affiliates.
The funds for the tender offer and the refinancing of DeCrane Aircraft's
existing debt were obtained from the sale of equity by DeCrane Holdings and the
issuance of debt by its finance subsidiary. DeCrane Holdings received an initial
capital contribution of approximately $99.0 million from the sale of its
preferred and common stock and warrants to DLJ Merchant Banking. DeCrane
Holdings used these funds to capitalize its finance subsidiary. The finance
subsidiary then entered into a $130.0 million syndicated bank credit facility
with a group of lenders led by DLJ Capital Funding, Inc. and issued
$100.0 million of senior subordinated increasing rate bridge notes to DLJ Bridge
Finance Inc. The finance subsidiary capitalized the acquisition subsidiary with
the funds necessary to complete the tender offer.
Upon completion of the tender offer, the acquisition and finance
subsidiaries were merged into DeCrane Aircraft, and DeCrane Aircraft's existing
debt was repaid. As a result of the mergers, DeCrane Aircraft became a
wholly-owned subsidiary of DeCrane Holdings, and the bank credit facility and
bridge notes became obligations of DeCrane Aircraft. In October 1998, DeCrane
Aircraft refinanced the bridge notes with the proceeds from the sale of the old
notes issued under the indenture described in this prospectus.
The gross purchase price for DeCrane Aircraft's shares and options was
$186.3 million. Assets acquired and liabilities assumed have been recorded at
their estimated fair values based on an independent appraisal. The purchase
price was allocated to the assets acquired based on the estimated fair values of
$4.4 million for inventory, $2.6 million for fixed assets, and $50.0 million for
identifiable intangible assets. The excess of the
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purchase price over the fair value of the net assets acquired totalling
$70.0 million was allocated to goodwill. The increase in inventory value was
expensed as the inventory was sold during the four months ended December 31,
1998. The intangible assets, other than goodwill, are being amortized on a
straight-line basis over periods between five and fifteen years. Goodwill is
being amortized on a straight-line basis over a period of thirty years.
In connection with the DLJ acquisition, DeCrane Holdings raised
approximately $99.0 million through its sale of common stock, preferred stock,
and warrants. The proceeds of those sales were contributed to the paid-in
capital of DeCrane Aircraft. The DeCrane Holdings preferred stock provides for
cumulative dividends that do not require payment in cash through 2003, but will
be payable in cash thereafter and will be mandatorily redeemable in 2009. The
DeCrane Holdings preferred stock is exchangeable into debentures that will
contain customary covenants and events of default, including covenants that
limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay
dividends and acquire or make equity investments in other companies.
INDUSTRY OUTLOOK AND TRENDS
We sell our products to the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related electronic equipment, aircraft repair and
modification centers and commercial airlines.
The Teal Group Corporation, an industry-recognized aerospace research group,
projects delivery of 5,067 corporate aircraft between 1999 and 2008,
representing an increase of approximately 52% over the 3,326 corporate aircraft
that were delivered between 1989 and 1998. Similarly, the 1999 CURRENT MARKET
OUTLOOK, released by The Boeing Company in June 1999, projects that the world
jetliner fleet will grow from 12,600 aircraft at the end of 1998 to 19,100
aircraft by 2008, and to 28,400 aircraft by 2018. The Boeing report also
projects that, between 1999 and 2008, the commercial aircraft industry will
require 8,900 new commercial aircraft, and between 2009 and 2018, it will
require an additional 11,250 new aircraft, both to support the projected world
fleet expansion and to replace capacity lost as aircraft are removed from
commercial airline service.
Boeing has, however, announced production cutbacks in several of its lines
for 2000 and 2001. Our sales to Boeing, our largest customer, have decreased due
to a number of factors at the manufacturer and the overall commercial aircraft
industry. For example, Boeing deliveries of its 747, 767 and 777 airplanes have
declined due to the recent financial difficulties of many Asian carriers. We
believe that over the next two years, Boeing's commercial aircraft deliveries
will stabilize at about 490 aircraft, a decline from the record level of 620
aircraft in 1999. As a result, we expect short-term demand for our commercial
aircraft products to be lower than in previous years, with recovery in the
longer term.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31,
1998 (PREDECESSOR) AND THE ONE MONTH ENDED SEPTEMBER 31, 1998 (SUCCESSOR).
REVENUES. Revenues increased $71.7 million, or 67.6%, to $177.8 million for
the nine months ended September 30, 1999 from $106.1 million for the nine months
ended September 30, 1998. Revenues increased due to:
- the inclusion of $76.9 million of revenues resulting from the Avtech,
Dettmers, PATS, PPI and Custom Woodwork acquisitions; and
- a $6.7 million increase in entertainment and cabin management product
revenues.
The increases were offset by:
- a $8.7 million decrease in revenues due to weak demand for our commercial
aircraft products; and
- a $3.2 million net decrease in revenues from our other products and
services.
GROSS PROFIT. Gross profit increased $24.9 million, or 71.3%, to $59.8
million for the nine months ended September 30, 1999. Gross profit as a percent
of revenues increased to 33.6% for the nine months ended September 30, 1999 from
32.9% for the same period last year. Factors contributing to the gross profit
increase were:
- a contribution of $29.1 million from the acquired companies;
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- a $3.5 million increase due to higher entertainment and cabin management
products revenues; and
- a $1.2 million increase resulting from the portion of the DLJ acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the one month ended September 30, 1998.
Offsetting the above favorable factors were:
- a $2.8 million decrease due to lower commercial aircraft product revenues;
- a $2.5 million decrease due to lower margins resulting from fixed overhead
costs absorbed over a lower revenue base;
- a $1.6 million charge for the portions of PPI and Custom Woodwork
acquisition purchase prices allocated to inventory and charged to
operations as the inventory was sold during the nine months ended
September 30, 1999; and
- a $2.0 million decrease related to other products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.6 million, or 45.5%, to $27.5 million for
the nine months ended September 30, 1999, from $18.9 million for the same period
last year. SG&A expenses as a percent of revenues decreased to 15.5% for the
nine months ended September 30, 1999 compared to 17.8% for the same period last
year. SG&A expenses increased as a result of:
- a $8.0 million increase from the inclusion of expenses from acquired
companies; and
- a $0.6 million increase in expenses at our other companies.
OPERATING INCOME. Operating income increased $12.5 million to
$22.7 million for the nine months ended September 30, 1999, from $10.2 million
for the same period last year. Operating income as a percent of revenues
increased to 12.8% for the nine months ended September 30, 1999, from 9.6% for
the same period last year. Operating income increased due to:
- the inclusion of $21.0 million from the acquired companies;
- a $3.6 million charge recorded in 1998 for nonrecurring tender offer
expenses;
- a $2.6 million increase related to entertainment and cabin management
products; and
- a $1.2 million charge resulting from the portion of the DLJ acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the one month ended September 30, 1998.
The increases were offset by:
- higher amortization expenses of $7.4 million associated with the DLJ
acquisition and the PATS, PPI and Custom Woodwork acquisitions; and
- a $5.5 million reduction resulting from weakened demand for our commercial
aircraft products;
- a $1.6 million charge for the portions of the PPI and Custom Woodwork
acquisition purchase prices allocated to inventory and charged to
operations as the inventory was sold during the nine months ended
September 30, 1999; and
- a $1.4 million decrease related to other products and services.
INTEREST EXPENSE. Interest expense increased $15.8 million to $19.9 million
for the nine months ended September 30, 1999, from $4.1 million for the same
period last year. Higher debt levels resulting from the tender offer and the
Avtech, Dettmers, PATS, PPI, and Custom Woodwork acquisitions caused the
increase.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from the
amount determined by applying the applicable U.S. statutory federal rate to the
income (loss) before income taxes primarily due to the effects of state and
foreign income taxes and non-deductible expenses, principally goodwill
amortization. The difference in the effective tax rates between periods is
mostly a result of higher goodwill amortization.
NET INCOME. Net income decreased $1.9 million, to $0.5 million for the nine
months ended September 30, 1999 compared to $2.4 million for the same period in
1998.
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BOOKINGS AND BACKLOG. Bookings increased $115.1 million, or 103.4%, to
$226.4 million for the nine months ended September 30, 1999 compared to
$111.3 million for the same period in 1998. An increase in bookings of
$132.5 million attributable to companies acquired was offset by decreases of
$15.3 million for commercial aircraft products and $2.1 million for our other
products and services. Backlog increased $64.4 million, or 85.4%, to
$139.8 million as of September 30, 1999 compared to $75.4 million as of
December 31, 1998. A $71.0 million increase in backlog attributable to companies
acquired was offset by decreases of $5.7 million for commercial aircraft
products and $0.9 million for our other products and services.
EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999
COMPANIES ACQUIRED. We acquired PCI NewCo, International Custom Interiors
and Infinity for a total purchase price of $29.6 million, plus contingent
consideration totaling a maximum of $29.7 million payable over five years based
on future attainment of defined performance criteria. The acquisitions were
funded with borrowings under our senior credit facility.
REORGANIZATION AND RESTRUCTURING CHARGE. In December 1999, we announced a
plan to reorganize and restructure the operations of two of our subsidiaries,
Hollingsead and Elsinore Engineering. In conjunction with this restructuring, we
expect to record a nonrecurring pre-tax charge of approximately $9.5 million in
the fourth quarter of 1999, resulting in a net loss for the quarter and year
ending December 31, 1999.
MANAGEMENT STOCK PURCHASE. In December 1999, our management purchased
171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total
purchase price was $3.9 million, of which one-half was paid in cash at closing
and one-half was loaned to management by DeCrane Aircraft with interest at
applicable federal rates.
STOCK OPTION PLAN. The DeCrane Holdings qualified management incentive
stock option plan provides for the granting of options, to employees of DeCrane
Aircraft and its subsidiaries, to purchase 356,257 common shares of DeCrane
Holdings and expires in 2009. The options generally vest based upon future
attainment of defined performance criteria, although alternate vesting schedules
may be authorized. In December 1999, options to purchase 279,662 shares at
$23.00 per share were granted, of which options to purchase approximately 28,000
shares immediately vested. DeCrane Holdings believes the per share exercise
price of the options granted approximated the fair market value of the
underlying common stock on the grant date.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31,
1998 (PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR).
REVENUES. Revenues increased $41.6 million, or 38.2%, to $150.5 million for
the year ended December 31, 1998 from $108.9 million for the year ended
December 31, 1997. Revenues increased primarily due to the inclusion of:
- $20.2 million of revenues from Audio International, which was acquired on
November 14, 1997;
- $25.2 million of revenues from Avtech, which was acquired on June 26,
1998; and
- $3.3 million of revenues from Dettmers, which was acquired on June 30,
1998.
These revenue increases were somewhat offset by continued softness in the
electrical contact markets, where we experienced a sales decline of
approximately $8.6 million for the year ended December 31, 1998 compared with
the same period last year.
GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to
$47.6 million for the year ended December 31, 1998 from $28.7 million for the
year ended December 31, 1997. Gross profit as a percent of revenues increased to
31.6% for the year ended December 31, 1998 from 26.3% for the year ended
December 31, 1997. Factors contributing to the gross profit increase were:
- $12.4 million from an overall increase in sales volume, primarily a result
of the November 1997 Audio International and June 1998 Avtech and Dettmers
acquisitions;
- $10.3 million due to the higher overall gross margins of the acquired
companies; and
- $1.8 million due to overall margin improvements at existing companies.
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The increase was offset by:
- a $1.2 million decrease due to a decline in electrical contact revenues;
and
- a $4.4 million charge for the portion of the DLJ acquisition purchase
price allocated to inventory and expensed as the inventory was sold during
the four months ended December 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for
the year ended December 31, 1998 from $15.8 million for the year ended
December 31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for
the year ended December 31, 1998 from 14.5% for the year ended December 31,
1997. SG&A expenses increased primarily as a result of:
- the inclusion of $9.2 million of expenses pertaining to Audio
International, Avtech and Dettmers which were acquired during 1997 and
1998;
- $3.6 of non-capitalizable costs associated with the DLJ acquisition; and
- a $1.9 million increase in research and development costs related to new
product introductions at Audio International and Dettmers.
OPERATING INCOME. Operating income increased $1.5 million to $13.5 million
for the year ended December 31, 1998 from $12.0 million for the year ended
December 31, 1997. Operating income as a percent of revenues decreased to 8.9%
for the year ended December 31, 1998 from 11.0% for the year ended December 31,
1997. An overall $13.1 million increase in operating income, including
$12.0 million from the acquisitions of Audio International, Avtech and Dettmers,
was offset by:
- the $4.4 million charge for the portion of the DLJ purchase price
allocated to inventory;
- $3.6 million of higher amortization expense associated with acquisitions,
including the DLJ acquisition; and
- the $3.6 million charge for non-capitalizable costs associated with the
DLJ acquisition.
INTEREST EXPENSE. Interest expense increased $6.0 million, or 187.5%, to
$9.2 million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. This increase resulted primarily from the higher debt
levels associated with the DLJ acquisition.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1998, we
decreased our provision for income taxes by $3.2 million to $0.2 million from
$3.4 million for the year ended December 31, 1997, as a result of lower income
before taxes and the reduction of our deferred tax asset valuation allowance by
$2.6 million. This decrease was significantly offset by an increase in
non-deductible expenses, particularly the amortization of intangible assets,
during the same period. We have approximately $17.4 million and $0.6 million in
loss carry forwards available at December 31, 1998 for federal and state income
tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the year ended
December 31, 1998, we incurred a $2.2 million extraordinary charge, net of an
estimated $1.5 million income tax benefit, as a result of the refinancing of the
bridge notes with a units offering consisting of notes and warrants. During the
year ended December 31, 1997, we incurred a $2.1 million extraordinary charge,
net of an estimated $1.4 million income tax benefit, as a result of a debt
refinancing with the proceeds from our initial public offering.
NET INCOME. Net income decreased $2.6 million to $0.6 million for the year
ended December 31, 1998 compared to $3.2 million for the same period in 1997
primarily due to the higher amortization, interest and other expenses associated
with the DLJ acquisition.
BOOKINGS AND BACKLOG. Bookings increased $36.4 million, or 32.5%, to
$148.5 million for the year ended December 31, 1998 compared to $112.1 million
for the same period in 1997. The increase in bookings for 1998 includes:
- $21.0 million attributable to Audio International;
- $15.4 million attributable to Avtech; and
- $2.9 million attributable to Dettmers.
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As of December 31, 1998, we had a sales order backlog of $75.4 million
compared to $49.0 million as of December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for
1997 from $65.1 million for 1996. Revenues increased primarily due to:
- the inclusion of $10.7 million of revenues from Aerospace Display Systems;
- growth in our private labeling programs of $6.4 million;
- growth in contact sales of $6.3 million driven by new aircraft production
rate increases;
- an increase in sales of harness assemblies for in-flight entertainment
systems of $5.1 million;
- an increase in sales of specialty connectors for cabin management and
in-flight entertainment systems principally on Boeing's 777 aircraft of
$4.9 million;
- an increase of sales to Interactive Flight Technologies, Inc. of
$3.3 million relating to a major systems integration program for Swiss Air
Transport Co. Ltd.;
- the inclusion of $3.0 million of revenue from Elsinore;
- new systems integration programs for navigational systems of
$1.5 million;
- the inclusion of $1.3 million of revenue from Audio International;
- a new systems integration program for United Parcel Service, Inc. of
$0.9 million; and
- the overall growth in the commercial aircraft market.
Partially offsetting this increase was a decline in sales to AT&T Wireless
Services, Inc. of $3.8 million, reflecting the completion in late 1995 and early
1996 of a major systems integration program.
GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to
$28.7 million for 1997 from $15.7 million for 1996. Gross profit as a percentage
of revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in
gross profit was attributable to:
- a $10.6 million increase as a result of increased sales volume,
$3.8 million of which was attributable to the Aerospace Display Systems,
Elsinore and Audio International acquisitions; and
- a $2.3 million increase attributable to a favorable shift in revenues to
higher margin products, cost reductions and sustained price increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
$5.0 million, or 46.6%, to $15.8 million for 1997 from $10.7 million for 1996.
SG&A expenses as a percentage of revenues decreased to 14.5% for 1997 from 16.5%
for 1996. SG&A expenses increased primarily due to:
- $2.3 million of incremental expenses resulting from the acquisition of
Aerospace Display Systems, the AMP facility and Elsinore, all of which
occurred in late 1996;
- $0.8 million for additional staff to pursue higher sales to aircraft
manufacturers and to develop capabilities for in-flight entertainment,
navigation and satellite communication and safety systems integration
services; and
- $0.6 million of incremental expenses resulting from the acquisition of
Audio International, which occurred in 1997.
OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to
$12.0 million for 1997 from $4.3 million for 1996. Operating income as a
percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The
increase in operating income resulted from the factors described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to
$3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the
completion of the initial public offering on April 16, 1997 and the repayment of
a substantial portion of debt with the net proceeds.
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PROVISION FOR INCOME TAXES. During 1997, we reduced our deferred tax asset
valuation allowance by $0.5 million to reflect the book benefit of federal and
state net operating loss carry forwards not previously recognized. We have
approximately $2.5 million of net operating loss carry forwards available at
December 31, 1997 for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, we incurred a
$2.1 million extraordinary charge, net of an estimated $1.4 million income tax
benefit, as a result of refinancing debt with the net proceeds from the initial
public offering.
NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for
1997 from a net loss of $0.8 million for 1996. The increase is a result of the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
We have required cash primarily to fund acquisitions and, to a lesser
extent, to fund capital expenditures and for working capital. Our principal
sources of liquidity have been cash flow from operations and third party
borrowings.
For the nine months ended September 30, 1999, we generated $10.2 million of
cash from operating activities, which is the net of $15.5 million of cash
generated from operations after adding back depreciation, amortization and other
non-cash items, and $5.9 million used for working capital and $0.1 million
resulting from an increase in other liabilities. The following factors
contributed to the $5.9 million working capital increase:
- a net $5.7 million decrease in accounts payable and accrued expenses
resulting from lower inventory levels, the 1999 payment of $3.0 million
accrued contingent consideration pertaining to the 1997 Audio
International acquisition and payment timing patterns;
- a $2.6 million accounts receivable increase due to higher sales; and
- a $1.3 million increase in prepaid expenses and other assets.
The working capital increases were offset by:
- a $1.4 million inventory decrease as a result of achieving a higher
inventory turnover rate; and
- a $2.3 million increase in income taxes payable due to higher current
taxable income.
For the year ended December 31, 1998, we generated cash from operating
activities of $4.0 million. Our accounts receivable consist of trade receivables
and unbilled receivables, which are recognized pursuant to the percentage of
completion method of accounting for long-term contracts. Accounts receivable
increased $6.6 million for the year ended December 31, 1998 from higher overall
sales. Unbilled receivables comprised $3.5 million of this increase. Inventories
decreased $2.2 million for the year ended December 31, 1998, due to improved
inventory management at several subsidiaries as well as the sale of some contact
product lines and the disposal of obsolete inventory items. Accounts payable
decreased $2.9 million for the year ended December 31, 1998 as a result of
payment of various assumed transaction expenses in the acquisitions of 1998 and
an agreement with a new gold supplier for significantly lower prices in exchange
for shorter payment terms. Accrued expenses, however, increased $5.9 million for
the year ended December 31, 1998, primarily as a result of a $2.8 million
increase in accrued interest.
Cash used for investing activities during the nine months ended September
30, 1999 consisted of $113.8 million for the PATS, PPI and Custom Woodwork
acquisitions, $3.0 million of contingent consideration paid during 1999 related
to the 1997 Audio International acquisition, and $4.8 million for capital
expenditures. We anticipate spending $6.6 million for capital expenditures in
1999.
Cash used in investing activities was $89.2 million during the year ended
December 31, 1998. Of this amount, $83.6 million was used for the Avtech
acquisition and $2.2 million for the Dettmers acquisition, net of cash acquired.
The total purchase price for the Dettmers acquisition also included additional
contingent consideration with a maximum of $2.0 million payable between 1999 and
2002. We spent $3.6 million on capital expenditures during the year ended
December 31, 1998, which was lower than the $4.5 million originally anticipated
because the actual cash outlays for our information systems upgrade program were
delayed until 1999. The bank credit facility contains restrictions on our
ability to make capital expenditures; however, we believe the permitted capital
expenditures will be sufficient to complete our investment program and maintain
our facilities.
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Cash provided by financing activities was $110.9 million for the nine months
ended September 30, 1999. The cash provided was primarily used to fund our
acquisitions as follows:
- January 1999 -- the senior term loan facility was amended to provide for
an additional $20.0 million of term loan borrowings and we used the funds,
along with $14.9 million of borrowings under our acquisition revolving
credit facility and a $5.0 million customer advance to acquire all of the
common stock of PATS;
- April 1999 -- the term loan facility was further amended and we borrowed
an additional $70.0 million and used $50.0 million of the proceeds to
partially fund the PPI acquisition and $20.0 million to repay borrowings
under our acquisition and working capital revolving credit facilities; we
also used an additional $12.5 million capital contribution received from
DeCrane Holdings to fund the remaining portion of the PPI acquisition; and
- August 1999 -- we borrowed an additional $13.8 million under our
acquisition and working capital revolving credit facilities to fund the
Custom Woodwork acquisition.
Subsequent to September 30, 1999, we:
- borrowed $11.5 million under our acquisition revolving credit facility in
conjunction with the October 1999 PCI NewCo and International Custom
Interiors acquisitions;
- further amended our term loan facility in December 1999 to provide for an
additional $45.0 million of term loan borrowings; the interest rate
margins applicable to the incremental term loan borrowings are 2.50% for
prime rate borrowings or 3.75% for Euro-Dollar borrowings;
- used the term loan proceeds to fund the Infinity acquisition and repay
$28.0 million of acquisition and working capital revolving credit facility
borrowings; and
- used the cash proceeds from the sale of DeCrane Holdings' common stock to
management to repay senior credit facility borrowings.
At September 30, 1999, senior credit facility borrowings totaling $182.6
million are at variable interest rates based on defined margins over the current
prime or Euro-Dollar rates. As of September 30, 1999 we had $59.1 million of
working capital, $25.0 million of borrowings available under our working capital
senior credit facility and $11.5 million available under our acquisition senior
credit facility. Although we cannot be certain, we believe that the current
levels of working capital and amounts available under our senior credit
facilities will enable us to meet our liquidity requirements for the foreseeable
future.
Cash provided by financing activities was $88.3 million for the year ended
December 31, 1998. In connection with the DLJ acquisition, we entered into a new
bank credit facility that initially provided for term loan borrowings in the
aggregate principal amount of $80.0 million, now increased to $99.9 million, and
revolving loan borrowings up to an aggregate principal amount of $50.0 million,
including $25.0 million for working capital purposes which expires in 2004. In
1998, prior to the DLJ acquisition, we also completed a common stock offering
and used the $34.8 million net proceeds to reduce the amount outstanding under
our credit facility, and borrowed $85.8 million under our then-existing senior
credit facility to finance the Avtech and Dettmers acquisitions.
The DLJ acquisition created substantial debt for us, resulting in
significant debt service obligations. Although we cannot be certain, we
anticipate that operating cash flow, together with borrowings under the bank
credit facility, will be sufficient to meet our future short- and long-term
operating expenses, working capital, capital expenditures and debt service
obligations for the foreseeable future. However, our ability to pay principal or
interest, to refinance our debt and to satisfy our other debt obligations will
depend on our future operating performance. We will be affected by economic,
financial, competitive, legislative, regulatory, business and other factors
beyond our control. In addition, we are continually considering acquisitions
that complement or expand our existing businesses or that may enable us to
expand into new markets. Future acquisitions may require additional debt, equity
financing or both. We may not be able to obtain any additional financing on
acceptable terms.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be accounted for
depending on the use of the derivative and whether it qualifies for
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hedge accounting. Adoption of SFAS No. 133, as amended by SFAS No. 137 in
June 1999, is required for the fiscal year beginning January 1, 2001. Management
believes the adoption of SFAS No. 133 will not have a material impact on our
consolidated financial position or results of operations.
SWISS FRANC FORWARD EXCHANGE CONTRACTS
Some of the contact blanks we use in the production of our contacts are
manufactured at our Swiss facility and shipped to our El Segundo, California
facility for plating and assembly. In 1996, 1997 and 1998, solely in an effort
to mitigate the effects of currency fluctuations between the U.S. Dollar and the
Swiss Franc, we entered into forward exchange contracts at fixed rates. However,
we have not entered into any such contracts during the nine months ended
September 30, 1999 and no such contracts are open as of that date. We plan to
continue efforts to mitigate this risk in the future. We do not engage in any
currency exchange transactions for trading or speculative purposes. Realized and
unrealized gains and losses on foreign exchange contracts are recognized
currently in the consolidated statements of operations.
COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS
We are dependent in part on computer- and date-controlled systems for some
internal functions, particularly inventory control, purchasing, customer billing
and payroll. Similarly, suppliers of components and services on which we rely,
and our customers, may have Year 2000 compliance risks, which would affect their
operations and their transactions with us. Other parties with whom we have
commercial relationships, including raw materials suppliers and service
providers, such as banking and financial services, data processing services,
telecommunications services and utilities, are highly reliant on computer-based
technology.
We have incurred less than $1.0 million in the aggregate to remediate and
test our systems, and evaluate and address the risks of our key customers and
vendors. All of our Year 2000 compliance costs have been funded from our
operating cash flow. We believe the number of products manufactured by us whose
functioning is dependent upon computer-controlled or other date-controlled
systems is not significant. Our manufacturing operations and our products
generally are not based upon date-controlled machinery; our business operations
and systems are not so time-sensitive that brief interruptions, or a shift to
backup paper records, should cause significant losses.
As of the date of this prospectus, the January 1, 2000 date has passed and
we are not aware of any significant internal-, customer- or vendor-related Year
2000 issues or computer-related failures. However, as of this date we have not
performed all of the month-, quarter and year-end update and closing procedures
for our computer and date-controlled systems. We cannot assure you that our
efforts to address Year 2000 issues were fully effective, or that Year 2000
issues will not have a material adverse effect on our business, financial
condition or results of operations. We intend to continue to monitor our systems
and our vendors, suppliers and customers for Year 2000 related issues and take
necessary actions to correct the problems, if any, as they occur.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union provides for the
introduction of a single European currency, the Euro, in substitution for the
national currencies of the member states of the European Union that adopt the
Euro. In May 1998, the European Council determined the 11 member states that met
the requirement for the Monetary Union and the currency exchange rates among the
currencies for the member states joining the Monetary Union. The transitory
period for the Monetary Union started on January 1, 1999. According to the
European Council Resolution of July 7, 1997, the transition will be made in
three steps, beginning with a transition period from January 1, 1999 to
December 31, 2001, in which currency accounts may be opened and financial
statements may be drawn in Euros, and local currencies and Euros will coexist.
From January 1, 2002 to June 30, 2002, local currencies will be exchanged for
Euros. On July 1, 2002, local currencies are scheduled to disappear. We could
incur transitional costs as we redesign our software systems to reflect the
adoption of the new currency, but we do not expect such costs to be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and changes
in foreign currency exchange rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as interest rates and
foreign currency exchange rates. From time to time we use derivative financial
instruments to manage and reduce risks associated with these factors. We do not
enter into derivatives or other financial instruments for trading or speculative
purposes.
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INTEREST RATE RISK. A significant portion of our capital structure is
comprised of long-term variable- and fixed-rate debt.
Market risk related to our variable-rate debt is estimated as the potential
decrease in pre-tax earnings resulting from an increase in interest rates. The
interest rates applicable to variable-rate debt are, at our option, based on
defined margins over the current prime or Euro-Dollar rates. At September 30,
1999, the current prime rate was 8.25% and the current Euro-Dollar rate was
5.52%. Based on $182.6 million of variable-rate debt outstanding as of
September 30, 1999, a hypothetical one percent rise in interest rates, to 9.25%
for prime rate borrowings and 6.52% for Euro-Dollar borrowings, would reduce our
pre-tax earnings by $1.8 million annually. Subsequent to September 30, 1999, we
increased our variable-rate debt by $28.5 million. Prior to December 31, 1997,
we purchased interest rate cap contracts to limit our exposure related to rising
interest rates on our variable-rate debt. While we have not entered into similar
contracts since that date, we may do so in the future depending on our
assessment of future interest rate trends.
At September 30, 1999, the carrying value of our fixed-rate long-term debt
approximated its fair value. Market risk related to our fixed-rate debt is
deemed to be the potential increase in fair value resulting from a decrease in
interest rates. For example, a hypothetical ten percent decrease in the interest
rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt
by approximately $7.0 million.
FOREIGN CURRENCY EXCHANGE RATE RISK. Our foreign customers are located in
various parts of the world, primarily Western Europe, the Far East and Canada,
and two of our subsidiaries operate in Western Europe. To limit our foreign
currency exchange rate risk related to sales to our customers, orders are
primarily valued and sold in U.S. dollars. From time to time we have entered
into forward foreign exchange contracts to limit our exposure related to foreign
inventory procurement and operating costs. However, we have not entered into any
such contracts during the nine months ended September 30, 1999 and no such
contracts are open as of that date.
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<PAGE>
BUSINESS
OVERVIEW
Since our founding in 1989, through acquisitions and internal growth, we
have become one of the premier suppliers to the general aviation market. We
offer a complete line of interior cabin furniture, galleys, seating, and
entertainment systems for corporate aircraft. In addition, we manufacture
aviation electronic components, referred to as avionics, and provide systems
integration services. We sell our products in the corporate, commercial
(including regional), retrofit, aftermarket and military aircraft markets.
Within these markets, our customers include original manufacturers of aircraft
and related avionics equipment, commonly referred to as OEM's, major components
suppliers, aircraft repair and modification centers and commercial airlines. For
the twelve months ended September 30, 1999, we generated pro forma revenues and
EBITDA (as defined) of $294.9 million and $67.1 million, respectively.
During 1998 and 1999, we completed and integrated eight acquisitions,
increasing our diversification within the aircraft industry and reducing our
reliance on the commercial aircraft market. We have built a leading position in
a number of niche markets in the aircraft industry. The substantial majority of
our revenue is generated by businesses in which we have a leading market share.
In order to take advantage of the complementary nature of our various product
offerings, to rationalize and consolidate the operations of each of our separate
companies and to provide even higher levels of customer service, in 1999 we
reorganized our related businesses into three separate operating groups: Cabin
Management, Specialty Avionics and Systems Integration.
THE CABIN MANAGEMENT GROUP. We are the leading independent provider of
cabin management products for the corporate aircraft market, serving major
manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault,
Gulfstream and Raytheon. We provide a full line of interior cabin components,
including seats, furniture, cabinetry, galleys, in-flight entertainment systems,
sidewalls and headliners, which are either sold separately or as a
pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers
customized, pre-engineered, pre-fit interior cabinetry and galley kits to
corporate jet OEM's and independent completion centers. We also have developed
and are currently marketing our "cabin-in-a-box" product, which is comprised of
a customized, pre-engineered, pre-fit cabin interior system, including
furniture, galleys, seats, audio-visual entertainment systems, lighting,
sidewalls, headliners and electrical control units. Our cabin-in-a-box product
will enable our customers to rely on us as the single source for cabin-related
products. We estimate that this product could decrease cycle times by 15% to
20%, offering significant cost reduction opportunities to our customers, and
could increase the dollar content per plane for us. The Cabin Management Group
contributed approximately 40% of our pro forma revenue for the twelve months
ended September 30, 1999.
THE SPECIALTY AVIONICS GROUP. This group designs, engineers and
manufactures electronic components, electronic display devices and interconnect
components and assemblies. Among the products offered by this group are flight
deck communications and audio power control equipment, harness assemblies and
connectors, power and signal contact products and liquid crystal display
devices, commonly referred to as LCD's. Customers of this group include Airbus,
Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics
Group contributed approximately 39% of our pro forma revenue for the twelve
months ended September 30, 1999.
THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks,
auxiliary power units and system integration services, including engineering,
kit manufacturing, installation and certification. Customers of this group
include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and
Rockwell Collins. The Systems Integration Group contributed approximately 21% of
our pro forma revenue for the twelve months ended September 30, 1999.
INDUSTRY OVERVIEW AND TRENDS
We sell our products in the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related avionics equipment, major component
suppliers, aircraft repair and modification centers and commercial airlines.
The leading manufacturers of corporate aircraft include Airbus, Boeing
Business Jet, Cessna, Dassault, Gulfstream and Raytheon, while the leading
manufacturers of regional aircraft include Bombardier, Embraer and Fairchild
Dornier. Airbus and Boeing are the primary manufacturers of commercial aircraft
designed to
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carry 100 or more passengers. The major systems installed on new aircraft, such
as flight deck avionics systems, are produced by a limited number of
manufacturers, including Honeywell, Rockwell Collins and Sextant Avionique. The
integration of new systems into existing aircraft, referred to as the retrofit
market, and the manufacture and sale of replacement products for existing
aircraft, referred to as the aftermarket, are served by a highly fragmented
group of companies, including many of the foregoing manufacturers and a number
of smaller, specialized companies. We market our commercial aircraft products
directly to the aircraft manufacturers as well as to the manufacturers of major
aircraft sub-systems. In some cases, we sell our products to competing
manufacturers.
We believe the following characteristics of our markets have contributed to
our growth and profitability and should provide further opportunities for our
success:
- INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. The Teal Group Corporation,
an industry-recognized aerospace research group, projects delivery of
5,067 corporate aircraft between 1999 and 2008, representing an increase
of approximately a 52% over the 3,326 aircraft that were delivered between
1989 and 1998. We believe that the following factors have driven increased
demand for new corporate aircraft:
- the growing popularity of fractional aircraft ownership in the United
States and the expansion of this form of ownership to Europe and the
Far East;
- the introduction of new, larger and more efficient aircraft, including:
- several new mid to high end corporate aircraft, such as the Airbus
CJ, Boeing Business Jet, and Bombardier Global Express; and
- additional new model aircraft, such as the Bombardier Continental,
Cessna Sovereign, and Raytheon Horizon, which are expected to be
introduced in the next few years;
- the need for long range flights to expanding international markets;
- the increased demand for more expedient travel;
- the worldwide threat of terrorism; and
- the perceived decline in the level of service afforded commercial
airline passengers.
- INCREASED LONG-TERM DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1999 CURRENT
MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that
the world jetliner fleet will grow from 12,600 aircraft at the end of 1998
to 19,100 aircraft by 2008, and to 28,400 aircraft by 2018. The report
also projects that, between 1999 and 2008, the commercial aircraft
industry will require 8,900 new commercial aircraft, and between 2009 and
2018, it will require an additional 11,250 aircraft, both to support the
projected world fleet expansion and to replace capacity lost as aircraft
are removed from commercial airline service. Despite the increases
projected for the commercial aircraft industry generally, Boeing has
announced production cutbacks in several of its lines for 2000 and 2001,
and our sales to Boeing have decreased. For example, Boeing deliveries of
its 747, 767 and 777 airplanes have declined due to the recent financial
difficulties of many Asian carriers. See "Risk Factors--Aircraft Industry
Risks and--Concentration of Key Customers."
- INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. As part of the total projected
increase for the commercial aircraft fleet, Boeing's 1999 CURRENT MARKET
OUTLOOK projects a compounded annual growth rate of 9.4% for the regional
aircraft fleet from 1999 to 2008. We believe that the projected increase
in the regional aircraft fleet is driven by the following factors:
- the introduction of new regional aircraft with state-of-the-art
cockpits and the same safety equipment as larger commercial aircraft;
- continued integration of the services of regional carriers with major
carriers;
- newer longer-range turboprop and jet aircraft that allow regional
carriers to consider new "point-to-point" routes, which would permit
passengers to bypass hubs; and
- upgraded airport facilities for regional passengers.
- INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become
increasingly dependent on new technology, passengers are demanding more
advanced in-flight services, particularly in the corporate aircraft
market. These services include in-flight passenger telecommunications
systems and
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in-flight entertainment systems, such as video, video-on-demand and other
interactive systems. We believe that demand for systems in the passenger
cabin, as well as avionics systems on the flight deck, is increasing as a
result of:
- a desire by airlines for additional revenue-producing services;
- longer flights combined with a demand by passengers for more
sophisticated forms of in-flight services and entertainment; and
- the advent of new technologies and Federal Aviation Administration
mandates related to aircraft safety and navigation.
In corporate aircraft for example, Honeywell's AIS-1000 OneView-TM-
Airborne Information System delivers more than 40 channels of live
television programming and Internet and e-mail access to corporate
aircraft via direct broadcast satellite service providers.
- SIGNIFICANT BARRIERS TO ENTRY. We believe that there are many barriers to
entry that limit access to the aircraft industry, including:
- the reluctance of aircraft manufacturers to include new companies as
additional approved vendors on their engineering drawings, a favored
status often called "print position";
- the general FAA certification requirements necessary to perform
aircraft modifications or maintenance;
- the required compliance with FAA aircraft manufacturing and aircraft
modification design and installation standards;
- the required compliance with specifications for some products sold to
commercial and military markets;
- the required compliance with qualification and approval standards
imposed by aircraft and electronic systems manufacturers; and
- the initial capital investment and tooling requirements necessary for
the manufacture of some aircraft components and systems.
- REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines
have come under increasing pressure to reduce the operating and capital
costs associated with providing services. As a result, many OEM's are
initiating proactive programs to reduce cycle times, decrease inventory
and reduce costs. Boeing, for example, has announced that it intends to
reduce its number of suppliers by 19%, from 31,000 to 25,000, by the end
of 2000 and by 42% over the long term. Manufacturers can realize
efficiencies by purchasing a higher number of assemblies from a smaller
number of suppliers, each of whom has multiple related product capability.
- NEW SAFETY MANDATES. New technologies and FAA mandates are driving a
proliferation of new safety systems for airplanes. The world's airlines
and aircraft and electronic systems manufacturers have cooperated with
regulatory agencies in the development of industry standards, regulations
and system requirements for future air navigation systems. We expect that
this initiative will drive a complete modernization of both airborne and
ground-based air traffic management systems. As navigation technology
becomes more accurate, new navigation systems such as global positioning
systems may become federally required. Other new technologies, which have
already been mandated, include traffic collision avoidance systems, cargo
hold fire detection and suppression systems, and windshear detection
systems. In anticipation of new FAA recommendations and mandates, many
airlines have already begun to install enhanced ground proximity warning
systems, predictive windshear detection systems and enhanced digital
flight data recorders. These safety mandates should provide significant
retrofit opportunities for the commercial fleet, which today exceeds
12,000 aircraft.
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ACQUISITION HISTORY
DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since our formation, we have completed
seventeen acquisitions, summarized as follows:
<TABLE>
<CAPTION>
PRINCIPAL PRODUCTS AND SERVICES
ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION
- ----------------------------------------------- -----------------------------------------------
<S> <C>
1990
1 Hollingsead International Avionics support structures
1991
2 Tri-Star Electronics International Contacts and connectors
3 Tri-Star Europe Contact blanks
4 Tri-Star Technologies Wire marking equipment
5 Cory Components Connectors & harness assemblies
1996
6 Aerospace Display Systems Dichroic liquid crystal displays
7 Elsinore Engineering Engineering services
8 AMP manufacturing facility Contact blanks
1997
9 Audio International Cabin management & entertainment products
1998
10 Avtech Cockpit audio, lighting, power & control
11 Dettmers Industries Corporate aircraft seats
1999
12 PATS Auxiliary fuel & power systems
13 PPI Aircraft furniture components
14 Custom Woodwork and Plastics Aircraft furniture components
15 International Custom Interiors Aircraft furniture components
16 PCI NewCo Composite material components
17 Infinity Partners Aircraft furniture components
</TABLE>
COMPETITIVE STRENGTHS
We have used our strong market positions to compete more effectively, to
capitalize on industry consolidation trends and to cross-sell products to our
existing customer base. We believe that we are well-positioned to take advantage
of the foregoing trends and expected growth in the aircraft industry as a result
of the following competitive strengths:
- LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of
components within a number of the niche markets we serve. Our strategy has
been to combine complementary businesses in markets in which we have a
leading position, thereby increasing sales volume with our customers and
strengthening our competitive position. The substantial majority of our
revenue is generated by businesses in which we have a leading market
share. We believe our combination of component manufacturing and
integration and installation capabilities provides us with competitive
advantages. The combination of product lines we offer provides
opportunities for our customers to deal with a reduced number of vendors
and suppliers, to reduce the number of component parts through the
purchase of sub-assemblies and to reduce cycle times, all of which help to
reduce costs and simplify the production process.
- STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of
our performance, we have enjoyed long-term relationships with leaders in
our primary markets, including Boeing and Boeing Business Jet, Bombardier,
Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins.
We believe we have been able to develop and solidify these relationships
by combining production and engineering capabilities, providing
engineering support services and enhancing our customers' in-house
production processes.
- DIVERSIFIED REVENUE BASE. We sell our products in the corporate,
commercial, retrofit, aftermarket and military aircraft markets. Within
these markets, our customers include original manufacturers of aircraft
and related avionics equipment, aircraft repair and modification centers,
and airlines. Each of these markets has different demand drivers and
operates on different production cycles. Accordingly, our involvement in
these multiple markets reduces our exposure to cyclical product demand in
any
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one segment of the aircraft industry. Demand for new products in the
commercial aircraft market, for example, is driven largely by the age of
the existing commercial fleet, the growth in revenue passenger miles and
industry load factors, whereas demand in the corporate aircraft market is
driven largely by the growth in fractional ownership, competition from
commercial airlines and the growth in the global economy. Our aftermarket
sales are dependent in part upon the growing number of aircraft in the
existing fleet while technology advances and safety updates help drive
demand in the retrofit market.
- COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we
have completed seventeen acquisitions of businesses and assets. We believe
that our acquisitions complement each other and create a core of
interrelated products and services, which increases our cross-selling
opportunities to existing and new customers. The complementary nature of
our business lines should allow us to help our customers reduce their
production costs. For example, our acquisitions of PPI, Custom Woodwork,
International Custom Interiors and Infinity, corporate aircraft
furnishings manufacturers; Dettmers, a corporate aircraft seat
manufacturer; and Audio International, a corporate aircraft entertainment
and cabin management product manufacturer; should enable us to offer a
more integrated set of products and services to the middle and high-end
corporate aircraft market.
- LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations
through cost reduction programs, technological development and, where
appropriate, the use of vertical integration. For example, our low-cost
production capabilities, coupled with our focus on delivering high-quality
products, has enabled us to grow the number of programs under which we
supply electrical contacts to many of our competitors.
We use sophisticated processes to ensure that our products meet or exceed
industry and customer quality requirements. Many customers formally have
recognized the effectiveness of our quality programs by issuing quality
approval letters, awarding quality compliance certificates and authorizing
our inspection personnel to act as their authorized quality certification
representatives. For example, four of our facilities have received a
quality award from Boeing, and nine of our facilities are currently
certified according to the International Standards Organization
specifications ISO-9001 or ISO-9002.
- REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and
power-plant mechanics who are authorized to perform specified aircraft
modification functions provide us with a significant competitive
advantage. As of December 31, 1999, our subsidiaries include one of only
31 currently active FAA Designated Alteration Stations worldwide, hold
nine FAA domestic repair station certificates and hold numerous Parts
Manufacturer Approval authorizations from the FAA. These certifications
make us one of a few companies with the in-house capability to design,
engineer, produce, install and certify a part, which together help reduce
cycle times.
GROWTH STRATEGY
Our principal strategy is to establish and expand leading positions in
high-margin, niche markets within the corporate, commercial, retrofit,
aftermarket and military aircraft markets. We focus on the manufacture of
corporate aircraft interiors and avionics equipment and the integration of
avionics systems. We also seek to maintain a balance of revenues among the
equipment manufacturer market, the retrofit market and the aftermarket. We
believe that this strategy positions us for future success by:
- BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with
virtually every major OEM and with fractional ownership programs, such as
Executive Jet. We plan to continue cross-selling our portfolio of products
to our existing customer base in order to increase our dollar content per
plane. For example, we originally entered the corporate aircraft market by
offering cabin management systems and entertainment systems. We then
expanded our product offering to include seating and in 1999, through four
separate acquisitions, we added cabinetry and galley products, which we
sell to OEM's. Finally, we developed pre-fabricated interior kits,
cabinet-in-a-box and cabin-in-a-box, to facilitate cross-selling and
further encourage OEM's to outsource their cabin engineering requirements
to us. We believe these products should reduce cycle times and costs for
manufacturers and increase our dollar content per plane. We currently
provide cabinet-in-a-box kits to several of our customers and are in
discussions with a number of corporate jet manufacturers regarding our
cabin-in-a-box product.
- STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen
our position in niche markets by providing engineering and customer
service support to our existing customer base through
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the integration of our engineering services with the OEM's engineering
capabilities. We also plan to continue to examine new market niches and
consolidate the fragmented sectors in our markets to further service our
customers. We target for acquisition aircraft component manufacturers and
systems integration and installation providers that meet the following
criteria:
- are complementary to our existing businesses;
- have a leading market share in their own niches;
- leverage our existing strengths;
- add new expertise; and/or
- increase cross-selling opportunities.
In analyzing a potential acquisition's value, we focus on economies of
scale, product line extensions, new customer relationships, increased
manufacturing capacity and opportunities for increased cost reductions.
- CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of
areas of synergies across and within our three business segments by making
operational efficiency improvements in human resources, support,
procurement and cross-selling. For example, we recently formed the Systems
Integration Group to leverage the engineering capabilities of our
Hollingsead subsidiary with the manufacturing and systems integration and
installation capabilities of our PATS subsidiary. In addition, as part of
the Systems Integration Group's strategy, we are consolidating facilities,
reducing headcount and replacing relatively expensive manufacturing at
Hollingsead with more economical outsourced products. This will allow
Hollingsead to focus on its core engineering and systems integration
competencies. We are also standardizing processes and centralizing
procurement at our four recently acquired cabin furniture companies, and
we continue to evaluate our operations to streamline or increase
efficiencies.
- EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features
increases demand for many of our products and provides attractive
cross-selling opportunities. For example, our newly introduced e-CABIN, an
"office in the sky," provides leading-edge business and entertainment
services for the corporate jet cabin and its passengers. Our e-CABIN
provides each passenger with on-demand audio and video entertainment,
including live television and Internet and e-mail access via Honeywell's
OneView system. We will continue considering strategic partnerships with
leading technology companies to keep our product offerings on the cutting
edge, as we have done with Honeywell and its OneView system.
PRODUCTS AND SERVICES
Our principal products and services, on a pro forma basis, are:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1999
PRO FORMA
PRINCIPAL PRODUCTS AND SERVICES REVENUES
- ------------------------------------------------------------ -------------------
<S> <C>
CABIN MANAGEMENT GROUP
Interior furnishings, seating, composite components, and
entertainment and cabin control systems................... 39.9%
SPECIALTY AVIONICS GROUP
Cockpit audio, communication, lighting and power and control
devices, electrical contacts, connectors and harness
assemblies, liquid crystal display devices, and wire
marking and crimping equipment............................ 39.4
SYSTEMS INTEGRATION GROUP
Auxiliary fuel systems and power units, and integration of
cabin and fight deck systems.............................. 20.7
-----
Consolidated pro forma revenues......................... 100.0%
=====
</TABLE>
We believe historical data about our products and services is not meaningful
because it is not reflective of the companies we have recently acquired and the
products and services they provide.
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<PAGE>
CABIN MANAGEMENT GROUP. This group provides a full line of interior cabin
components and services for the middle- to high-end corporate aircraft market.
- INTERIOR FURNISHINGS, SEATING AND COMPOSITE COMPONENTS. We design,
engineer and manufacture customized, pre-fit products and provide services
including:
INTERIOR FURNISHINGS
- entertainment and refreshment centers;
- conference tables;
- hi-low dining/coffee tables;
- end tables;
- cabinets;
- arm and side ledges;
- galleys;
- lavatories;
- vanities;
- room enclosures;
- cabinetry refurbishment services;
SEATING
- executive track and swivel seats;
- jump-seats;
- divans, including models that convert
to beds or contain storable tables;
- upholstery services;
COMPOSITE COMPONENTS
- sound-damping side walls and headliners;
- passenger service units;
- environmental (HVAC) ducting; and
- closets.
Many of our products are made with what we believe to be high quality
veneers, leathers and fabrics and lightweight structural aluminum honeycomb
or foam- or balsa-core composites reinforced with Kevlar-TM-, Nomex-TM-,
graphite or fiberglass.
- ENTERTAINMENT AND CABIN CONTROL SYSTEMS. We design to customer
specifications, engineer and manufacture fully-integrated in-flight
entertainment and cabin management systems, including audio-video
entertainment systems, cabin lighting, passenger switching and control
modules, chimes and paging systems and headphone systems. Our
entertainment systems include video on demand, and our cabin lighting
products include both halogen and flat-candle fluorescent illumination.
The fully-integrated systems are operated with our passenger switching and
control modules, which includes membrane-type and touch-screen models. We
recently introduced a new fiber-optic based technology for our systems
that replaces traditional wire harnesses with lightweight fiber-optic
cable.
SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures
electronic components and display devices, interconnect components and
assemblies.
- COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We
are a leading manufacturer of cockpit audio, lighting and power and
control devices used in commercial, regional and corporate aircraft. We
also manufacture a variety of other commercial aircraft safety system
components, including warning tone generators, temperature and de-icing
monitoring systems, steep approach monitors and low voltage power supplies
for traffic collision avoidance systems.
- ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity
and are installed at the terminus of a wire or an electronic or electrical
device. We supply precision-machined contacts for use in connectors found
in virtually every electronic and electrical system on a commercial
aircraft. We sell contacts directly to aircraft and related electronics
manufacturers and, through our private labeling programs, to several major
connector manufacturers who sell connectors to the same markets under
their brand name.
- CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors
link wires and devices in avionics systems, and permit their assembly,
installation, repair and removal. Our connectors are specially
manufactured to meet the critical performance requirements demanded by
manufacturers and required in the harsh environment of an operating
aircraft. We produce connectors that are used in aircraft galleys, flight
decks and control panels in the passenger cabin. We also produce wire
harness assemblies for use in cabin avionics systems, from wire,
connectors, contacts and hardware. We typically sell our harness
assemblies to manufacturers of aircraft electronic systems. In addition,
we incorporate and sell our harness assemblies as part of our systems
integration services.
- LIQUID CRYSTAL DISPLAY DEVICES. We manufacturer dichroic liquid crystal
displays, also known as LCD's, and modules used in commercial and military
aircraft. Modules are liquid crystal displays packaged
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<PAGE>
with a backlight source and additional on-board electronic components. Our
products are used in a variety of flight deck applications, such as flight
control systems, fuel quantity indicators, airborne communications and
safety systems. Dichroic liquid crystal display products are widely used
in the aircraft industry because they are easily adapted to custom design,
and they possess high performance characteristics, which include high
readability in sunlight and darkness, readability from extreme viewing
angles, and the ability to withstand wide temperature fluctuations. We
also manufacture electronic clocks, capable of serving all types of
aircraft, that use our liquid crystal display devices.
- WIRE MARKING AND CRIMPING EQUIPMENT. Wires running between the individual
contacts that comprise a connector are marked according to their function
and, in some applications, the contacts are crimped onto the wire. We
design and manufacture high-speed wire marking systems and portable
crimping machines used by harness manufacturers, wire mills, aircraft
manufacturers and the U.S. military.
SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tank,
auxiliary power units and systems integration products and services, including
engineering, kit manufacturing, installation and certification.
- AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. We manufacture and
install auxiliary fuel tanks for commercial and corporate aircraft. Our
unique design and tank construction has made us a leader in the auxiliary
fuel tank market. We also manufacture auxiliary power units which provide
ground power to corporate jets made by Cessna, Gulfstream, Learjet and
Raytheon.
- INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed and
patented a wide range of avionics support structures. These structures are
used to support and environmentally cool avionics equipment, including
navigation, communication and flight control equipment. We sell our
avionics support structures under the Box-Mount-TM- name. We sell these
support structures to aircraft and related electronics manufacturers,
airlines and major modification centers. In addition, these products are
essential components of the installation kits used in our systems
integration operations. We also perform all of the functions, including
design, engineering, certification, manufacturing and installation,
necessary to retrofit an aircraft with a new or upgraded avionics system.
INDUSTRY REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration and in other countries by similar agencies to
ensure that aviation products and services meet stringent safety and performance
standards. We and our customers are subject to these regulations. In addition,
many customers impose their own compliance and quality requirements on their
suppliers. The FAA prescribes standards and licensing requirements for aircraft
components, issues Designated Alteration Station authorizations, and licenses
private repair stations. Our subsidiaries hold various FAA approvals, which may
only be used by the subsidiary obtaining such approval.
The FAA can authorize or deny authorization of many of the services and
products we provide. Any such denial would preclude our ability to provide the
pertinent service or product. If we failed to comply with applicable FAA
standards or regulations, the FAA could exercise a wide range of remedies,
including a warning letter, a letter of correction, a civil penalty action, and
emergency or non-emergency suspension or revocation of a certificate or
approval.
In July of 1997, the FAA notified us that our FAA-approved repair station
which holds Designated Alteration Station authorization did not fully comply
with some of the requirements for some of the FAA ratings that it held. The FAA
granted us until September 10, 1997 to bring the facility into full compliance,
and curtailed several operations of the repair station, including prohibiting
initiation of new projects under that authorization, until it achieved full
compliance. On August 28, 1997 the FAA inspected the repair station and
determined that it was in full compliance with all FAA requirements applicable
to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency
Certificate including those ratings, and removed the operating restrictions, as
of September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief. If the FAA were
to suspend or revoke our certificates or approvals on a nonemergency basis, we
would be permitted to continue making the products and delivering the goods
pending any available appeals, but would be required to stop if the FAA
eventually prevailed on appeal. If the FAA did so on an emergency basis, we
would be obliged to stop immediately the manufacturing of products and
delivering of services that require such certificate or approval. If the FAA
were to determine that noncompliance with its standards creates a safety hazard,
it also could order that the pertinent component or aircraft immediately cease
to be operated until the condition is corrected. This could require
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that customers ground aircraft or remove affected components from aircraft
currently in service, both of which are expensive actions.
Each type of aircraft operated by airlines in the United States must possess
an FAA type certificate, generally held by the aircraft manufacturer, indicating
that the type design meets applicable airworthiness standards. When someone else
develops a major modification to an aircraft already type-certificated, that
person must obtain an FAA-issued Supplemental Type Certificate for the
modification. Historically, we have obtained several hundred of these
Supplemental Type Certificates, most of which we obtained on behalf of our
customers as part of our systems integration services. Some of these
certificates we obtain are or will eventually be transferred to our customers.
As of January 1, 2000, we own and/or manage 235 Supplemental Type Certificates.
Many are multi-aircraft certificates which apply to all of the aircraft of a
single type. We foresee the need to obtain additional Supplemental Type
Certificates so that we can expand the services we provide and the customers we
serve.
Supplemental Type Certificates can be issued for proposed aircraft
modifications directly by the FAA, or on behalf of the FAA by one of the 31
holders of currently active Designated Alteration Station authorizations as of
January 1, 2000. The FAA designates what types of Supplemental Type Certificates
can be issued by each Designated Alteration Station. Our subsidiary Hollingsead,
as one of the 31, can directly issue many of the Supplemental Type Certificates
we and our customers require for our systems integration operations. In many
cases, this has increased the speed with which we can obtain such certificates
and help bring our customers' systems to market.
After obtaining a Supplemental Type Certificate, a manufacturer must apply
for a Parts Manufacturer Approval from the FAA, or a supplement to an existing
Parts Manufacturer Approval, which permits the holder to manufacture and sell
installation kits according to the approved design and data package. We have
nine Parts Manufacturer Approvals and over 200 supplements to those approvals.
In general, each initial Parts Manufacturer Approval is an approval of a
manufacturing or modification facility's production quality control system. Each
Parts Manufacturer Approval supplement authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding
Supplemental Type Certificate. We routinely apply for and receive such Parts
Manufacturer Approval supplements. In order to perform the actual installations
of a modification, we are also required to have FAA approval. This authority is
contained either in our Parts Manufacturer Approvals and related supplements, or
in our repair station certificates. In order for a company to perform most kinds
of repair, engineering, installation or other services on aircraft, its facility
must be designated as an FAA-authorized repair station. As of January 1, 2000,
we had nine authorized repair stations.
In addition to its approval of design, production, and installation, the FAA
certifies personnel. Several of our engineering personnel have been certified by
the FAA to perform specific tasks related to the design, production, and
performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. The FAA also delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified Designated Engineering Representatives. We employ or contract for
several of such designated representatives who evaluate engineering design data
packages, ensure compliance with applicable FAA regulations, oversee product
testing to ensure airworthiness, and work with the FAA to obtain approvals of
those data packages.
U. S. military specification standards are frequently used by both military
and commercial customers in the aircraft industry to define and control
characteristics of a product. Through the use of a government Qualified Parts
List and Qualified Vendor's List, a customer may be assured that a product or
service has met all of the requirements set forth in the military specification.
Parts listed with a Qualified Parts List allow others to reliably design parts
to interface with such parts as a result of the military specification standards
used. We believe that we hold more Qualified Parts Lists for our contact product
line than any other manufacturer.
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SALES AND MARKETING
Product line managers and our product engineering staff provide technical
sales support for our direct sales personnel and agents. We may also assign
responsibility for marketing, sales and/or services for key customers to one of
our senior executives. We have nine authorized distributors who purchase, stock
and resell several of our product lines.
Our systems integration services are sold by sales managers on our staff who
are assigned to geographic territories. Because of the significant amount of
technical engineering work required in the sales process, our sales managers are
generally assisted by a support team of program management, installation and
engineering personnel. Each support team specializes in safety systems,
in-flight entertainment, or navigation systems. These support teams continue to
manage the project throughout the entire integration process.
CUSTOMERS
We estimate that in 1999, we sold our products and services to about 1,300
customers on a pro forma basis. Our primary customers include manufacturers of
aircraft and related avionics equipment, airlines, aircraft component
manufacturers and distributors, and aircraft repair and modification companies.
The following customers accounted for 10.0% or more of our consolidated pro
forma revenues:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1999
PRO FORMA
SIGNIFICANT CUSTOMER REVENUES(A)
- ------------------------------------------------------------ -------------------
<S> <C>
Boeing(b)................................................... 18.3%
Textron(c).................................................. 14.6
Bombardier.................................................. 11.4
----
Total pro forma revenues.................................. 44.3%
====
</TABLE>
- ------------------------
(a) Historical data is not deemed to be meaningful because it is not
reflective of the companies we have recently acquired.
(b) Reflects only our direct revenues from Boeing. Excludes revenues from
components we provide indirectly to Boeing through our sales to other
Boeing suppliers.
(c) Includes Cessna.
Most of our sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time and include various terms favorable to the
buyer. For example, one provides that we must extend to Boeing any reductions in
prices or lead times that we provide to other customers and that we must match
other suppliers' price reductions of more than five percent, or delete the
affected products from the contract. Another contract relieves Boeing from any
obligation to order products covered by the contract if Boeing's customers
request an alternate supplier, or our product is not technologically competitive
in Boeing's judgment, or Boeing changes the design of an aircraft so that our
products are no longer needed, or Boeing reasonably determines that we cannot
meet its requirements in the amounts and within the schedules it requires. Our
contracts with Boeing also generally grant Boeing an irrevocable non-exclusive
worldwide license to use our designs, tooling and other intellectual property
rights related to products sold to Boeing, if we default, or suffer a bankruptcy
filing, or transfer our manufacturing rights to a third party.
MANUFACTURING AND QUALITY CONTROL
Many of our product lines use process-specific equipment and procedures that
have been custom-designed or fabricated to provide high-quality products at
relatively low cost. Some of our key product lines are vertically integrated,
which we believe improves our product performance, customer service and
competitive pricing.
We have conducted programs to reduce costs including overhead expenses. In
some cases, these programs have involved the use of proprietary equipment or
processes which have enabled us to reduce costs without reducing quality levels.
Several of our key customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers to comply with such standards. As a result, we have developed
and conducted comprehensive quality policies and procedures which meet or exceed
our
43
<PAGE>
customers' requirements. Many of our customers have recognized formally the
effectiveness of our quality programs by issuing quality approval letters and
awarding quality compliance certificates. In addition, some of our customers
have authorized our inspection personnel also to act as their authorized quality
representatives. That authorization enables us to ship directly into the
inventory stockrooms of these customers, eliminating the need for inspection at
the receiving end.
We use sophisticated equipment and procedures to ensure the quality of our
products and to comply with United States military specifications and FAA
certification requirements. We perform 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 our manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components we manufacture require the use of various raw materials
including gold, aluminum, copper, rhodium, plating chemicals, hardwoods and
plastics. The availability and prices of these materials may fluctuate. Their
price is a significant component in, and part of, the sales price of many of our
products. Although some of our contracts have prices tied to raw materials
prices, we cannot always recover increases in raw materials prices in our
product sale prices. We also purchase a variety of manufactured component parts
from various suppliers. Raw materials and component parts are generally
available from multiple suppliers at competitive prices. However, any delay in
our ability to obtain necessary raw materials and component parts may affect our
ability to meet customer production needs. See "Risk Factors--Gold and Copper
Prices."
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We have various trade secrets, proprietary information, trademarks, trade
names, patents, copyrights and other intellectual property rights which we
believe are important to our business in the aggregate, but not individually.
COMPETITION
We operate in a highly competitive industry and compete with a number of
companies, many of whom have significantly greater financial, technological,
manufacturing and marketing resources than we do. We believe that our ability to
compete depends on high product performance, short lead-time and timely
delivery, competitive price and superior customer service and support.
The niche markets within the aircraft industry that we serve are relatively
fragmented, with several competitors offering the same products and services we
provide. Due to the global nature of the aircraft industry, competition comes
from both U.S. and foreign companies.
Our principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. In other areas
we generally face a group of smaller companies and enterprises, except for the
corporate aircraft manufacturers, which are generally part of large and
diversified companies.
<TABLE>
<CAPTION>
GROUP--PRINCIPAL PRODUCTS AND SERVICES--PRINCIPAL COMPETITORS
- -------------------------------------------------------------
<S> <C>
CABIN MANAGEMENT GROUP
INTERIOR FURNISHINGS
- Aviart
- Custom Aircraft Cabinets
- Hiller
- Corporate aircraft manufacturers and independent
completion and modification companies
SEATING
- Aircraft Modular Products, a division of BE Aerospace
- ERDA
COMPOSITE COMPONENTS
- AAR
- Burnham
- Fibre Art
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
GROUP--PRINCIPAL PRODUCTS AND SERVICES--PRINCIPAL COMPETITORS
- -------------------------------------------------------------
<S> <C>
- Plastic Fab
- Sealed Composites Works
- The Nordam Group
ENTERTAINMENT AND CABIN CONTROL SYSTEMS
- Aerospace Lighting
- Baker Electronics
- DPI Labs
- Grimes Aerospace
- Nellcor Puritan Bennett
- Air Show / Pacific Systems
SPECIALTY AVIONICS GROUP
COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND
CONTROL DEVICES
- Becker Avionics
- Crane ELDEC
- Diehl GmbH
- Gables Engineering
- Page Aerospace
ELECTRICAL CONTACTS
- Amphenol
- Deutsch Engineered Connecting Devices, a division of
Deutsch
CONNECTORS AND HARNESS ASSEMBLIES
- AMP (connectors)
- Electronic Cable Specialists (harness assemblies)
- ITT Cannon (connectors)
- Radiall S.A. (connectors)
LIQUID CRYSTAL DISPLAY DEVICES
- Cristalloid
SYSTEMS INTEGRATION GROUP
AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS
- Allied Signal (power units)
- Marshall Engineering (fuel systems)
INTEGRATION OF CABIN AND FIGHT DECK SYSTEMS
- Electronic Cable Specialists (avionics support
structures)
- Engineering departments of airlines
- Numerous independent airframe maintenance and
modification companies
</TABLE>
BACKLOG
As of September 30, 1999, we had an aggregate sales order backlog of
$150.8 million compared to $143.9 million as of December 31, 1998, all on a pro
forma basis. Orders are generally filled within twelve months; however, our
orders are generally subject to cancellation by the customer prior to shipment.
The level of unfilled orders at any given date will be materially affected by
when we receive orders and how fast we fill them. Period-to-period comparisons
of backlog figures may not be meaningful. For that reason, our backlogs do not
necessarily accurately predict actual shipments or sales for any future period.
EMPLOYEES
As of December 31, 1999, we had 2,536 employees, of whom 1,997 were in
manufacturing operations, 261 were in engineering, 183 were in finance and
administration and 95 were in sales. The foregoing numbers include 83 temporary
employees but do not reflect the anticipated employee reductions resulting from
the Hollingsead and Elsinore Engineering restructuring. None of our employees is
subject to a collective bargaining agreement, and we have not experienced any
material business interruption as a result of labor disputes since DeCrane
Aircraft was formed. We believe that we generally have a good relationship with
our employees.
FACILITIES
Our principal facilities are described in the following table. We believe
that our facilities are in good condition and are adequate to support our
operations for the foreseeable future.
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE LEASE
LOCATION FACILITY DESCRIPTION SQ. FT. EXPIRATION
- ---------------------------------------------- ---------------------------------------------- ------------ ----------
<S> <C> <C> <C>
LEASED FACILITIES
Wichita, KS (two buildings)................... Manufacturing, engineering and administration 156,500 2007
Georgetown, DE (a)............................ Manufacturing and aircraft modifications 110,000 2041
El Segundo, CA................................ Manufacturing, engineering and administration 81,300 2010
Columbia, MD.................................. Manufacturing, engineering and administration 65,923 2007
Garden Grove, CA (b).......................... Manufacturing, engineering and administration 58,303 2007
Denton, TX (three buildings).................. Manufacturing, engineering and administration 47,905 2015
Goleta, CA.................................... Engineering 33,200 2010
Wichita, KS................................... Manufacturing and administration 33,000 2009
Stuart, FL.................................... Manufacturing, engineering and administration 29,700 2008
Orlando, FL................................... Manufacturing and administration 28,500 2010
Hatfield, PA.................................. Manufacturing, engineering and administration 27,500 2002
Bioggio, Switzerland.......................... Manufacturing 21,915 2004
Denton, TX (d)................................ Manufacturing and administration 20,000 2015
Orlando, FL (c)............................... Manufacturing 20,000 2000
Mezzovico, Switzerland........................ Manufacturing 18,046 2001
Lewisville, TX (d)............................ Manufacturing 13,000 2004
Garden Grove, CA (b).......................... Warehouse 10,000 2003
Seattle, WA................................... Warehouse 10,000 2001
North Little Rock, AR (three buildings) (e)... Engineering 8,828 2000
Santa Ana, CA................................. Engineering and aircraft hanger 8,816 2000
El Segundo, CA................................ Corporate administration 7,853 2007
Anaheim, CA................................... Manufacturing 6,036 2004
Goleta, CA (b)................................ Engineering 5,816 2000
Hutchinson, KS................................ Manufacturing 5,300 2000
Bioggio, Switzerland (two buildings).......... Administration 4,660 2000
Tucson, AZ.................................... Field service office 580 2000
Quebec, Canada................................ Field service office 380 2000
Wichita, KS................................... Field service office 350 2000
Cedex, France................................. Field service office 210 2000
OWNED FACILITIES
Seattle, WA (six buildings)................... Manufacturing, engineering and administration 87,382
Pooler, GA.................................... Manufacturing and administration 24,000
North Little Rock, AR (e)..................... Manufacturing and engineering 20,000
North Little Rock, AR......................... Manufacturing, engineering and administration 18,000
OWNED AND LEASED FACILITIES--SUBLEASED TO
OTHERS
Seattle, WA (owned)........................... Office space 34,229
Santa Fe Springs, CA (leased)................. Manufacturing and office space 24,000 2000
Santa Fe Springs, CA (leased)................. Manufacturing and office space 17,600 2000
Wiltshire, United Kingdom (leased)............ Manufacturing and office space 4,823 2013
</TABLE>
- ------------------------------
(a) Includes a 25,000 square foot expansion under construction and expected to
be ready for occupancy in 2000.
(b) Will be vacated in 2000 and subleased in conjunction with the Hollingsead
and Elsinore Engineering restructuring.
(c) Will be replaced with a 33,000 square foot building under construction and
expected to be ready for occupancy in 2000; the new lease will expire in
2010.
(d) During 2000, the Lewisville, TX facility will be vacated and subleased for
the remaining lease term upon occupancy of the Denton, TX facility.
(e) A new, owned 20,000 square foot facility is under construction and expected
to be ready for occupancy in 2000; upon occupancy, the three leased
buildings will be vacated and subleased for the remainder of their lease
terms, if any.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to various federal, state, local,
and foreign environmental laws and regulations, including those relating to
discharges to air, water, and land, the handling and disposal of solid and
hazardous waste, and the cleanup of properties affected by hazardous substances.
In addition, some environmental laws, such as the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended (CERCLA) and
similar state laws, impose strict liability upon persons responsible for
releases or potential releases of hazardous substances. That liability generally
is retroactive, and may create "joint and several" liability among multiple
parties who have some relationship to a site or a source of waste. We have sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. We have received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency regarding our
use of several of those sites. In addition, some of our operations are located
on properties which are contaminated to varying degrees.
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<PAGE>
We have not incurred, nor do we expect to incur, liabilities in any
significant amount as a result of the foregoing matters, because in these cases
other entities have been held primarily responsible, the levels of contamination
are sufficiently low so as not to require remediation, or we are indemnified
against such costs. In most cases, we do not believe that we have any material
liability for past waste disposal. However, in a few cases, we do not have
sufficient information to assess our potential liability, if any. It is
possible, given the potentially retroactive nature of environmental liability,
that we will receive additional notices of potential liability relating to
current or former activities.
Some of our manufacturing processes create wastewater which requires
chemical treatment, and one of our facilities was cited for excessive quantity
and strength of its wastewater. The costs associated with remedying that failure
have not been material. In addition, volatile organic compounds were discovered
at a different facility of ours during groundwater sampling in 1998. We have
completed a voluntary cleanup program there and have received a "no further
action" letter.
We believe that we have been and are in substantial compliance with
environmental laws and regulations and that we have no liabilities under
environmental laws and regulations, except for liabilities which we do not
expect would likely have a material adverse effect on our business, financial
position, results of operations or cash flows. However, some risk of
environmental liability is inherent in the nature of our business, and we might
in the future incur material costs to meet current or more stringent compliance,
cleanup, or other obligations pursuant to environmental laws and regulations.
See "Risk Factors--Environmental Risks and Regulations."
LEGAL PROCEEDINGS
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board (TSB) notified us that they recovered burned wire which was attached to
the in-flight entertainment system installed on some of Swissair's aircraft by
one of our subsidiaries. We are fully cooperating with the on-going TSB
investigation. Although the TSB has not issued a final report, it has advised us
that it has no evidence to date that the system we installed malfunctioned or
failed during the flight. Families of the 229 persons who died aboard the flight
have filed actions in federal and state courts against us, and many other
parties unaffiliated with us, including Swissair and Boeing. The actions claim
negligence, strict liability and breach of warranty relating to the installation
and testing of the in-flight entertainment system. The actions seek compensatory
and punitive damages and costs in an unstated amount. We intend to defend the
claims vigorously.
We are a party to a license agreement with McDonnell Douglas (now a part of
Boeing) pursuant to which we may request specified data in order to design and
market modifications to aircraft manufactured by McDonnell Douglas. Under the
agreement, we are to pay McDonnell Douglas a royalty of five percent of the net
sales price of all modifications sold by us for which we have requested data
from McDonnell Douglas. We requested data for a single modification, which we
believe is exempt from the agreement's provision requiring royalties. In 1996,
McDonnell Douglas made a demand for $650,000 for royalties. We do not believe
that we are obligated to McDonnell Douglas in any amount. However, if the claim
is asserted, and if we are unsuccessful in defending it, we may be required to
pay royalties to McDonnell Douglas.
We are party to other litigation incident to the normal course of business.
We do not believe that the outcome of any of such other matters in which we are
currently involved will have a material adverse effect on our financial
condition or results of operations.
WHERE YOU CAN GET MORE INFORMATION
Any registered purchaser may request from us any information it wishes in
order to verify the information in this prospectus. Apart from this prospectus
and any responses we make to those requests, no-one is authorized to give
information about this exchange offer or the notes on our behalf.
We have filed with the Securities and Exchange Commission a registration
statement on the SEC's Form S-1, to register the new notes. This prospectus is
an update of that registration statement. However, the registration statement
has additional information which is not included here, in accordance with SEC
rules. Our descriptions and statements about any contract or other document in
this prospectus are summaries only, and, in each instance, reference is made to
a copy of such contract or other document filed as an exhibit to the
registration statement, each such description or statement being qualified in
all respects
47
<PAGE>
by such reference. We are required to attach copies of our material contracts
and documents as exhibits to the registration statement we filed with the SEC.
We became a reporting company as a result of the registration of the notes,
and file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our fiscal year ends on December 31. You may read and
copy any reports, statements or other information we file with the SEC at the
SEC's reference room in Washington D.C. Please call the SEC at (202) 942-8090
for further information on the operation of the reference rooms. You can also
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC, or review our SEC filings on the SEC's EDGAR web site, which can be
found at http\\www.sec.gov. You may also write or call us at our corporate
headquarters located at 2361 Rosecrans Avenue, Suite 180, El Segundo, California
90245. Our telephone number is (310) 725-9123.
48
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each person
who is currently a director or executive officer of DeCrane Aircraft. Each
director also serves as a director of DeCrane Holdings.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------------------- --------
<S> <C> <C>
R. Jack DeCrane........................... 53 Director and Chief Executive Officer
Charles H. Becker......................... 54 Senior Vice President and Group President
Richard J. Kaplan......................... 56 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Robert G. Martin.......................... 62 Senior Vice President and Group President
Jeffrey A. Nerland........................ 42 Vice President, Business Development
Jeffrey F. Smith.......................... 39 Senior Vice President and Group President
Thompson Dean............................. 41 Chairman of the Board of Directors
John F. Fort, III......................... 58 Director
Dr. Robert J. Hermann..................... 66 Director
Dr. Paul G. Kaminski...................... 57 Director
Susan C. Schnabel......................... 38 Director
Timothy J. White.......................... 38 Director
</TABLE>
R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as
President since it was founded in December 1989 until April 1993 when he was
elected to the newly-created office of Chief Executive Officer. Prior to
founding our company, Mr. DeCrane held various positions at the aerospace
division of B.F. Goodrich. Mr. DeCrane was a Group Vice President at the
aerospace division of B.F. Goodrich with management responsibility for three
business units from 1986 to 1989. He has served on our board of directors since
its inception.
CHARLES H. BECKER has been our Senior Vice President and President of the
Cabin Management Group since October 1999. Mr. Becker previously served as
President and Chief Operating Officer of DeCrane Aircraft from April 1998 to
October 1999, Group Vice President of Components of DeCrane Aircraft from
December 1996 to April 1998, and President of Tri-Star from December 1994 to
April 1998. Prior to joining us, Mr. Becker was President of the Interconnect
Systems Division of Microdot, Inc., a manufacturer of contacts and connectors
for aerospace applications, from 1984 to 1994.
RICHARD J. KAPLAN has been the Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of DeCrane Aircraft since March 1999. From
April 1998 to March 1999, he served as Executive Vice President and Chief
Operating Officer of Developers Diversified Realty Corporation. From 1977 to
1998, he was a partner with Price Waterhouse LLP, having joined the firm in
1964.
ROBERT G. MARTIN has been our Senior Vice President and President of the
Systems Integration Group since October 1999 and President of PATS since we
acquired it in January 1999. Mr. Martin also served as President of Aerospace
Display Systems from September 1996 until October 1999. Prior to our acquisition
of Aerospace Display Systems in 1996, Mr. Martin had served as its President
since 1992.
JEFFREY A. NERLAND has been our Vice President, Business Development, since
January 1999. From July 1994 through December 1998, he was President of The
Nerland Group and a partner with Budetti, Harrison, Nerland and Associates, a
consulting and interim management firm. Previously, Mr. Nerland was a director
with Kibel, Green Inc., a consulting firm.
JEFFREY F. SMITH has been our Senior Vice President and President of the
Specialty Avionics Group since October 1999 and President of Avtech since we
acquired it in June 1998. Previously, he has served in various capacities with
Avtech since 1989.
THOMPSON DEAN has been the Managing Partner of DLJ Merchant Banking, Inc.
since November 1996. Previously, Mr. Dean was a Managing Director of DLJ
Merchant Banking, Inc. and its predecessor. Mr. Dean serves as a director of
Commvault Inc., Von Hoffman Press, Inc., Manufacturer's Services Limited, Phase
Metrics, Inc., AKI Holding Corp. and Insilco Holding Corporation. He became a
director in 1998.
JOHN F. FORT, III served as Chairman of the Board of Directors of Tyco
International, Inc. from 1982 to December 1992, and as Chief Executive Officer
from 1982 to June 1992. Mr. Fort serves as a director of Tyco International,
Inc., Dover Corporation and Roper Industries. He became a director in 1998.
DR. ROBERT J. HERMANN is a Senior Partner of Global Technology Partners.
Dr. Hermann most recently served as Senior Vice President for Science and
Technology at United Technologies Corporation and served
49
<PAGE>
in various other capacities at United Technologies Corporation since 1982. Prior
to joining United Technologies Corporation, Dr. Hermann spent 20 years with the
National Security Agency. In 1977 he was appointed Principal Deputy Assistant
Secretary of Defense for Communications, Command, Control and Intelligence, and
in 1979 was named Assistant Secretary of the Air Force for Research, Development
and Logistics and Director of the National Reconnaissance Office. He became a
director in 1998.
DR. PAUL G. KAMINSKI is a Senior Partner of Global Technology Partners.
Dr. Kaminski currently serves as Chief Executive Officer of Technovation, Inc.,
a consulting firm focusing on business strategy and advanced technology.
Dr. Kaminski served as U.S. Undersecretary of Defense for Acquisition and
Technology from October 1994 to 1997. Prior to that time, he served as Chairman
and Chief Executive Officer of Technology Strategies and Alliances.
Dr. Kaminski is a former Chairman of the Defense Science Board and is currently
a member of the Senate Select Committee on Intelligence-Technical Advisory
Group, the NRO Advisory Council and the National Academy of Engineering.
Dr. Kaminski is a director of General Dynamics Corporation, Dyncorp,
Eagle-Picher Technologies and several privately held information technology
companies. He became a director in 1998.
SUSAN C. SCHNABEL has been a Managing Director of DLJ Merchant
Banking, Inc. since January 1998. In 1997, she served as Chief Financial Officer
of PETsMART, a specialty retailer of pet products and supplies. From 1990 to
1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation,
where she became a Managing Director in 1996. Ms. Schnabel serves as a director
of Dick's Clothing and Sporting Goods, Environmental Systems Products and
Wavetek Corporation. She became a director in 1998.
TIMOTHY J. WHITE has been a Vice President of DLJ Merchant Banking, Inc.
since June 1998. From October 1994 to May 1998, Mr. White was an Associate and
Vice President at Donaldson, Lufkin & Jenrette Securities Corporation. From
May 1994 to October 1994, Mr. White was an Associate Counsel in the Office of
the Independent Counsel, United States Department of Justice. Prior to that
time, Mr. White was an attorney with Davis Polk & Wardwell. He became a director
in 1998.
An agreement entered into in connection with the DLJ acquisition entitled a
holding company controlled by DLJ Merchant Banking Partners II, L.P. to
designate a number of directors proportionally commensurate with its stock
ownership of DeCrane Aircraft. DeCrane Holdings selected all of the current
members of the Board of Directors of DeCrane Aircraft. DLJ Merchant Banking or
its designate selected all of the members of the Board of Directors of DeCrane
Holdings.
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to our Chief Executive Officer and the four most highly compensated
executive officers other than the Chief Executive Officer for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER
ANNUAL SECURITIES
COMPENSATION UNDERLYING OTHER
YEAR SALARY BONUS (1) OPTIONS(2) (3)
---- -------- ---------- ------- ------------------------ -------
R. Jack DeCrane............................. 1999 $334,791 $ 700,000 $30,873 106,877 $ 9,025
Chief Executive Officer 1998 281,761 1,044,000 30,151 50,000 34,064
and Director(4) 1997 244,744 220,000 -- 50,000 29,411
Charles H. Becker........................... 1999 $235,000 $ 210,000 $19,158 26,719 --
Senior Vice President(5) 1998 206,948 160,000 14,678 -- --
1997 174,492 102,000 6,168 15,000 $18,000
Richard J. Kaplan........................... 1999 $158,333 $ 258,000 $13,572 28,669 --
Senior Vice President(6) 1998 -- -- -- -- --
1997 -- -- -- -- --
Robert G. Martin............................ 1999 $187,500 $ 209,000 $ 1,300 17,813 --
Senior Vice President(7) 1998 172,000 66,000 1,300 -- --
1997 130,000 66,000 1,300 10,000 --
Jeffrey A. Nerland.......................... 1999 $160,000 $ 181,000 $ 6,366 10,688 --
Vice President(8) 1998 -- -- -- -- --
1997 -- -- -- -- --
</TABLE>
- ------------------------
(1) Amounts paid by us for premiums on health, life and long-term disability
insurance and automobile leases provided by us for the benefit of the named
executive officer.
50
<PAGE>
(2) Number of shares of common stock of DeCrane Holdings issuable upon exercise
of options granted pursuant to our management incentive plan during the last
fiscal year.
(3) Relocation costs.
(4) Mr. DeCrane also served as Chairman of the Board of Directors through
August 1998.
(5) Mr. Becker served as Group Vice President of Components, and President of
Tri-Star, through April 1998. Mr. Becker became President and Chief
Operating Officer in April 1998 and Senior Vice President and Group
President of Cabin Management in October, 1999.
(6) Mr. Kaplan joined DeCrane Aircraft as Senior Vice President on March 15,
1999.
(7) Mr. Martin served as President Aerospace Display Systems from September 1996
until October 1999. Mr. Martin has been President of PATS since we acquired
it in January 1999, and became our Senior Vice President and Group President
of Systems Integration in October 1999.
(8) Prior to Mr. Nerland joining DeCrane Aircraft on January 1, 1999, he
provided consulting services to us during 1998 for which either Mr. Nerland
or The Nerland Group, of which Mr. Nerland was a principal, was paid a total
of $127,800 in 1998 and early 1999, which amount has been excluded from the
table above.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of options to purchase
shares of DeCrane Holdings common stock granted to the executive officers named
below during the fiscal year ended December 31, 1999, pursuant to the management
incentive plan. See "Employment Agreements and Compensation
Arrangements--INCENTIVE PLANS."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES ANNUAL RATES OF STOCK
UNDERLYING % OF EXERCISE OR PRICE APPRECIATION (1)
OPTIONS OPTIONS BASE PRICE EXPIRATION -----------------------
NAME GRANTED GRANTED PER SHARE DATE 5% 10%
- ---- ---------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane............................ 106,877 38.2% $23.00 2009 $1,545,931 $3,917,691
Charles H. Becker.......................... 26,719 9.6 23.00 2009 386,479 979,414
Richard J. Kaplan.......................... 28,669 10.3 23.00 2009 414,685 1,050,893
Robert G. Martin........................... 17,813 6.4 23.00 2009 257,657 652,955
Jeffrey A. Nerland......................... 10,688 3.8 23.00 2009 154,597 391,780
</TABLE>
- ------------------------
(1) The potential realizable value assumes stock price appreciation rates of 5%
and 10%, compounded annually, from the date the option was granted over the
full option term. These assumed annual compound rates are mandated by the
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future prices of the stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No stock options were exercised by our executive officers during the year
ended December 31, 1999. The following tables sets forth information about the
stock options held by the executive officers named below as of December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR-END(1)
- ---- ------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
R. Jack DeCrane......................................... 22,712/84,165 --/--
Charles H. Becker....................................... 5,678/21,041 --/--
Richard J. Kaplan....................................... 6,092/22,577 --/--
Robert G. Martin........................................ 3,785/14,028 --/--
Jeffrey A. Nerland...................................... 2,271/8,417 --/--
</TABLE>
- ------------------------
(1) No options were in-the-money based on the common stock share price of $23.00
per share as of December 31, 1999, the measuring date.
51
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors makes decisions regarding officer compensation as a
committee of the whole. R. Jack DeCrane, chief executive officer of DeCrane
Aircraft, participates in those discussions as a member of the Board of
Directors.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
R. JACK DECRANE
On July 17, 1998, the Compensation Committee of our Board of Directors
approved a three-year employment agreement between DeCrane Aircraft and R. Jack
DeCrane, replacing his prior employment agreement that was to expire on
September 1, 1998. Mr. DeCrane's employment agreement provides for various
benefits, including:
- an initial salary of $310,000, which is subject to annual review and
increase, but not decrease;
- an annual bonus, currently determined pursuant to the performance-based
cash incentive bonus plan;
- a $500,000 bonus in recognition of our then-recent acquisition of Avtech
Corporation;
- a $250,000 signing bonus;
- options to purchase 50,000 shares of common stock of DeCrane Aircraft at a
price equal to the fair market value of the shares as of July 16, 1998,
one-half of which were immediately exercisable; the rest became
exercisable upon the completion of the DLJ acquisition; and
- a $150,000 cash continuation bonus payable on January 2, 1999, if employed
by us on January 1, 1999.
Mr. DeCrane's options were cancelled in August 1998 and he received a cash
payout in lieu of the options.
The employment agreement also provides that if specified change-of-control
events occur, and Mr. DeCrane's employment is terminated by us for any reason
other than for cause or as a result of his death or disability, or by
Mr. DeCrane for "good reason," as defined in the agreement, then we will pay
Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment
will be $1.00 less than three times the sum of Mr. DeCrane's average base salary
plus bonus for the five calendar years preceding his termination date and
accrued but unpaid salary and bonus through the termination date. Mr. DeCrane
will also receive other specified benefits, including continued coverage under
our welfare plans for up to two years; a lump sum payment in cash equal to any
unvested portions of our contributions to him under specified savings plans,
plus two times the amount of our annual contributions on his behalf to those
plans; a lump sum payment in cash equal to our matching contributions under
those savings plans that Mr. DeCrane would have received had he continued
maximum participation in the plans until the earlier of two years following his
termination and December 31 of the year he turns 65, plus the vested and
unvested amounts credited to him under any of our deferred compensation plans
and the amount required to be credited during the year of his termination; and
outplacement consulting services to aid Mr. DeCrane with re-employment. We will
reduce these payments to the extent necessary to ensure deductibility for tax
purposes.
ROBERT G. MARTIN
We entered into an employment agreement with Robert G. Martin, Senior Vice
President of DeCrane Aircraft and President of the Systems Integration Group on
September 10, 1999, amending his prior employment agreement dated September 19,
1996. Mr. Martin's employment agreement provides for an annual salary of
$210,000 and an annual bonus determined pursuant to the performance-based cash
incentive bonus plan. Mr. Martin's employment agreement expires on December 31,
2001, and DeCrane Aircraft may terminate the agreement at any time for cause or
if Mr. Martin otherwise breaches the agreement or in the event of Mr. Martin's
death or disability.
JEFFREY F. SMITH
We entered into an employment agreement with Jeffrey F. Smith, Vice
President and General Manager of our Avtech subsidiary, on June 26, 1998.
Mr. Smith's employment agreement provides for an annual salary, initially in the
amount of $145,000 and an annual bonus currently determined pursuant to the
performance-based cash incentive bonus plan. Mr. Smith's employment agreement
expires on June 30, 2000, and Avtech may terminate the agreement at any time for
cause or in the event of Mr. Smith's death or disability. If Mr. Smith's
employment is terminated without cause, Mr. Smith is entitled to receive
severance compensation in an amount equal to his base salary plus his
anticipated bonus for the year in which he resigns.
52
<PAGE>
401(K) RETIREMENT PLAN
Substantially all of our full-time employees are eligible to participate in
one of six 401(k) retirement plans we sponsor. The 401(k) plans allow employees
as participants to defer, on a pre-tax basis, a portion of their salary and
accumulate tax deferred earnings, as a retirement fund. Effective October 1,
1997, we matched 25% of the employee contribution up to 6% of the employee's
salary for the fourth quarter of 1997 and each quarter of 1998. Currently, the
plans generally provide for us to match 50% of the employee contribution for up
to 6% of the employee's salary. The full amount vested in a participant's
account will be distributed to a participant following termination of
employment, normal retirement or in the event of disability or death.
INCENTIVE PLANS
Our management incentive plan provides for the issuance of options to
purchase the common stock of DeCrane Holdings as incentive compensation to
designated executive personnel and other key employees of DeCrane Aircraft and
its subsidiaries, in amounts determined by the plan's committee from time to
time. The management incentive plan is administered by a committee appointed by
the Board of Directors of DeCrane Holdings. The plan provides for the granting
of options to purchase 356,257 common shares and expires in 2009. Generally, ten
percent of the options awarded to each plan participant vest immediately, and
the remaining ninety percent of each participant's options will vest at a later
date. The options generally vest based upon future attainment of defined
performance criteria, although alternate vesting schedules may be authorized by
the committee appointed by the Board of Directors of DeCrane Holdings to
administer the plan. As of the date of this prospectus, options to purchase
279,662 shares at $23.00 per shares have been granted, of which options to
purchase approximately 28,000 shares vested immediately. We believe the per
share exercise price of the options granted approximated the fair market value
of the underlying common stock on the grant date.
Our stock purchase plan provides for the purchase of shares of common stock
of DeCrane Holdings by designated executive personnel and other key employees of
DeCrane Aircraft and its subsidiaries, with a portion of the purchase price to
be loaned to the participants by DeCrane Aircraft. This arrangement was made
available to persons and in amounts determined by the committee appointed by the
Board of Directors of DeCrane Holdings to administer the plan. In December 1999,
management purchased 171,295 shares of DeCrane Holdings common stock for $23.00
per share. The total purchase price was $3.9 million, of which one-half was paid
in cash at closing and one-half was loaned to management by DeCrane Aircraft
with interest at applicable federal rates.
Our cash incentive bonus plan provides for the allocation of a bonus pool
each year for incentive compensation to designated executive personnel and other
key employees of DeCrane Aircraft and its subsidiaries. The bonus pool for
participants will be adjusted upwards or downwards each year based on EBITDA and
cash flow, as defined, generated by the relevant participant's operating unit.
Bonus payments will be made in the quarter following the end of the year or
period to which they relate and have been approved.
DIRECTORS' COMPENSATION
The directors of DeCrane Aircraft generally do not receive annual fees or
fees for attending meetings of the Board of Directors of DeCrane Aircraft or
committees thereof. However, John F. Fort, III, an independent director not
affiliated with any investor in DeCrane Holdings, receives a director's fee of
$5,000 for each meeting attended. In addition, the Board of Directors of DeCrane
Holdings extended the management incentive plan to independent non-management
directors, and issued options to purchase 3,260 shares of DeCrane Holdings
common stock to Mr. Fort under the terms of the management incentive plan. See
"Related Party Transactions." Also, all directors are reimbursed for
out-of-pocket expenses. We expect to continue those policies. DeCrane Holdings
does not compensate or intend to compensate its directors.
53
<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND MANAGEMENT
All of the 100 outstanding shares of common stock of DeCrane Aircraft are
owned by DeCrane Holdings. DeCrane Aircraft has no other class of stock
outstanding. DeCrane Holdings has 3,571,827 shares of common stock issued and
outstanding, which are owned by 33 shareholders, and 342,417 shares of 14%
Senior Redeemable Exchangeable Preferred Stock due 2008 issued and outstanding
as of December 31, 1999. The following table sets forth the beneficial ownership
of DeCrane Holdings' voting securities as of December 31, 1999 by its principal
owners and our executive officers and directors.
<TABLE>
<CAPTION>
COMMON STOCK(2) 14% SENIOR REDEEMABLE
------------------------- EXCHANGEABLE PREFERRED
NUMBER OF STOCK DUE 2008
SHARES, -------------------------
PARTIALLY NUMBER OF
NAME OF BENEFICIAL OWNER (1) DILUTED PERCENTAGE SHARES PERCENTAGE
- ---------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P., and
affiliates(3)..................................... 3,519,565 94.6% 340,000 99.3%
Thompson Dean(4).................................... -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue
New York, New York 10172
Susan C. Schnabel(4)................................ -- -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue New York, New York 10172
Timothy J. White(4)................................. -- -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue
New York, New York 10172
Global Technology Partners, LLC(5).................. -- -- -- --
1300 I Street N.W.
Washington, D.C.
Dr. Robert J. Hermann(5)............................ 9,561 * 714 *
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
Dr. Paul G. Kaminski(5)............................. 9,561 * 714 *
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
John F. Fort, III(6)................................ 1,087 * -- --
R. Jack DeCrane(7).................................. 79,233 2.2% -- --
Charles H. Becker(8)................................ 23,069 * -- --
Richard J. Kaplan(9)................................ 27,831 * -- --
Robert G. Martin(10)................................ 8,132 * -- --
Jeffrey A. Nerland(11).............................. 8,792 * -- --
Jeffrey A. Smith(12)................................ 12,480 * -- --
All directors and named executive officers as a
group
(12 persons)...................................... 179,746 5.0% 1,428 *
</TABLE>
- ------------------------
* Less than 1.0%
(1) Each person who has the power to vote and direct the disposition of shares
is deemed to be a beneficial owner of those shares.
(2) The common stock columns reflect the number of shares owned and the total
percentage ownership in the manner required by Securities and Exchange
Commission rules. The entries for each holder assumes, if applicable, that
the particular holder, and no one else, fully exercises all rights under
warrants to purchase common stock and common stock which may be acquired
upon the exercise of stock options which are exercisable or will be
exercisable prior to 60 days from December 31, 1999.
(3) Reflects 3,369,565 shares and warrants for the issuance of an additional
150,000 shares, held directly by DLJ Merchant Banking Partners II, L.P. and
the following related investors: DLJ Merchant Banking
54
<PAGE>
Partners II-A, L.P.; DLJ Offshore Partners II, C.V.; DLJ Diversified
Partners, L.P.; DLJ Diversified Partners-A, L.P.; DLJ Millennium Partners,
L.P.; DLJ Millennium Partners-A, L.P.; DLJMB Funding II, Inc.; UK
Investment Plan 1997 Partners, Inc.; DLJ EAB Partners, L.P.; DLJ First ESC
L.P. and DLJ ESC II L.P. See "Related Party Transactions" and "Plan of
Distribution." The address of DLJ Offshore Partners II, C.V. is John B.
Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of UK
Investment Plan 1997 Partners, Inc. is 2121 Avenue of the Stars, Fox Plaza,
Suite 3000, Los Angeles, California 90067. The address of each of the other
persons is 277 Park Avenue, New York, New York 10172.
(4) Messrs. Dean and White and Ms. Schnabel are officers of DLJ Merchant
Banking, Inc., an affiliate of Merchant Banking Partners II, L.P. as well
as Donaldson, Lufkin & Jennette Securities Corporation. The share data
shown for these individuals excludes shares shown as held by the DLJ
affiliates separately listed in this table; Messrs. Dean and White and
Ms. Schnabel disclaim beneficial ownership of those shares.
(5) Messrs. Hermann and Kaminski are members of Global Technology Partners,
LLC. Six members of Global Technology Partners, including Messrs. Hermann
and Kaminski, acquired 30,967 shares of DeCrane Holdings common stock and
2,417 shares of DeCrane Holdings 14% Senior Redeemable Exchangeable
Preferred Stock due 2008, in transactions negotiated with DeCrane Holdings.
The share data shown for Global Technology Partners and Messrs. Hermann and
Kaminski excludes shares shown as held by the individual members; Messrs.
Hermann and Kaminski disclaim beneficial ownership in any of the shares
held by the other members.
(6) Includes 1,087 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(7) Includes 22,712 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(8) Includes 5,678 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(9) Includes 6,092 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(10) Includes 3,785 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(11) Includes 2,271 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(12) Includes 3,785 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
DeCrane Holdings is authorized to issue an aggregate of 4,500,000 shares of
DeCrane Holdings common stock, par value $.01 per share, of which 3,571,827 are
outstanding, excluding 305,000 reserved for issuance upon exercise of
outstanding warrants and 400,869 reserved for issuance upon exercise of stock
options outstanding. DeCrane Holdings is authorized to issue up to 2,500,000
shares of DeCrane Holdings preferred stock, par value $.01 per share, in one or
more series, of which 342,417 are outstanding. For a full description of DeCrane
Holdings' capital stock, please review DeCrane Holdings' Certificate of
Incorporation and Certificate of Designation for its 14% Senior Redeemable
Exchangeable Preferred Stock due 2008. You can obtain a copy from us or from the
exhibits to the registration statement of which this prospectus is a part. See
"Where You Can Obtain More Information" at the end of "Business."
55
<PAGE>
RELATED PARTY TRANSACTIONS
In August 1998, DeCrane Holdings, a holding company organized by DLJ
Merchant Banking Partners, II, L.P. and several affiliates acquired all our
then-outstanding common stock. An agreement entered into in connection with the
DLJ acquisition entitled a holding company controlled by DLJ Merchant Banking
Partners II, L.P. to designate a number of directors proportionally commensurate
with its stock ownership of DeCrane Aircraft. DeCrane Holdings selected all of
the current members of the Board of Directors of DeCrane Aircraft. DLJ Merchant
Banking or its designate selected all of the members of the Board of Directors
of DeCrane Holdings.
We also entered into certain financing arrangements in connection with the
DLJ Acquisition. DLJ Capital Funding, Inc., another DLJ affiliate of DLJ
Merchant Banking, received customary fees and reimbursement of expenses in
connection with the arrangement and syndication of our previous bank credit
facility and as a lender thereunder. Donaldson, Lufkin & Jenrette Securities
Corporation, which is also an affiliate of DLJ Merchant Banking, acted as the
initial purchaser of the old notes and is the sole market-maker for the notes.
In addition, DeCrane Aircraft is obligated to pay DLJ Securities Corporation an
annual advisory fee of $300,000 until 2003. We may from time to time enter into
other investment banking relationships with DLJ Securities Corporation or one of
its affiliates pursuant to which DLJ Securities Corporation or its affiliate
will receive customary fees and will be entitled to reimbursement for all
reasonable disbursements and out-of-pocket expenses incurred in connection
therewith. We expect that any such arrangement will include provisions for the
indemnification of DLJ Securities Corporation against liabilities, including
liabilities under the federal securities laws.
In connection with the DLJ acquisition, an Investors' Agreement dated as of
August 28, 1998, and amended as of October 2, 1998, was entered into among
DeCrane Holdings, DLJ Merchant Banking and its affiliates which hold DeCrane
Holdings stock. It provides that:
- Any person acquiring shares of common stock or preferred stock of DeCrane
Holdings who is required by the terms of the Investors' Agreement or any
employment agreement or stock purchase, option, stock option or other
compensation plan of DeCrane Holdings to become a party thereto shall
execute an agreement to become bound by the Investors' Agreement and
thereafter shall be bound by it.
- Transfers of the shares of DeCrane Holdings common stock and preferred
stock by the parties to the agreement are restricted.
- Parties to the agreement may participate in some specific kinds of sales
of shares of DeCrane Holdings' common stock by the DLJ affiliates.
- The DLJ affiliates may require the other parties to the agreement to sell
shares of DeCrane Holdings' common stock in some cases should the DLJ
affiliates choose to sell any such shares owned by them.
- The DLJ affiliates may request six demand registrations with respect to
the warrants for DeCrane Holdings common stock held by DLJ Merchant
Banking and the common stock and preferred stock held by those affiliates,
which are immediately exercisable subject to customary deferral and
cutback provisions.
- The parties to the agreement are entitled to unlimited piggyback
registration rights, subject to customary cutback provisions, and
excluding registrations of shares issuable in connection with any employee
stock options, employee benefit plan or an acquisition.
- DeCrane Holdings will indemnify the shareholders against some liabilities
and expenses, including liabilities under the Securities Act.
- The DLJ affiliates have the right to appoint all of the members of the
Boards of Directors of DeCrane Holdings and DeCrane Aircraft, and at least
one of such directors on each board will be an independent director.
Messrs. Hermann, Kaminski and Fort are independent directors.
Each warrant for DeCrane Holdings common stock held by the DLJ affiliates
entitles the holder thereof to purchase one share of common stock at an exercise
price of not less than $0.01 per share subject to customary antidilution
provisions and other customary terms. Those DLJ warrants are exercisable at any
time prior to 5:00 p.m. New York City time on August 28, 2009, subject to
applicable federal and state securities laws.
56
<PAGE>
In connection with the DLJ acquisition, seven members of Global Technology
Partners, LLC, including Messrs. Hermann and Kaminski, were granted options to
purchase 44,612 shares of DeCrane Holdings common stock effective July 30, 1999.
The options vest over a three-year period, subject to acceleration if the
foregoing DLJ affiliates sell any of their shares of common stock. Those options
will be exercisable at an exercise price equal to the price paid for DeCrane
Holdings common stock by DLJ Merchant Banking and its affiliates. In December
1998, six members of Global Technology Partners, including Messrs. Hermann and
Kaminski, purchased for approximately $704,000, newly issued shares of preferred
and common stock of DeCrane Holdings. DeCrane Aircraft loaned one-half of the
purchase price for such shares to those members with interest at applicable
federal rates. The loans are repayable out of the proceeds from the sale of such
stock and are secured by such stock. DeCrane Holdings has indemnified Global
Technology Partners against some claims and liabilities including, liabilities
under the Securities Act.
The Board of Directors of DeCrane Holdings extended the management incentive
plan to independent non-management directors, and issued options to purchase
3,260 shares of DeCrane Holdings common stock to Mr. Fort, the only director
presently qualifying for such plan.
In connection with our acquisition of PPI in April 1999, DLJ Merchant
Banking invested an additional $12.5 million of capital in DeCrane Holdings by
purchasing 543,478 additional shares of its common stock, for $23.00 per share.
DeCrane Holdings, in turn, contributed the proceeds to DeCrane Aircraft. Three
members of Global Technology Partners, including Messrs. Hermann and Kaminski,
also purchased 10,869 newly issued shares of DeCrane Holdings common stock at
$23.00 per share. DeCrane Aircraft loaned one-half of the purchase price for
such shares to those members with interest at applicable federal rates. The
loans are repayable out of the proceeds from the sale of such stock and are
secured by such stock.
In December 1999, management purchased 171,295 shares of DeCrane Holdings
common stock for $23.00 per share. The total purchase price was $3.9 million, of
which one-half was paid in cash at closing and one-half was loaned to management
by DeCrane Aircraft with interest at applicable federal rates. The loans are
repayable out of the proceeds from the sale of such stock and are secured by
such stock.
The following table sets forth all indebtedness owed to us by our executive
officers and directors which individually exceed $60,000 as required by the
rules of the Securities and Exchange Commission. All indebtedness set forth
below results from the above-described purchases of DeCrane Holdings preferred
and common stock and is payable to DeCrane Aircraft. The indebtedness, plus
accrued interest, is payable upon the sale of the DeCrane Holdings stock held as
collateral for each of the loans. See "Management" for information regarding
each individual's relationship with DeCrane Aircraft and DeCrane Holdings.
<TABLE>
<CAPTION>
TOTAL INDEBTEDNESS TO DECRANE AIRCRAFT
NUMBER OF SHARES AS OF DECEMBER 31, 1999
HELD AS COLLATERAL(A) ----------------------------------------
--------------------- INTEREST ACCRUED
NAME PREFERRED COMMON RATE(B) PRINCIPAL(C) INTEREST(D) TOTAL(E)
- ---- --------- --------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane......................... -- 56,521 5.74% $649,991 $1,124 $651,115
Charles H. Becker....................... -- 17,391 5.74 199,996 346 200,342
Richard J. Kaplan....................... -- 21,739 5.74 249,998 432 250,430
Jeffrey A. Nerland...................... -- 6,521 5.74 74,991 130 75,121
Jeffrey F. Smith........................ -- 8,695 5.74 99,992 173 100,165
Dr. Robert J. Hermann................... 714 13,184 (f) 145,664 5,375 151,039
Dr. Paul G. Kaminski.................... 714 13,184 (f) 145,664 5,375 151,039
</TABLE>
- ------------------------
(a) Reflects the number of shares of DeCrane Holdings preferred and common stock
held by DeCrane Aircraft as collateral for the loans.
(b) Reflects the applicable federal rate of interest charged on the loans.
Interest is compounded annually.
(c) Reflects the original principal amount of the loans.
(d) Reflects accrued interest payable through December 31, 1999.
(e) Reflects the maximum amount of indebtedness during the year ended
December 31, 1999.
(f) Loans in the principal amount of $104,000 are at 4.33% and loans in the
principal amount of $41,664 are at 5.54%.
57
<PAGE>
DESCRIPTION OF BANK CREDIT FACILITY
The bank credit facility is provided by a syndicate of lenders led by DLJ
Securities Corporation, as arranger, DLJ Capital Funding, as syndication agent
and Bank One, as administrative agent. The bank credit facility presently
includes a $215 million term loan facility and a $50.0 million revolving credit
facility, under which up to $10.0 million in letters of credit may be issued.
The term loan facility is comprised of a Term A facility in the amount of $40.0
million which matures on September 30, 2004, a Term B facility in the amount of
$65.0 million which matures on September 30, 2005, a Term C facility in the
amount of $70.0 million which matures on April 23, 2006 and a Term D facility in
the amount of $40.0 million which matures on December 17, 2006. The revolving
credit facility is comprised of an acquisition facility of $25.0 million and a
working capital facility of $25.0 million, each of which matures on September
30, 2004. Part of the working capital facility was initially used in August 1998
to finance the conversion of shares into cash in connection with the DLJ
acquisition; the remainder can be used for general corporate and working capital
purposes. The working capital facility is subject to a potential, but
uncommitted, increase of up to $20.0 million at our request at any time prior to
the 2004 maturity date. That increase will be available only if one or more
financial institutions agree, at the time of our request, to provide it.
Loans under the bank credit facility generally bear interest based on a
margin over, at our option, the base rate or the Euro-Dollar rate. The margin
for Term A loans through their maturity varies based upon DeCrane Aircraft's
ratio of total debt to EBITDA, as defined in the credit agreement, ranging from
0.0% to 1.50% over the alternate base rate and from 1.00% to 2.75% over the
reserve adjusted Euro-Dollar rate. The margin for Term B loans through their
maturity is 1.75% for base rate borrowings and 3.00% for Euro-Dollar borrowings.
The margin for Term C loans through their maturity is 2.00% for base rate
borrowings and 3.25% for Euro-Dollar borrowings. The margin for Term D loans
through their maturity is 2.5% for base rate borrowings and 3.75% for
Euro-Dollar borrowings. The applicable commitment fees are determined based on
the ratio of consolidated total debt to consolidated EBITDA of DeCrane Aircraft
and its subsidiaries as specified in the bank credit agreement, called the
"leverage ratio." We will pay commitment fees at a rate equal to 0.5% per annum
on the unused portion of the working capital facility; and at a rate equal to
0.5% or 0.75% per annum, depending upon utilization, on the unused portion of
the acquisition facility. Such fees are payable quarterly in arrears and upon
the maturity or termination of the revolving credit facility.
We will pay fees with respect to letters of credit issued hereunder equal to
0.125% per annum of the daily amount available to be drawn under such letter of
credit. We will also pay fees with respect to letters of credit issued hereunder
equal to, in the case of standby letters of credit, the applicable Euro-Dollar
rate margin for working capital loans which are Euro-Dollar rate loans and, in
the case of trade letters of credit, 1.25%, in each case multiplied by the daily
amount available from time to time to be drawn under such letter of credit. All
such fees are payable quarterly in arrears and computed on the basis of a
360-day year for the actual number of days elapsed. We will also pay documentary
and processing charges with respect to the issuance, amendment or transfer of
each letter of credit and each payment of a drawing made thereunder in
accordance with such issuing lender's standard schedule for such charges in
effect at the time of such issuance, amendment, transfer or payment.
The term loans are subject to the following amortization schedule:
<TABLE>
<CAPTION>
TERM A TERM B TERM C TERM D
YEAR LOAN LOAN LOAN LOAN
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Year 1................................... 0.00% 0.90% 1.00% 0.75%
Year 2................................... 5.00% 1.00% 1.00% 1.00%
Year 3................................... 10.00% 1.00% 1.00% 1.00%
Year 4................................... 20.00% 1.00% 1.00% 1.00%
Year 5................................... 25.00% 1.00% 1.00% 1.00%
Year 6................................... 40.00% 1.00% 1.00% 1.00%
Year 7................................... 0.00% 94.10% 94.00% 70.75%
Year 8................................... 0.00% 0.00% 0.00% 23.50%
------- ------- ------- -------
Total.................................. 100.00% 100.00% 100.00% 100.00%
======= ======= ======= =======
</TABLE>
58
<PAGE>
The bank credit facility is subject to mandatory prepayment:
- with 50% of the net cash proceeds received from the issuance of equity
securities, to the extent that the leverage ratio exceeds 3.5 to 1,
subject to certain exceptions,
- with 100% of the net cash proceeds received from the issuance of debt,
subject to certain exceptions,
- with 100% of the net cash proceeds received from permitted asset sales,
subject to certain exceptions and
- with 50% of excess cash flow (as defined in the bank credit facility) for
each fiscal year to the extent that the leverage ratio exceeds 3.5 to 1.
We are required to apply all mandatory prepayment amounts first to the
prepayment of the term loan facility, and thereafter to the prepayment of
the revolving credit facility.
DeCrane Holdings, and each of DeCrane Aircraft's wholly-owned direct and
indirect domestic operating subsidiaries, are guarantors of the bank credit
facility. Our obligations under the bank credit facility are secured by:
- all existing and after-acquired personal property of DeCrane Aircraft and
the foregoing subsidiary guarantors, including a pledge of all of the
stock of all existing or future subsidiaries of DeCrane Aircraft (provided
that no more than 65% of the voting stock of any foreign subsidiary shall
be pledged),
- first-priority perfected liens on all material existing and after-acquired
real property interests of DeCrane Aircraft and the foregoing subsidiary
guarantors, subject to customary permitted liens (as defined in the bank
credit facility),
- a pledge by DeCrane Holdings of the stock of DeCrane Aircraft, and
- a negative pledge on all assets of DeCrane Aircraft and its subsidiaries,
in each case subject to certain exceptions.
The bank credit facility contains customary covenants and restrictions on
our ability to engage in certain activities, including, but not limited to:
- limitations on other indebtedness, liens, investments and guarantees.
- restrictions on dividends and redemptions and payments on subordinated
debt.
- restrictions on mergers and acquisitions, sales of assets and leases.
- a minimum level of EBITDA, a minimum coverage ratio of interest expense.
- a minimum coverage ratio of fixed charges.
- a maximum leverage ratio.
- a maximum level of capital expenditures.
Borrowings under the bank credit facility are subject to significant
conditions, including compliance with several tests of our financial condition
and the absence of any material adverse change. These restrictions may limit our
access to borrowings, as described in "Risk Factors--Substantial Leverage."
59
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The notes have been issued pursuant to an indenture between DeCrane Aircraft
Holdings, Inc. and State Street Bank and Trust Company, as Trustee. For purposes
of this section only, "DeCrane Aircraft" and "we," "us," "our" and similar terms
refer to DeCrane Aircraft Holdings, Inc. and its successors in accordance with
the terms of the indenture and not to its subsidiaries, unless the context
otherwise requires. The terms of the notes include those stated in the
indenture, and those which are incorporated into the indenture by reference to
the Trust Indenture Act of 1939. The notes are subject to all of those terms,
and holders of notes are referred to the indenture and the Trust Indenture Act
for a statement thereof.
The terms of the new notes and the old notes are substantially the same in
all material respects, except that the new notes will not be subject to
liquidated damages penalties for failure to timely register the notes under the
Securities Act, and will be more freely transferable by the holders thereof by
reason of their registration thereunder.
You should read the entire indenture for a complete understanding of the
rights and obligations of the holders of notes. Copies of the indenture and
registration rights agreement are available as set forth under "--Additional
Information." Also, the terms of the indenture use many specially defined terms.
In this summary, we have used the key defined terms, which are shown here as
capitalized words. You should refer to the definitions listed in "--Key
Definitions" below for their complete scope and meaning.
The notes are:
- general unsecured obligations of DeCrane Aircraft;
- subordinated in right of payment to all existing and future Senior
Indebtedness of DeCrane Aircraft, including the bank credit facility;
- ranking at the same level of payment priority, sometimes called "PARI
PASSU," with any future senior subordinated Indebtedness of DeCrane
Aircraft and senior in right of payment to all future subordinated
Indebtedness of DeCrane Aircraft;
- effectively subordinated to all liabilities of DeCrane Aircraft's
subsidiaries that are not Guarantors, including trade payables;
- fully and unconditionally guaranteed on a senior subordinated basis by
DeCrane Aircraft's existing wholly-owned domestic subsidiaries, as their
general unsecured obligations, subordinated in right of payment to all
existing and future Senior Indebtedness of the Guarantors, including
indebtedness under our bank credit facility, and ranking senior in right
of payment to any future subordinated indebtedness of the Guarantors.
We may issue an unlimited amount of additional senior subordinated notes
under the indenture, so long as the total amount of debt is permitted by our
financial covenants.
On a pro forma basis, as of September 30, 1999, DeCrane Aircraft and the
Guarantors would have had outstanding approximately $216.3 million of Senior
Indebtedness and DeCrane Aircraft's non-Guarantor subsidiaries would have had
approximately $2.3 million of outstanding liabilities, including trade payables
but excluding guarantees under the bank credit facility. The indenture will
permit DeCrane Aircraft and its Subsidiaries to incur additional Indebtedness,
including Senior Indebtedness, in the future. The risk of such indebtedness to
you as an investor is described in "Risk Factors--Subordination."
As of the date of the indenture, all of DeCrane Aircraft's Subsidiaries were
designated as Restricted Subsidiaries. However, under some circumstances,
DeCrane Aircraft will be permitted to designate current or future Subsidiaries
as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
the restrictive covenants set forth in the indenture.
PRINCIPAL, MATURITY AND INTEREST
The notes will initially be limited in aggregate principal amount to
$100.0 million and will mature on September 30, 2008. Interest on the notes will
accrue at the rate of 12% per annum and will be payable semi-annually in arrears
on March 30 and September 30, commencing on March 30, 1999, to holders of record
on the immediately preceding March 15 and September 15. Interest on the notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
60
<PAGE>
Principal of, premium, if any, and interest on the notes will be payable at
the office or agency of DeCrane Aircraft maintained for such purpose in New York
City or, at the option of DeCrane Aircraft, payment of interest may be made by
check mailed to the holders of the notes at their respective addresses set forth
in the register of holders of notes. However, all payments of principal, premium
and interest with respect to notes represented by one or more permanent global
notes will be paid by wire transfer of immediately available funds to the
account of the Depository Trust Company or any successor thereto. Until
otherwise designated by DeCrane Aircraft, DeCrane Aircraft's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
notes will be issued in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of Subordinated Note Obligations is subordinated in right of
payment, as set forth in the indenture, to the prior payment in full in cash or
cash equivalents of all Senior Indebtedness, whether outstanding on the date of
the indenture or thereafter incurred.
Upon any distribution to creditors of DeCrane Aircraft in a liquidation or
dissolution of DeCrane Aircraft or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to DeCrane Aircraft or their
property, an assignment for the benefit of creditors or any marshalling of
DeCrane Aircraft's assets and liabilities, the holders of Senior Indebtedness
will be entitled to receive payment in full in cash or cash equivalents of all
Obligations due in respect of such Senior Indebtedness, including interest after
the commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness, before the holders of notes will be entitled to receive any
payment with respect to the Subordinated Note Obligations. In that instance,
until all Obligations with respect to Senior Indebtedness are paid in full in
cash or cash equivalents, any distribution to which the holders of notes would
be entitled shall be made to the holders of Senior Indebtedness except Permitted
Junior Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance."
DeCrane Aircraft also may not make any payment upon or in respect of the
Subordinated Note Obligations, except in Permitted Junior Securities or from the
trust described under "--Legal Defeasance and Covenant Defeasance", if a default
in the payment of the principal of, premium, if any, or interest on or
commitment fees relating to, Designated Senior Indebtedness occurs and is
continuing beyond any applicable period of grace, or if any other default occurs
and is continuing with respect to Designated Senior Indebtedness that permits
holders of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default
from the holders of any Designated Senior Indebtedness. This right of a senior
creditor is typically called "blockage." Payments on the notes may and shall be
resumed, in the case of a payment default, upon the date on which such default
is cured or waived, and otherwise, upon the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable blockage notice is received, unless the maturity of any Designated
Senior Indebtedness has been accelerated. No new period of payment blockage may
be commenced unless and until 360 days have elapsed since the effectiveness of
the immediately prior blockage notice. No nonpayment default that existed or was
continuing on the date of delivery of any blockage notice to the Trustee shall
be, or be made, the basis for a subsequent blockage notice unless such default
shall have been waived or cured for a period of not less than 90 days.
"Designated Senior Indebtedness" means any Indebtedness outstanding under
the bank credit facility, and any other Senior Indebtedness permitted under the
indenture the principal amount of which is $25.0 million or more and that has
been designated by DeCrane Aircraft in writing to the Trustee as "Designated
Senior Indebtedness."
"Permitted Junior Securities" means Equity Interests in DeCrane Aircraft or
debt securities of DeCrane Aircraft that are subordinated to all Senior
Indebtedness, and any debt securities issued in exchange for Senior
Indebtedness, to substantially the same extent as, or to a greater extent than,
the notes are subordinated to Senior Indebtedness.
"Senior Indebtedness" means, with respect to any person,
- all Obligations of such person outstanding under the bank credit facility
and all Hedging Obligations payable to a lender or an Affiliate thereof or
to a person that was a lender or an Affiliate thereof at the time the
contract was entered into under the bank credit facility or any of its
Affiliates, including interest accruing subsequent to the filing of, or
which would have accrued but for the filing of, a petition for bankruptcy,
whether or not such interest is an allowable claim in such bankruptcy
proceeding,
61
<PAGE>
- any other Indebtedness, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in
right of payment to any other Senior Indebtedness of such person and
- all Obligations with respect to the foregoing.
However, Senior Indebtedness does not include any liability for federal, state,
local or other taxes, any Indebtedness of such person, excluding that arising
under the bank credit facility, to any of its Subsidiaries or other Affiliates,
any trade payables or any Indebtedness that is incurred in violation of the
indenture.
"Subordinated Note Obligations" means all Obligations with respect to the
notes, including principal, premium if any and interest payable pursuant to the
terms of the notes, including upon the acceleration or redemption thereof,
together with and including any amounts received or receivable upon the exercise
of rights of rescission, claims for damages or other rights of action or
otherwise.
The indenture further requires that DeCrane Aircraft promptly notify holders
of Senior Indebtedness if payment of the notes is accelerated because of an
Event of Default. As a result of the subordination provisions described above,
in the event of a liquidation or insolvency, holders of notes may recover less
ratably than creditors of DeCrane Aircraft who are holders of Senior
Indebtedness.
NOTE GUARANTEES
DeCrane Aircraft's payment obligations under the notes are fully and
unconditionally guaranteed on a joint and several basis by the Guarantors. The
guarantee of each Guarantor is subordinated to the prior payment in full in cash
or cash equivalents of all Senior Indebtedness of such Guarantor, including such
Guarantor's guarantee of the bank credit facility, to the same extent that the
notes are subordinated to Senior Indebtedness of DeCrane Aircraft. The
obligations of each Guarantor under its guarantee are limited so as not to
constitute a fraudulent conveyance under applicable law.
The indenture provides that no Guarantor may consolidate or merge with or
into another corporation, person or entity whether or not affiliated with such
Guarantor unless:
- subject to the provisions of the following paragraph, the person formed by
or surviving any such consolidation or merger assumes all the obligations
of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the notes, the
indenture and the registration rights agreement;
- immediately after giving effect to such transaction, no Default or Event
of Default exists; and
- Unless the consolidation or merger is with DeCrane Aircraft, DeCrane
Aircraft or another Guarantor would, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred
at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the covenant described in
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
The indenture provides that, in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, that Guarantor will be released and relieved of any obligations under
its guarantee, so long as the Net Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the indenture, as
described in "--Repurchase at the Option of Holders."
OPTIONAL REDEMPTION
Except as provided below, the notes are not redeemable at DeCrane Aircraft's
option before September 30, 2003. Thereafter, the notes will be subject to
redemption at any time at the option of DeCrane Aircraft, in whole or in part,
on not less than 30 nor more than 60 days' notice, in cash at the redemption
prices set forth below, plus accrued and unpaid interest thereon to the
applicable redemption date, if redeemed during the twelve months beginning on
September 30 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE
YEAR OF PRINCIPAL AMOUNT
- ---- -------------------
<S> <C>
2003........................................................ 106.000%
2004........................................................ 104.000%
2005........................................................ 102.000%
2006 and thereafter......................................... 100.000%
</TABLE>
62
<PAGE>
Notwithstanding the foregoing, on or prior to September 30, 2001, DeCrane
Aircraft may redeem up to 35% of the aggregate principal amount of notes ever
issued under the indenture in cash at a redemption price of 112% of the
principal amount thereof, plus accrued and unpaid interest thereon to the
redemption date, with the net cash proceeds of one or more Public Equity
Offerings. However, the foregoing redemption is only permitted if at least 65%
of the aggregate principal amount of notes ever issued under the indenture
remains outstanding immediately after the occurrence of the redemption, and the
redemption occurs within 90 days of the date of the closing of any such Public
Equity Offering.
In addition, at any time prior to September 30, 2003, DeCrane Aircraft may,
at its option upon the occurrence of a Change of Control, redeem the notes, in
whole but not in part, upon not less than 30 nor more than 60 days' prior
notice, and no more than 60 days after the occurrence of such Change of Control,
in cash at a redemption price equal to
(1) the present value of the sum of all the remaining interest,
excluding any accrued and unpaid interest, premium and principal payments
that would become due on the notes as if the notes were to remain
outstanding and be redeemed on September 30, 2003, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, plus
(2) accrued and unpaid interest to the date of redemption.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity most nearly equal to the period from the redemption date to
September 30, 2003, as stated in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at least two Business Days
prior to the redemption date or, if such Statistical Release is no longer
published, any publicly available source of similar market data. However, if the
period from the redemption date to September 30, 2003 is less than one year, the
weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, selection of
notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
notes are listed, or, if the notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate. However,
notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any note is to be
redeemed in part only, the notice of redemption that relates to such note shall
state the portion of the principal amount thereof to be redeemed. A new note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
MANDATORY REDEMPTION
DeCrane Aircraft is not required to make mandatory redemption of, or sinking
fund payments with respect to, the notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, as specifically defined in the
indenture and summarized below, each holder of notes will have the right to
require DeCrane Aircraft to repurchase all or any part, equal to $1,000 or an
integral multiple thereof, of such holder's notes which the holder offers in the
manner described below at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the date
of repurchase. Within 60 days following any Change of Control, DeCrane Aircraft
will cause the mailing of a notice to each holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
notes on the payment date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed, pursuant to the procedures required by the indenture and described in
such notice. DeCrane Aircraft will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the
63
<PAGE>
provisions of any securities laws or regulations conflict with the provisions of
the Indenture relating to the foregoing offer and repurchase, DeCrane Aircraft
will comply with the applicable securities laws and regulations and shall not be
deemed to have breached their obligations described in the Indenture by virtue
thereof.
On the foregoing payment date, DeCrane Aircraft will, to the extent lawful,
accept for payment all notes or portions thereof properly tendered pursuant to
its offer to repurchase, deposit with the paying agent an amount equal to the
foregoing payment in respect of all notes or portions thereof so tendered, and
deliver or cause to be delivered to the Trustee the notes so accepted together
with an officers' certificate stating the aggregate principal amount of notes or
portions thereof being purchased by DeCrane Aircraft. The paying agent will
promptly mail to each holder of notes so tendered the foregoing payment for such
notes, and the Trustee will promptly authenticate and mail, or cause to be
transferred by book-entry, to each holder a new Note equal in principal amount
to any unpurchased portion of the notes surrendered, if any. However, each such
new Note must be in a principal amount of $1,000 or an integral multiple
thereof. The indenture provides that, prior to complying with the provisions of
this covenant, but in any event within 90 days following a Change of Control,
DeCrane Aircraft will either repay all outstanding Senior Indebtedness or obtain
the requisite consents, if any, under all agreements governing outstanding
Senior Indebtedness to permit the repurchase of notes required by this covenant.
DeCrane Aircraft will publicly announce the results of its offer to repurchase
on or as soon as practicable after the foregoing payment date.
The change of control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as described
above, the indenture does not contain provisions that permit the holders of the
notes to require that DeCrane Aircraft repurchase or redeem the notes in the
event of a takeover, recapitalization or similar transaction.
The bank credit facility prohibits DeCrane Aircraft from purchasing any
notes and also provides that change of control events, which may include events
not otherwise constituting a "change of control" as defined in the indenture,
with respect to DeCrane Aircraft would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Indebtedness to
which DeCrane Aircraft becomes a party may contain similar restrictions and
provisions. In the event such a change of control occurs at a time when DeCrane
Aircraft is prohibited from purchasing notes, DeCrane Aircraft could seek the
consent of its lenders to the purchase of notes or could attempt to refinance
the borrowings that contain such prohibition. If DeCrane Aircraft does not
obtain such a consent or repay such borrowings, DeCrane Aircraft will remain
prohibited from purchasing notes. In such case, DeCrane Aircraft's failure to
purchase tendered notes would constitute an Event of Default under the
indenture, which would, in turn, constitute a default under the bank credit
facility. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the holders of notes.
DeCrane Aircraft will not be required to make an offer to repurchase upon a
change of control in the manner described above if a third party makes the offer
to repurchase in the manner, at the times and otherwise in compliance with the
requirements set forth in the indenture applicable to an offer to repurchase
made by DeCrane Aircraft and purchases all notes validly tendered and not
withdrawn under such offer.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all of the assets of DeCrane Aircraft
and its Subsidiaries, taken as a whole, to any "person" or "group," as such
terms are used in Section 13(d) of the Exchange Act, other than the
Principals and their Related Parties;
(2) the adoption of a plan for the liquidation or dissolution of DeCrane
Aircraft;
(3) the consummation of any transaction, including, any merger or
consolidation the result of which is that any "person" or "group," as such
terms are used in Section 13(d) of the Exchange Act, other than the
Principals and their Related Parties, becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly through one or more intermediaries, of 50% or more of
the voting power of the outstanding voting stock of DeCrane Aircraft; or
(4) the first day on which a majority of the members of the board of
directors of DeCrane Aircraft are not Continuing Members.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of DeCrane Aircraft and its Subsidiaries taken as a
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whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
DeCrane Aircraft to repurchase such notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
DeCrane Aircraft and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
"Continuing Members" means, as of any date of determination, any member of
the board of directors of DeCrane Aircraft who was a member of such board of
directors immediately after consummation of the Acquisition, or was nominated
for election or elected to such board of directors with the approval of, or
whose election to the board of directors was ratified by, at least a majority of
the Continuing Members who were members of such board of directors at the time
of such nomination or election or any successor Continuing Directors appointed
by such Continuing Directors or their successors.
ASSET SALES
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(1) DeCrane Aircraft or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
fair market value, evidenced by a resolution of the board of directors set
forth in an officers' certificate delivered to the Trustee, of the assets or
Equity Interests issued or sold or otherwise disposed of, and
(2) at least 75% of the consideration therefor received by DeCrane
Aircraft or such Restricted Subsidiary is in the form of cash or Cash
Equivalents or property or assets that are used or useful in a Permitted
Business, or the Capital Stock of any person engaged in a Permitted Business
if, as a result of the acquisition by DeCrane Aircraft or any Restricted
Subsidiary thereof, such Person becomes a Restricted Subsidiary The
foregoing 75% requirement will not apply to any Asset Sale in which the cash
or Cash Equivalents portion of the consideration received therefrom,
determined in accordance with the foregoing proviso, is equal to or greater
than what the after-tax proceeds would have been had such Asset Sale
complied with that 75% rule. The following types of assets will be deemed
cash in applying that 75% test:
(a) any liabilities as shown on DeCrane Aircraft's most recent
balance sheet or such Restricted Subsidiary's of DeCrane Aircraft or any
Restricted Subsidiary as shown on their most recent balance sheet, other
than contingent liabilities and liabilities that are by their terms
subordinated to the notes or any guarantee thereof, that are assumed by
the transferee of any such assets pursuant to a customary novation
agreement that releases DeCrane Aircraft or such Restricted Subsidiary
from further liability,
(b) any securities, notes or other obligations received by DeCrane
Aircraft or any such Restricted Subsidiary from such transferee that are
contemporaneously converted by DeCrane Aircraft or such Restricted
Subsidiary into cash or Cash Equivalents, to the extent of the cash or
Cash Equivalents received, and
(c) any Designated Noncash Consideration received by DeCrane Aircraft
or any of its Restricted Subsidiaries in such Asset Sale having an
aggregate fair market value, taken together with all other Designated
Noncash Consideration received pursuant to this clause (c) that is at
that time outstanding, not to exceed 15% of Total Assets at the time of
the receipt of such Designated Noncash Consideration, with the fair
market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent
changes in value.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
DeCrane Aircraft or any such Restricted Subsidiary shall apply such Net
Proceeds, at its option, or to the extent DeCrane Aircraft is required to apply
such Net Proceeds pursuant to the terms of the bank credit facility, to
(1) repay or purchase Senior Indebtedness or Pari Passu Indebtedness of
DeCrane Aircraft or any Indebtedness of any Restricted Subsidiary, PROVIDED
that, if DeCrane Aircraft shall so repay or purchase Pari Passu Indebtedness
of DeCrane Aircraft, it will equally and ratably reduce Indebtedness under
the notes if the notes are then redeemable, or, if the notes may not then be
redeemed, DeCrane Aircraft shall make an offer in accordance with the
procedures set forth below for an Asset Sale Offer to all holders of notes
to purchase at a purchase price equal to 100% of the principal amount of the
notes,
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plus accrued and unpaid interest thereon to the date of purchase, the notes
that would otherwise be redeemed, or
(2) an investment in property, the making of a capital expenditure or
the acquisition of assets that are used or useful in a Permitted Business,
or Capital Stock of any Person primarily engaged in a Permitted Business if
(a) as a result of the acquisition by DeCrane Aircraft or any
Restricted Subsidiary thereof, such Person becomes a Restricted
Subsidiary or
(b) the Investment in such Capital Stock is permitted by clause (f)
of the definition of Permitted Investments. Pending the final application
of any such Net Proceeds, DeCrane Aircraft may temporarily reduce
Indebtedness or otherwise invest such Net Proceeds in any manner that is
not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
DeCrane Aircraft will be required to make an offer to all holders of notes
referred to as an "Asset Sale Offer," to purchase the maximum principal amount
of notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof, plus accrued
and unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in the indenture. To the extent that any Excess Proceeds
remain after consummation of an Asset Sale Offer, DeCrane Aircraft may use such
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of notes surrendered by holders thereof in
connection with an Asset Sale Offer exceeds the amount of Excess Proceeds, the
Trustee shall select the notes to be purchased as set forth under "--Selection
and Notice." Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the indenture relating to such Asset Sale Offer, DeCrane Aircraft will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations described in the indenture by virtue thereof.
PRINCIPAL COVENANTS
RESTRICTED PAYMENTS
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any other payment or
distribution on account of DeCrane Aircraft's or any of its Restricted
Subsidiaries' Equity Interests, other than dividends or distributions
payable in Equity Interests other than Disqualified Stock of DeCrane
Aircraft or dividends or distributions payable to DeCrane Aircraft or any
Wholly Owned Restricted Subsidiary of DeCrane Aircraft;
(b) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of DeCrane Aircraft, any of its Restricted Subsidiaries or any
other Affiliate of DeCrane Aircraft, other than any such Equity Interests
owned by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft;
(c) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any Indebtedness
of DeCrane Aircraft that is subordinated in right of payment to the notes,
except in accordance with the mandatory redemption or repayment provisions
set forth in the original documentation governing such Indebtedness, but not
pursuant to any mandatory offer to repurchase upon the occurrence of any
event; or
(d) make any Restricted Investment;
all such payments and other actions set forth in clauses (a) through (d) above
are collectively referred to as "Restricted Payments"; unless, at the time of
and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
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(2) DeCrane Aircraft would, immediately after giving pro forma effect
thereto as if such Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by DeCrane Aircraft and its Restricted Subsidiaries
after the date of the indenture, excluding Restricted Payments permitted by
clause (a) to the extent that the declaration of any dividend referred to
therein reduces amounts available for Restricted Payments pursuant to this
clause (3), clauses (b) through (i), and clauses (k), (l), (o), (p) and (r) of
the next succeeding paragraph, is less than the sum, without duplication, of
(A) 50% of the Consolidated Net Income of DeCrane Aircraft for the
period, taken as one accounting period, commencing October 1, 1998 to the
end of DeCrane Aircraft's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit, plus
(B) 100% of the Qualified Proceeds received by DeCrane Aircraft on or
after the date of the Indenture from contributions to DeCrane Aircraft's
capital or from the issue or sale on or after the date of the Indenture of
Equity Interests of DeCrane Aircraft or of Disqualified Stock or convertible
debt securities of DeCrane Aircraft to the extent that they have been
converted into such Equity Interests, other than Equity Interests,
Disqualified Stock or convertible debt securities sold to a Subsidiary of
DeCrane Aircraft and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock, plus
(C) the amount equal to the net reduction in Investments in Persons
after the date of the Indenture who are not Restricted Subsidiaries other
than Permitted Investments resulting from
(x) Qualified Proceeds received as a dividend, repayment of a loan or
advance or other transfer of assets, valued at the fair market value
thereof, to DeCrane Aircraft or any Restricted Subsidiary from such
Persons,
(y) Qualified Proceeds received upon the sale or liquidation of such
Investment and
(z) the redesignation of Unrestricted Subsidiaries, available for
Restricted Payments pursuant to clause (j) or (n) below arising from the
redesignation of such Restricted Subsidiary, whose assets are used or
useful in, or which is engaged in, one or more Permitted Business as
Restricted Subsidiaries valued, proportionate to DeCrane Aircraft's
equity interest in such Subsidiary, at the fair market value of the net
assets of such Subsidiary at the time of such redesignation.
The foregoing provisions will not prohibit:
(a) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of the Indenture;
(b) the redemption, repurchase, retirement, defeasance or other acquisition
of any subordinated Indebtedness or Equity Interests of DeCrane Aircraft (the
"Retired Capital Stock") in exchange for or out of the net cash proceeds of the
substantially concurrent sale, other than to a Subsidiary of DeCrane Aircraft,
of other Equity Interests of DeCrane Aircraft other than any Disqualified Stock
(the "Refunding Capital Stock"), PROVIDED that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (3)(B) of the
preceding paragraph;
(c) the defeasance, redemption, repurchase, retirement or other acquisition
of subordinated Indebtedness of DeCrane Aircraft with the net cash proceeds from
an incurrence of, or in exchange for, Permitted Refinancing Indebtedness;
(d) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of DeCrane Aircraft or DeCrane Holdings held by any
member of DeCrane Holdings' or DeCrane Aircraft's or any of its Restricted
Subsidiaries' management pursuant to any management equity subscription
agreement or stock option agreement and any dividend to DeCrane Holdings to fund
any such repurchase, redemption, acquisition or retirement, PROVIDED that
(1) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed
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(x) $4.0 million in any calendar year with unused amounts in any
calendar year being carried over to succeeding calendar years subject to
a maximum, without giving effect to the following clause (y) of
$7.0 million in any calendar year, plus
(y) the aggregate cash proceeds received by DeCrane Aircraft during
such calendar year from any reissuance of Equity Interests by DeCrane
Aircraft or DeCrane Holdings to members of management of DeCrane Aircraft
and its Restricted Subsidiaries and
(2) no Default or Event of Default shall have occurred and be continuing
immediately after such transaction;
(e) payments and transactions in connection with the Acquisition, the
Acquisition Financing, the Offering, the bank credit facility including
commitment, syndication and arrangement fees payable thereunder, and the
application of the proceeds thereof including the purchase of shares of common
stock of DeCrane Aircraft and any payment therefor by way of dissenting rights
or otherwise, and the payment of fees and expenses with respect thereto;
(f) the payment of dividends or the making of loans or advances by DeCrane
Aircraft to DeCrane Holdings not to exceed $3.0 million in any fiscal year for
costs and expenses incurred by DeCrane Holdings in its capacity as a holding
company or for services rendered by DeCrane Holdings on behalf of DeCrane
Aircraft;
(g) payments or distributions to DeCrane Holdings pursuant to any Tax
Sharing Agreement;
(h) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if such dividend is paid pro rata to
all holders of such class of common stock, and at least 51% of such class of
common stock is held by DeCrane Aircraft or one or more of its Restricted
Subsidiaries;
(i) the repurchase of any class of common stock of a Restricted Subsidiary
if such repurchase is made pro rata with respect to such class of common stock,
and at least 51% of such class of common stock is held by DeCrane Aircraft or
one or more of its Restricted Subsidiaries;
(j) any other Restricted Investment made in a Permitted Business which,
together with all other Restricted Investments made pursuant to this clause (j)
since the date of the Indenture, does not exceed $25.0 million, in each case,
after giving effect to all subsequent reductions in the amount of any Restricted
Investment made pursuant to this clause (j), either as a result of
(1) the repayment or disposition thereof for cash or
(2) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, valued proportionate to DeCrane Aircraft's equity interest in
such Subsidiary at the time of such redesignation at the fair market value
of the net assets of such Subsidiary at the time of such redesignation,
in the case of clause (1) and (2), not to exceed the amount of such Restricted
Investment previously made pursuant to this clause (j); PROVIDED that no Default
or Event of Default shall have occurred and be continuing immediately after
making such Restricted Investment;
(k) the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of DeCrane Aircraft or any Restricted Subsidiary
issued on or after the date of the indenture in accordance with the covenant
described under "--Incurrence of Indebtedness and Issuance of Preferred Stock";
PROVIDED that no Default or Event of Default shall have occurred and be
continuing immediately after making such Restricted Payment;
(l) repurchases of Equity Interests deemed to occur upon exercise of stock
options if such Equity Interests represent a portion of the exercise price of
such options;
(m) the payment of dividends or distributions on DeCrane Aircraft's common
stock, following the first public offering of DeCrane Aircraft's common stock or
DeCrane Holdings' common stock after the date of the Indenture, of up to 6.0%
per annum of
(1) the net proceeds received by DeCrane Aircraft from such public
offering of its common stock or
(2) the net proceeds received by DeCrane Aircraft from such public
offering of DeCrane Holdings' common stock as common equity or preferred
equity other than Disqualified Stock,
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other than, in each case, with respect to public offerings with respect to
DeCrane Aircraft's common stock or DeCrane Holdings' common stock registered on
Form S-8; PROVIDED that no Default or Event of Default shall have occurred and
be continuing immediately after any such payment of dividends or distributions;
(n) any other Restricted Payment which, together with all other Restricted
Payments made pursuant to this clause (n) since the date of the Indenture, does
not exceed $10.0 million, in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant to this
clause (n) either as a result of
(1) the repayment or disposition thereof for cash or
(2) the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary valued proportionate to DeCrane Aircraft's equity interest in
such Subsidiary at the time of such redesignation at the fair market value
of the net assets of such Subsidiary at the time of such redesignation,
in the case of clause (1) and (2), not to exceed the amount of such Restricted
Investment previously made pursuant to this clause (n); PROVIDED that no Default
or Event of Default shall have occurred and be continuing immediately after
making such Restricted Payment;
(o) the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted
Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted
Subsidiary;
(p) the purchase, redemption or other acquisition or retirement for value of
any Equity Interests of any Restricted Subsidiary issued after the date of the
indenture, PROVIDED that the aggregate price paid for any such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed the sum of
- the amount of cash and Cash Equivalents received by such Restricted
Subsidiary from the issue or sale thereof and
- any accrued dividends thereon the payment of which would be permitted
pursuant to clause (k) above;
(q) any Investment in an Unrestricted Subsidiary that is funded by Qualified
Proceeds received by DeCrane Aircraft on or after the date of the Indenture from
contributions to DeCrane Aircraft's capital or from the issue and sale on or
after the date of the Indenture of Equity Interests of DeCrane Aircraft or of
Disqualified Stock or convertible debt securities to the extent they have been
converted into such Equity, other than Equity Interests, Disqualified Stock or
convertible debt securities sold to a Subsidiary of DeCrane Aircraft and other
than Disqualified Stock or convertible debt securities that have been converted
into Disqualified Stock, in an amount measured at the time such Investment is
made and without giving effect to subsequent changes in value that does not
exceed the amount of such Qualified Proceeds; and
(r) distributions or payments of Receivables Fees.
The board of directors of DeCrane Aircraft may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such designation, all outstanding Investments
by DeCrane Aircraft and its Restricted Subsidiaries, except to the extent repaid
in cash, in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of
- the net book value of such Investments at the time of such designation and
- the fair market value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted Investment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments other than cash shall be the fair
market value on the date of the Restricted Payment of the assets or securities
proposed to be transferred or issued by DeCrane Aircraft or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The amount
of all Qualified Proceeds other than cash shall be the fair market value on the
date of receipt thereof by DeCrane Aircraft of such Qualified Proceeds. The fair
market value of any non-cash Restricted Payment shall be determined by the board
of directors of DeCrane Aircraft whose resolution with respect thereto shall be
delivered to the Trustee. Not later than the date of making any Restricted
Payment, DeCrane Aircraft shall deliver to the Trustee an officers' certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The indenture provides that
- DeCrane Aircraft will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to any Indebtedness, including Acquired
Indebtedness,
- DeCrane Aircraft will not, and will not permit any of its Restricted
Subsidiaries to, issue any shares of Disqualified Stock and
- DeCrane Aircraft will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock;
PROVIDED that DeCrane Aircraft or any Restricted Subsidiary may incur
Indebtedness, including Acquired Indebtedness, or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for DeCrane Aircraft's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 2.0 to
1, determined on a consolidated pro forma basis including a pro forma
application of the net proceeds therefrom, as if the additional Indebtedness had
been incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(1) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of
Indebtedness under the bank credit facility; PROVIDED that the aggregate
principal amount of all Indebtedness, with letters of credit being deemed to
have a principal amount equal to the maximum potential liability of DeCrane
Aircraft and such Restricted Subsidiaries thereunder, then classified as having
been incurred in reliance upon this clause (1) that remains outstanding under
the bank credit facility after giving effect to such incurrence does not exceed
an amount equal to $150.0 million;
(2) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of
Existing Indebtedness;
(3) the incurrence by DeCrane Aircraft of Indebtedness represented by the
notes and the Indenture and by the Guarantors of Indebtedness represented by
their note guarantees;
(4) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of
Indebtedness denominated in Swiss francs or their successor European common
currency in an aggregate principal amount, or accreted value, as applicable, not
to exceed $4.0 million outstanding after giving effect to such incurrence;
(5) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Expenditure Indebtedness, Capital Lease
Obligations or purchase money obligations, in each case, incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the business
of DeCrane Aircraft or such Restricted Subsidiary, in an aggregate principal
amount or accreted value, as applicable not to exceed $15.0 million outstanding
after giving effect to such incurrence;
(6) Indebtedness arising from agreements of DeCrane Aircraft or any
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in connection
with the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any portion
of such business, assets or Restricted Subsidiary for the purpose of financing
such acquisition; PROVIDED that
(A) such Indebtedness is not reflected on the balance sheet of DeCrane
Aircraft or any Restricted Subsidiary, other than in the footnotes in the
case of a contingent obligation; and
(B) the maximum assumable liability in respect of such Indebtedness
shall at no time exceed the gross proceeds including non-cash proceeds
actually received by DeCrane Aircraft and/or such Restricted Subsidiary in
connection with such disposition, the fair market value of such non-cash
proceeds being measured at the time received and without giving effect to
any subsequent changes in value;
(7) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness other than
intercompany Indebtedness that was permitted by the Indenture to be incurred;
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(8) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among DeCrane Aircraft and/or any of its
Restricted Subsidiaries; PROVIDED that
(1) if DeCrane Aircraft is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the notes and
(2) (A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than DeCrane
Aircraft or a Restricted Subsidiary thereof and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either DeCrane
Aircraft or a Restricted Subsidiary thereof shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by DeCrane Aircraft or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (8);
(9) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or hedging
(A) interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this Indenture to be outstanding and
(B) exchange rate risk with respect to agreements or Indebtedness of
such Person payable denominated in a currency other than U.S. dollars,
PROVIDED that such agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder;
(10) the guarantee by DeCrane Aircraft or any of its Restricted Subsidiaries
of Indebtedness of DeCrane Aircraft or a Restricted Subsidiary of DeCrane
Aircraft that was permitted to be incurred by another provision of this
covenant;
(11) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of Acquired Indebtedness in an aggregate principal amount or accreted value, as
applicable not to exceed $10.0 million outstanding after giving effect to such
incurrence;
(12) obligations in respect of performance and surety bonds and completion
guarantees provided by DeCrane Aircraft or any Restricted Subsidiary in the
ordinary course of business; and
(13) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount or accreted value,
as applicable outstanding after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (13), not to exceed
$20.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (1) through (13) above or is
entitled to be incurred pursuant to the first paragraph of this covenant,
DeCrane Aircraft shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. In addition, DeCrane
Aircraft may, at any time, change the classification of an item of Indebtedness
or any portion thereof to any other clause or to the first paragraph hereof,
PROVIDED that DeCrane Aircraft would be permitted to incur such item of
Indebtedness or such portion thereof pursuant to such other clause or the first
paragraph hereof, as the case may be, at such time of reclassification. Accrual
of interest, accretion or amortization of original issue discount will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant.
All Indebtedness under the bank credit facility outstanding on the date of
the indenture shall be deemed to have been incurred on such date in reliance on
the first paragraph of the covenant described under "--Incurrence of
Indebtedness and Issuance of Preferred Stock." As a result, DeCrane Aircraft
will be permitted to incur significant additional secured indebtedness under
clause (1) of the definition above of "Permitted Indebtedness."
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LIENS
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien, other than a Permitted Lien, that secures
obligations under any Pari Passu Indebtedness or subordinated Indebtedness of
DeCrane Aircraft on any asset or property now owned or hereafter acquired by
DeCrane Aircraft or any of its Restricted Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
notes are equally and ratably secured with the obligations so secured until such
time as such obligations are no longer secured by a Lien; PROVIDED that, in any
case involving a Lien securing subordinated Indebtedness of DeCrane Aircraft,
such Lien is subordinated to the Lien securing the notes to the same extent that
such subordinated Indebtedness is subordinated to the notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to
(a) (1) pay dividends or make any other distributions to DeCrane
Aircraft or any of its Restricted Subsidiaries
(A) on its Capital Stock or
(B) with respect to any other interest or participation in, or
measured by, its profits, or
(2) pay any Indebtedness owed to DeCrane Aircraft or any of its
Restricted Subsidiaries,
(b) make loans or advances to DeCrane Aircraft or any of its Restricted
Subsidiaries or
(c) transfer any of its properties or assets to DeCrane Aircraft or any
of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of
(a) Existing Indebtedness as in effect on the date of the indenture,
(b) the bank credit facility as in effect as of the date of the
indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
(c) the indenture and the notes,
(d) applicable law and any applicable rule, regulation or order,
(e) any agreement or instrument of a Person acquired by DeCrane Aircraft
or any of its Restricted Subsidiaries as in effect at the time of such
acquisition, except to the extent created in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
person, or the properties or assets of any person, other than the person, or
the property or assets of the person, so acquired, PROVIDED that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred,
(f) customary non-assignment provisions in leases and contracts entered
into in the ordinary course of business and consistent with past practices,
(g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (e) above on the property so acquired,
(h) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary,
(i) Permitted Refinancing Indebtedness, PROVIDED that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are, in the good faith judgment of DeCrane Aircraft's board of
directors, not materially less favorable, taken as a whole, to the holders
of the notes than those contained in the agreements governing the
Indebtedness being refinanced,
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(j) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and "--Liens" that limit the right of the debtor to dispose
of the assets securing such Indebtedness,
(k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business,
(l) other Indebtedness or Disqualified Stock of Restricted Subsidiaries
permitted to be incurred subsequent to the Issuance Date pursuant to the
provisions of the covenant described under "--Incurrence of Indebtedness and
Issuance of Preferred Stock",
(m) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business, and
(n) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the board of directors of DeCrane
Aircraft, are necessary or advisable to effect such Receivables Facility.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The indenture provides that DeCrane Aircraft may not consolidate or merge
with or into, whether or not DeCrane Aircraft is the surviving corporation, or
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
person unless
(a) DeCrane Aircraft is the surviving corporation, or the other person
formed by or surviving any such consolidation or merger or to which such
sale, assignment, transfer, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia,
(b) the person other than DeCrane Aircraft formed by or surviving any
such consolidation or merger or the person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of DeCrane Aircraft under the registration rights agreement,
the notes and the indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee,
(c) immediately after such transaction no Default or Event of Default
exists, and
(d) DeCrane Aircraft or the other person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made
(1) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock" or
(2) would together with its Restricted Subsidiaries have a higher
Fixed Charge Coverage Ratio immediately after such transaction, after
giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable four-quarter period, than the Fixed
Charge Coverage Ratio of DeCrane Aircraft and its Restricted Subsidiaries
immediately prior to such transaction.
The foregoing clause (d) will not prohibit a merger between DeCrane Aircraft
and a Wholly Owned Subsidiary of DeCrane Holdings created for the purpose of
holding the Capital Stock of DeCrane Aircraft, a merger between DeCrane
Aircraft and a Wholly Owned Restricted Subsidiary or a merger between
DeCrane Aircraft and an Affiliate incorporated solely for the purpose of
reincorporating DeCrane Aircraft in another state of the United States so
long as, in each case, the amount of Indebtedness of DeCrane Aircraft and
its Restricted Subsidiaries is not increased thereby.
The indenture provides that DeCrane Aircraft will not lease all or substantially
all of its assets to any person.
TRANSACTIONS WITH AFFILIATES
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or
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assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate of DeCrane Aircraft each of
which the indenture refers to as an "Affiliate Transaction", unless
(a) such Affiliate Transaction is on terms that are no less favorable to
DeCrane Aircraft or such Restricted Subsidiary than those that would have
been obtained in a comparable transaction by DeCrane Aircraft or such
Restricted Subsidiary with an unrelated Person and
(b) DeCrane Aircraft delivers to the Trustee, with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $7.5 million, either
(1) a resolution of the board of directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with
clause (a) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the board of directors or
(2) an opinion as to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions:
(a) customary directors' fees, indemnification or similar arrangements
or any employment agreement or other compensation plan or arrangement
entered into by DeCrane Aircraft or any of its Restricted Subsidiaries in
the ordinary course of business, including ordinary course loans to
employees not to exceed
(1) $5.0 million outstanding in the aggregate at any time and
(2) $2.0 million to any one employee,
and consistent with the past practice of DeCrane Aircraft or such Restricted
Subsidiary;
(b) transactions between or among DeCrane Aircraft and/or its Restricted
Subsidiaries;
(c) payments of customary fees by DeCrane Aircraft or any of its
Restricted Subsidiaries to DLJ Merchant Banking and its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without
limitation, in connection with acquisitions or divestitures which are
approved by a majority of the board of directors in good faith;
(d) any agreement as in effect on the date of the indenture or any
amendment thereto which such amendment is not disadvantageous to the holders
of the notes in any material respect, or any transaction contemplated
thereby;
(e) payments and transactions in connection with the Acquisition, the
bank credit facility and the bridge notes and the Offering and the
application of the proceeds thereof, and the payment of the fees and
expenses with respect thereto;
(f) Restricted Payments that are permitted by the provisions of the
indenture described under "--Restricted Payments" and any Permitted
Investments;
(g) payments and transactions in connection with the Global Technology
Investment, and the payment of fees and expenses with respect thereto; and
(h) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
SALE AND LEASEBACK TRANSACTIONS
The indenture provides that DeCrane Aircraft will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; PROVIDED that DeCrane Aircraft or any Restricted Subsidiary may
enter into a sale and leaseback transaction if
(a) DeCrane Aircraft or such Restricted Subsidiary, as the case may be,
could have incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale and leaseback transaction pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
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covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock," and incurred a Lien to secure such Indebtedness pursuant
to the covenant described under "--Liens,"
(b) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value, as determined in good faith by the
board of directors and set forth in an officers' certificate delivered to
the Trustee, of the property that is the subject of such sale and leaseback
transaction and
(c) the transfer of assets in such sale and leaseback transaction is
permitted by, and DeCrane Aircraft applies the proceeds of such transaction
in compliance with, the covenant described under "--Repurchase at the Option
of Holders--Asset Sales."
NO SENIOR SUBORDINATED INDEBTEDNESS
The indenture provides that DeCrane Aircraft will not incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Indebtedness and
senior in right of payment to the notes and no Guarantor will incur any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in right of payment to the Note Guarantees.
ADDITIONAL NOTE GUARANTEES
The indenture provides that, if any Wholly-Owned Restricted Subsidiary of
DeCrane Aircraft that is a Domestic Subsidiary guarantees any Indebtedness under
the bank credit facility, then such Restricted Subsidiary shall become a
Guarantor and execute a supplemental indenture and deliver an opinion of
counsel, in accordance with the terms of the indenture.
ACCOUNTS RECEIVABLE FACILITY
The indenture provides that no Accounts Receivable Subsidiary will incur any
Indebtedness if immediately after giving effect to such incurrence the aggregate
outstanding Indebtedness of all Accounts Receivable Subsidiaries, excluding any
Indebtedness owed to DeCrane Aircraft or any Restricted Subsidiary, would exceed
$60.0 million.
REPORTS
The indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any notes are outstanding, DeCrane Aircraft
will furnish to the holders of notes
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
DeCrane Aircraft were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by
DeCrane Aircraft's certified independent accountants and
(2) all current reports that would be required to be filed with the SEC
on Form 8-K if DeCrane Aircraft were required to file such reports, in each
case, within the time periods specified in the SEC's rules and regulations.
In addition, following the consummation of the exchange offer contemplated by
the registration rights agreement, whether or not required by the rules and
regulations of the SEC, DeCrane Aircraft will file a copy of all such
information and reports with the SEC for public availability within the time
periods specified in the SEC's rules and regulations and make such information
available to securities analysts and prospective investors upon request. In
addition, DeCrane Aircraft and the Guarantors have agreed that, for so long as
any notes remain outstanding, they will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The indenture provides that each of the following constitutes an Event of
Default:
(a) default for 30 days in the payment when due of interest on the
notes, whether or not prohibited by the subordination provisions of the
indenture;
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(b) default in payment when due of the principal of or premium, if any,
on the notes, whether or not prohibited by the subordination provisions of
the indenture;
(c) failure by DeCrane Aircraft or any of its Restricted Subsidiaries
for 30 days after receipt of notice from the Trustee or holders of at least
25% in principal amount of the notes then outstanding to comply with the
provisions described under "Repurchase at the Option of Holders--Change of
Control," "--Asset Sales," "Principal Covenants--Restricted Payments,"
"--Incurrence of Indebtedness and Issuance of Preferred Stock" or "Merger,
Consolidation or Sale of Assets";
(d) failure by DeCrane Aircraft for 60 days after notice from the
Trustee or the holders of at least 25% in principal amount of the notes then
outstanding to comply with any of its other agreements in the Indenture or
the notes;
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by DeCrane Aircraft or any of its Restricted
Subsidiaries, or the payment of which is guaranteed by DeCrane Aircraft or
any of its Restricted Subsidiaries, whether such Indebtedness or guarantee
now exists, or is created after the date of the indenture, which default
(1) is caused by a failure to pay Indebtedness at its stated final
maturity after giving effect to any applicable grace period provided in
such Indebtedness (a "Payment Default") or
(2) results in the acceleration of such Indebtedness prior to its
stated final maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(f) failure by DeCrane Aircraft or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million, net of any
amounts with respect to which a reputable and creditworthy insurance company
has acknowledged liability in writing, which judgments are not paid,
discharged or stayed for a period of 60 days;
(g) except as permitted by the indenture, any note guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
person acting of behalf of any Guarantor, shall deny or disaffirm its
obligations under its note guarantee; and
(h) events of bankruptcy or insolvency with respect to DeCrane Aircraft
or any of its Restricted Subsidiaries that is a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding notes may declare
all the notes to be due and payable immediately; PROVIDED that, so long as any
Indebtedness permitted to be incurred pursuant to the bank credit facility shall
be outstanding, such acceleration shall not be effective until the earlier of
(a) an acceleration of any such Indebtedness under the bank credit
facility or
(b) five business days after receipt by DeCrane Aircraft and the
administrative agent under the bank credit facility of written notice of
such acceleration.
Notwithstanding the foregoing, in the case of an Event of Default arising from
events of bankruptcy or insolvency with respect to DeCrane Aircraft or any
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. holders of the notes may not enforce the
indenture or the notes except as provided in the indenture. In the event of a
declaration of acceleration of the notes because an Event of Default has
occurred and is continuing as a result of the acceleration of any Indebtedness
described in clause (e) of the preceding paragraph, the declaration of
acceleration of the notes shall be automatically annulled if the holders of any
Indebtedness described in clause (e) have rescinded the declaration of
acceleration in respect of such Indebtedness within 30 days of the date of such
declaration, and if the annulment of the acceleration of the notes would not
conflict with any judgment or decree of a court of competent jurisdiction, and
all existing Events of Default, except non-payment of principal or interest on
the notes that became due solely because of the acceleration of the notes, have
been cured or waived.
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Subject to limitations, holders of a majority in principal amount of the
then outstanding notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from holders of the notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
DeCrane Aircraft is required to deliver to the Trustee annually a statement
regarding compliance with the indenture, and DeCrane Aircraft is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF MEMBER, DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No member, director, officer, employee, incorporator or stockholder of
DeCrane Aircraft, as such, shall have any liability for any obligations of
DeCrane Aircraft under the notes or the indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
notes by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the notes. Such waiver may
not be effective to waive liabilities under the federal securities laws, and it
is the view of the SEC that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
DeCrane Aircraft may, at its option and at any time, elect to have all of
its and the Guarantors' obligations discharged with respect to the outstanding
notes, the note guarantees and the indenture ("Legal Defeasance") except for
(a) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest on such notes
when such payments are due from the trust referred to below,
(b) DeCrane Aircraft's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
(c) the rights, powers, trusts, duties and immunities of the Trustee,
and DeCrane Aircraft's obligations in connection therewith and
(d) the Legal Defeasance provisions of the indenture.
In addition, DeCrane Aircraft may, at its option and at any time, elect to have
their obligations released with respect to some covenants that are described in
the indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the notes. In the event Covenant Defeasance occurs, some of the events
described under "--Events of Default and Remedies" other than non-payment and
bankruptcy will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(a) DeCrane Aircraft must irrevocably deposit with the Trustee, in
trust, for the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding notes on the stated maturity or on the
applicable redemption date, as the case may be, and DeCrane Aircraft must
specify whether the notes are being defeased to maturity or to a particular
redemption date,
(b) in the case of Legal Defeasance, DeCrane Aircraft shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that DeCrane Aircraft has
received from, or there has been published by, the Internal Revenue Service
a ruling, or since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, subject to
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customary assumptions and exclusions, the holders of the outstanding notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred,
(c) in the case of Covenant Defeasance, DeCrane Aircraft shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred,
(d) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit, other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit, or,
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 123rd day after the date
of deposit,
(e) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument other than the indenture to which DeCrane Aircraft
or any of its Subsidiaries is a party or by which DeCrane Aircraft or any of
its Subsidiaries is bound,
(f) DeCrane Aircraft must have delivered to the Trustee an opinion of
counsel to the effect that, subject to customary assumptions and exclusions,
after the 123rd day following the deposit, the trust funds will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
any analogous New York State law provision or any other applicable federal
or New York bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally,
(g) DeCrane Aircraft must deliver to the Trustee an officers'
certificate stating that the deposit was not made by DeCrane Aircraft with
the intent of preferring the holders of notes over the other creditors of
DeCrane Aircraft with the intent of defeating, hindering, delaying or
defrauding creditors of DeCrane Aircraft or others, and
(h) DeCrane Aircraft must deliver to the Trustee an officers'
certificate and an opinion of counsel, subject to customary assumptions and
exclusions, each stating that all conditions precedent provided for relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and DeCrane Aircraft may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. DeCrane Aircraft are not required to transfer or exchange any note
selected for redemption. Also, DeCrane Aircraft is not required to transfer or
exchange any note for a period of 15 days before a selection of notes to be
redeemed. The registered holder of a note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the indenture, the
note guarantees and the notes may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the notes then
outstanding, and any existing default or compliance with any provision of the
indenture, the note guarantees or the notes may be waived with the consent of
the holders of a majority in principal amount of the then outstanding notes.
Without the consent of each holder affected, an amendment or waiver may
not,with respect to any notes held by a non-consenting holder:
(a) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver,
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(b) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other than
the provisions described under the caption "--Repurchase at the Option of
Holders,"
(c) reduce the rate of or extend the time for payment of interest on any
note,
(d) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in aggregate
principal amount of the notes and a waiver of the payment default that
resulted from such acceleration,
(e) make any note payable in money other than that stated in the notes,
(f) make any change in the provisions of the indenture relating to
waivers of past Defaults,
(g) waive a redemption payment with respect to any note, other than the
provisions described under the caption "--Repurchase at the Option of
Holders,"
(h) release any Guarantor from its obligations under its note guarantee
or the Indenture, except in accordance with the terms of the indenture or
(i) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, any amendment to or waiver of the covenant
described under the caption "--Repurchase at the Option of Holders--Change of
Control," and any amendment to Article 10 of the indenture, which relates to
subordination, will require the consent of the holders of at least two-thirds in
aggregate principal amount of the notes then outstanding if such amendment would
materially adversely affect the rights of holders of notes.
Notwithstanding the foregoing, without the consent of any holder of notes,
DeCrane Aircraft, the Guarantors and the Trustee may amend or supplement the
indenture, the note guarantees or the notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated notes in addition to or in place of
certificated notes, to provide for the assumption of DeCrane Aircraft's
obligations to holders of notes in the case of a merger or consolidation or sale
of all or substantially all of DeCrane Aircraft's assets, to make any change
that would provide any additional rights or benefits to the holders of notes or
that does not materially adversely affect the legal rights under the indenture
of any such holder, or to comply with requirements of the SEC in order to effect
or maintain the qualification of the indenture under the Trust Indenture Act or
to provide for guarantees of the notes.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the Trustee, State
Street Bank & Trust Co., should it become a creditor of any Company, to obtain
payment of claims in some cases, or to realize on property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions. However, if it acquires any conflicting interest
it must eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
exceptions. The indenture provides that in case an Event of Default shall occur
and not be cured, the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the indenture at the request of any holder of
notes, unless such holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
KEY DEFINITIONS
Set forth below are key defined terms used in the indenture. Please refer to
the indenture for a full description of all such terms, and any other
capitalized terms used herein for which no definition is provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means an Unrestricted Subsidiary of DeCrane
Aircraft to which DeCrane Aircraft or any of its Restricted Subsidiaries sells
any of its accounts receivable pursuant to a Receivables Facility.
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"ACQUIRED INDEBTEDNESS" means, with respect to any specified person,
(a) Indebtedness of any other person existing at the time such other
person is merged with or into or became a Subsidiary of such specified
person, including, without limitation, Indebtedness incurred in connection
with, or in contemplation of, such other person merging with or into or
becoming a Subsidiary of such specified person, and
(b) Indebtedness secured by a Lien encumbering an asset acquired by such
specified person at the time such asset is acquired by such specified
person.
"ACQUISITION" means the acquisition by an indirect subsidiary of DeCrane
Holdings of at least majority of the outstanding stock of DeCrane Aircraft, the
merger of such subsidiary into DeCrane Aircraft, the repayment of specified
indebtedness of DeCrane Aircraft, the payment of related fees and expenses and
the Finance Merger.
"ACQUISITION FINANCING" means the issuance and sale by DeCrane Aircraft of
the notes, the execution and delivery by DeCrane Aircraft and certain of its
subsidiaries of the bank credit facility and the borrowing thereunder and the
issuance and sale by DeCrane Aircraft of bridge notes to finance the Acquisition
and the issuance and sale by DeCrane Holdings of common stock and preferred
stock for consideration, the proceeds of each of which were used to fund the
purchase price for the Acquisition.
"AFFILIATE" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For purposes of this definition, "control,"
when used with respect to any person, means the power to direct the management
and policies of such person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET SALE" means
(1) the sale, lease, conveyance, disposition or other transfer referred
to as a "disposition" of any properties, assets or rights, provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of DeCrane Aircraft and its Subsidiaries taken as a whole will be
governed by the provisions of the indenture described under the caption "--
Change of Control" and the provisions described under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the
indenture's asset sale covenant, and
(2) the issuance, sale or transfer by DeCrane Aircraft or any of its
Restricted Subsidiaries of Equity Interests of any of DeCrane Aircraft's
Restricted Subsidiaries, in either case, whether in a single transaction or
a series of related transactions that either have a fair market value in
excess of $5.0 million or are for net proceeds in excess of $5.0 million.
However, the following items shall not be deemed to be Asset Sales:
- dispositions in the ordinary course of business;
- a disposition of assets by DeCrane Aircraft to a Restricted Subsidiary or
by a Restricted Subsidiary to DeCrane Aircraft or to another Restricted
Subsidiary;
- a disposition of Equity Interests by a Restricted Subsidiary to DeCrane
Aircraft or to another Restricted Subsidiary;
- the sale and leaseback of any assets within 90 days of the acquisition
thereof;
- foreclosures on assets;
- any exchange of like property pursuant to Section 1031 of the Internal
Revenue Code of 1986, for use in a Permitted Business;
- any sale of Equity Interests in, or Indebtedness or other securities of,
an Unrestricted Subsidiary;
- a Permitted Investment or a Restricted Payment that is permitted by the
covenant described under the caption "--Restricted Payments"; and
- sales of accounts receivable, or participations therein, in connection
with any Receivables Facility.
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"ATTRIBUTABLE INDEBTEDNESS" in respect of a sale and leaseback transaction
means, at the time of determination, the present value, discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP, of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction, including any
period for which such lease has been extended or may, at the option of the
lessor, be extended.
"BANK CREDIT FACILITY" means that Credit Agreement dated as of August 28,
1998 among DeCrane Aircraft, various financial institutions party thereto, DLJ
Capital Funding, Inc., as syndication agent, and The First National Bank of
Chicago, as administrative agent, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and, in each case, as amended, modified, renewed, refunded, replaced
or refinanced from time to time, including any agreement
(1) extending or shortening the maturity of any Indebtedness incurred
thereunder or contemplated thereby,
(2) adding or deleting borrowers or guarantors thereunder,
(3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder, PROVIDED that on the date such
Indebtedness is incurred it would not be prohibited by clause (1) of
"--Incurrence of Indebtedness and Issuance of Preferred Stock" or
(4) otherwise altering the terms and conditions thereof. Indebtedness
under the bank credit facility outstanding on the date of the indenture
shall be deemed to have been incurred on such date in reliance on the first
paragraph of the covenant described under the caption "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock."
"CAPITAL EXPENDITURE INDEBTEDNESS" means Indebtedness incurred by any person
to finance the purchase or construction or any property or assets acquired or
constructed by such person which have a useful life or more than one year so
long as
- the purchase or construction price for such property or assets is included
in "addition to property, plant or equipment" in accordance with GAAP,
- the acquisition or construction of such property or assets is not part of
any acquisition of a person or line of business and
- such Indebtedness is incurred within 90 days of the acquisition or
completion of construction of such property or assets.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means
(1) in the case of a corporation, corporate stock,
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock,
(3) in the case of a partnership or limited liability company,
partnership or membership interests whether general or limited and
(4) any other interest or participation that confers on a person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing person.
"CASH EQUIVALENTS" means
(1) Government Securities,
(2) any certificate of deposit maturing not more than 365 days after the
date of acquisition issued by, or demand deposit or time deposit of, an
Eligible Institution or any lender under the bank credit facility,
(3) commercial paper maturing not more than 365 days after the date of
acquisition of an issuer, other than an Affiliate of DeCrane Aircraft, with
a rating, at the time as of which any investment
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therein is made, of "A-3" or higher according to Standard & Poor's Rating
Group or "P-2" or higher according to Moody's or carrying an equivalent
rating by a nationally recognized rating agency if both of the two named
rating agencies cease publishing ratings of investments,
(4) any bankers acceptances of money market deposit accounts issued by
an Eligible Institution,
(5) any fund investing exclusively in investments of the types described
in clauses (1) through (4) above and
(6) in the case of any Subsidiary organized or having its principal
place of business outside the United States, investments denominated in the
currency of the jurisdiction in which such Subsidiary is organized or has
its principal place of business which are similar to the items specified in
clauses (1) through (5) above, including without limitation any deposit with
any bank that is a lender to any such Subsidiary.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus, to the extent deducted in computing Consolidated Net Income,
- an amount equal to any extraordinary or non-recurring loss plus any net
loss realized in connection with an Asset Sale,
- provision for taxes based on income or profits of such person and its
Restricted Subsidiaries for such period,
- Fixed Charges of such person for such period,
- depreciation, amortization, including amortization of goodwill and other
intangibles, and all other non-cash charges, excluding any such non-cash
charge to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period, including charges related to non-cash
minority interests, of such Person and its Restricted Subsidiaries for
such period,
- net periodic post-retirement benefits,
- other income or expense net as set forth on the face of such person's
statement of operations,
- expenses and charges related to the Acquisition, the bank credit facility
and the application of the proceeds thereof which are paid, taken or
otherwise accounted for within 180 days of the consummation of the
Acquisition, and
- any non-capitalized transaction costs incurred in connection with actual
or proposed financings, acquisition or divestitures, including, but not
limited to, financing and refinancing fees and costs incurred in
connection with the Acquisition, in each case, on a consolidated basis and
determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, the Fixed Charges of, and the depreciation and amortization and
other non-cash charges of, a Restricted Subsidiary of a person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent and
in the same proportion that Net Income of such Restricted Subsidiary was
included in calculating the Consolidated Net Income of such person.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any
period, the sum of, without duplication,
- the interest expense of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP,
including amortization of original issue discount, non-cash interest
payments, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments, if
any, pursuant to Hedging Obligations; PROVIDED that in no event shall any
amortization of deferred financing costs be included in Consolidated
Interest Expense; and
- the consolidated capitalized interest of such person and its Restricted
Subsidiaries for such period, whether paid or accrued;
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PROVIDED, however, that Receivables Fees shall be deemed not to constitute
Consolidated Interest Expense. Notwithstanding the foregoing, the Consolidated
Interest Expense with respect to any Restricted Subsidiary that is not a Wholly
Owned Restricted Subsidiary shall be included only to the extent and in the same
proportion that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the aggregate of the Net Income of such person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that
- the Net Income or loss of any person that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the referent person or a Restricted Subsidiary thereof,
- the Net Income or loss of any Restricted Subsidiary other than a
Subsidiary organized or having its principal place of business outside the
United States shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income or loss is not at the date of determination
permitted without any prior governmental approval that has not been
obtained or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary,
- the Net Income or loss of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded,
- the cumulative effect of a change in accounting principles shall be
excluded and
- expenses and charges related to the Acquisition, the bank credit facility
and the application of the proceeds thereof which are paid, taken or
otherwise accounted for within 180 days of the consummation of the
Acquisition shall be excluded.
"DECRANE HOLDINGS" means DeCrane Holdings Co., a Delaware corporation, the
corporate parent of DeCrane Aircraft, or its successors.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of non-cash
consideration received by DeCrane Aircraft or one of its Restricted Subsidiaries
in connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an officers' certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of DeCrane Aircraft, less the amount of cash or Cash
Equivalents received in connection with a sale of such Designated Noncash
Consideration.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms or by the
terms of any security into which it is convertible, or for which it is
exchangeable; or upon the happening of any event other than any event solely
within the control of the issuer thereof, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, is exchangeable for
Indebtedness, except to the extent exchangeable at the option of such Person
subject to the terms of any debt instrument to which such Person is a party, or
redeemable at the option of the holder thereof, in whole or in part, on or prior
to the date on which the notes mature. However, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require DeCrane Aircraft to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock, if the terms of such Capital Stock provide that DeCrane
Aircraft may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described under the caption "--Principal Covenants--Restricted Payments."
Further, if such Capital Stock is issued to any plan for the benefit of
employees of DeCrane Aircraft or its Subsidiaries or by any such plan to such
employees, such Capital Stock shall not constitute Disqualified Stock solely
because it may be required to be repurchased by DeCrane Aircraft in order to
satisfy applicable statutory or regulatory obligations.
"DOMESTIC SUBSIDIARY" means a Subsidiary that is organized under the laws of
the United States or any State, district or territory thereof other than Audio
International Sales, Inc., a U.S. Virgin Islands corporation.
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"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group or "P-2" or higher according to Moody's Investor
Services, Inc. or carrying an equivalent rating by a nationally recognized
rating agency if both of the two named rating agencies cease publishing ratings
of investments.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EXISTING INDEBTEDNESS" means Indebtedness of DeCrane Aircraft and its
Restricted Subsidiaries other than in existence on the date of the Indenture,
excluding Indebtedness under the Bank Credit Facility, until such amounts are
repaid.
"FINANCE MERGER" means the merger of DeCrane Finance Co. with and into
DeCrane Aircraft.
"FIXED CHARGES" means, with respect to any person for any period, the sum,
without duplication, of the Consolidated Interest Expense of such person for
such period, and all dividend payments on any series of preferred stock of such
person other than dividends payable solely in Equity Interests that are not
Disqualified Stock, in each case, on a consolidated basis and in accordance with
GAAP.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such person for such period, in each case exclusive of
amounts attributable to discontinued operations, as determined in accordance
with GAAP, or operations and businesses disposed of prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
referred to as the "Calculation Date." In the event that the referent Person or
any of its Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
other than revolving credit borrowings or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the Calculation Date, then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock and the use of the proceeds therefrom,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, acquisitions that have been made by DeCrane Aircraft or any of its
Subsidiaries, including all mergers or consolidations and any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated to include the
Consolidated Cash Flow of the acquired entities on a pro forma basis after
giving effect to cost savings resulting from employee terminations, facilities
consolidations and closings, standardization of employee benefits and
compensation practices, consolidation of property, casualty and other insurance
coverage and policies, standardization of sales and distribution methods,
reductions in taxes other than income taxes and other cost savings reasonably
expected to be realized from such acquisition, as determined in good faith by
the principal financial officer of DeCrane Aircraft, regardless of whether such
cost savings could then be reflected in PRO FORMA financial statements under
GAAP, Regulation S-X promulgated by the SEC or any other regulation or policy of
the SEC, and without giving effect to the third clause of the proviso set forth
in the definition of Consolidated Net Income.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GLOBAL TECHNOLOGY PARTNERS" means Global Technology Partners, LLC and its
Affiliates.
"GLOBAL TECHNOLOGY INVESTMENT" means the sale by DeCrane Holdings to Global
Technology Partners of its common stock, the purchase price of which will be
partially financed by Global Technology Loans, and the granting by DeCrane
Holdings to Global Technology Partners of options to purchase shares of its
common stock.
"GLOBAL TECHNOLOGY LOANS" means one or more loans by DeCrane Aircraft or
DeCrane Holdings to Global Technology Partners to finance Global Technology
Partners' purchase of common stock of DeCrane
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Holdings; PROVIDED, HOWEVER, that the aggregate principal amount of all such
Global Technology Loans outstanding at any time shall not exceed $2.0 million.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including letters of credit or reimbursement agreements
in respect thereof, of all or any part of any Indebtedness.
"GUARANTORS" means each of the Domestic Subsidiaries of DeCrane Aircraft
that is a Wholly Owned Restricted Subsidiary on the date of the indenture, and
any other Subsidiary that executes a note Guarantee in accordance with the
provisions of the indenture.
"HEDGING OBLIGATIONS" means, with respect to any person, the obligations of
such person under
(a) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements and
(b) other agreements or arrangements designed to protect such person
against fluctuations in interest rates and
(c) agreements or arrangements designed to protect such person against
fluctuations in exchange rates.
"INDEBTEDNESS" means, with respect to any person, any indebtedness of such
Person in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit, or reimbursement agreements in respect
thereof, or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
Indebtedness, than letters of credit and Hedging Obligations would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all Indebtedness of others secured by a Lien on any asset of such
person whether or not such Indebtedness is assumed by such person and, to the
extent not otherwise included, the guarantee by such Person of any Indebtedness
of any other person, PROVIDED that Indebtedness shall not include the pledge by
DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane
Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount
of any Indebtedness outstanding as of any date shall be
- the accreted value thereof, together with any interest thereon that is
more than 30 days past due, in the case of any Indebtedness that does not
require current payments of interest, and
- the principal amount thereof, in the case of any other Indebtedness;
PROVIDED that the principal amount of any Indebtedness that is denominated in
any currency other than United States dollars shall be the amount thereof, as
determined pursuant to the foregoing provision, converted into United States
dollars at the Spot Rate in effect on the date that such Indebtedness was
incurred, or, if such indebtedness was incurred prior to the date of the
Indenture, the Spot Rate in effect on the date of the indenture.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons including Affiliates in the forms of direct or indirect
loans, including guarantees by the referent person of, and Liens on any assets
of the referent person securing, Indebtedness or other obligations of other
persons, advances or capital contributions, excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business, purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. However, an investment by DeCrane Aircraft for consideration consisting of
common equity securities of DeCrane Aircraft shall not be deemed to be an
Investment. If DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of DeCrane Aircraft such that, after giving effect to any
such sale or disposition, such person is no longer a Subsidiary of DeCrane
Aircraft, DeCrane Aircraft shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
under "--Restricted Payments."
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"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code or equivalent statutes of any jurisdiction.
"MANAGEMENT LOANS" means one or more loans by DeCrane Aircraft or DeCrane
Holdings to officers and/or directors of DeCrane Aircraft and any of its
Restricted Subsidiaries to finance the purchase by such officers and directors
of common stock of DeCrane Holdings; PROVIDED, however, that the aggregate
principal amount of all such Management Loans outstanding at any time shall not
exceed $5.0 million.
"NET INCOME" means, with respect to any person, the net income or loss of
such person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however,
(a) any gain (or loss), together with any related provision for taxes on
such gain or loss, realized in connection with any Asset Sale, including
dispositions pursuant to sale and leaseback transactions, or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and
(b) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on such extraordinary or nonrecurring gain or
loss.
"NET PROCEEDS" means the aggregate cash proceeds received by DeCrane
Aircraft or any of its Restricted Subsidiaries in respect of any Asset Sale,
including any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale, net of, without duplication:
- the direct costs relating to such Asset Sale, including legal, accounting
and investment banking fees, and sales commissions, recording fees, title
transfer fees and appraiser fees and cost of preparation of assets for
sale, and any relocation expenses incurred as a result thereof,
- taxes paid or payable as a result thereof after taking into account any
available tax credits or deductions and any tax sharing arrangements,
- amounts required to be applied to the repayment of Indebtedness, other
than revolving credit Indebtedness incurred pursuant to the bank credit
facility, secured by a Lien on the asset or assets that were the subject
of such Asset Sale and
- any reserve established in accordance with GAAP or any amount placed in
escrow, in either case for adjustment in respect of the sale price of such
asset or assets until such time as such reserve is reversed or such escrow
arrangement is terminated, in which case Net Proceeds shall include only
the amount of the reserve so reversed or the amount returned to DeCrane
Aircraft or its Restricted Subsidiaries from such escrow arrangement, as
the case may be.
"NON-RECOURSE DEBT" means Indebtedness
- no default which, including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary, would
permit upon notice, lapse of time or both any holder of any other
Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity; and
- as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of DeCrane Aircraft or any of its
Restricted Subsidiaries, other than the stock of an Unrestricted
Subsidiary pledged by DeCrane Aircraft to secure debt of such Unrestricted
Subsidiary.
However, in no event shall Indebtedness of any Unrestricted Subsidiary fail to
be Non-Recourse Debt solely as a result of any default provisions contained in a
guarantee thereof by DeCrane Aircraft or any of its Restricted Subsidiaries if
DeCrane Aircraft or such Restricted Subsidiary was otherwise permitted to incur
such guarantee pursuant to the Indenture.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the offering of the notes by DeCrane Aircraft.
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"PARI PASSU INDEBTEDNESS" means Indebtedness of DeCrane Aircraft that ranks
pari passu in right of payment to the notes.
"PERMITTED BUSINESS" means the avionics manufacturing industry and any
business in which DeCrane Aircraft and its Restricted Subsidiaries are engaged
on the date of the indenture or any business reasonably related, incidental or
ancillary thereto.
"PERMITTED INVESTMENTS" means
- any Investment in DeCrane Aircraft or in a Restricted Subsidiary of
DeCrane Aircraft,
- any Investment in cash or Cash Equivalents,
- any Investment by DeCrane Aircraft or any Restricted Subsidiary of DeCrane
Aircraft in a Person, if as a result of such Investment such Person
becomes a Restricted Subsidiary of DeCrane Aircraft, or such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, DeCrane
Aircraft or a Wholly Owned Restricted Subsidiary of DeCrane Aircraft,
- any Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales,"
- any Investment acquired solely in exchange for Equity Interests other than
Disqualified Stock of DeCrane Aircraft,
- any Investment in a Person engaged in a Permitted Business, other than an
Investment in an Unrestricted Subsidiary, having an aggregate fair market
value, taken together with all other Investments made pursuant to this
clause that are at that time outstanding, not to exceed 15% of Total
Assets at the time of such Investment, with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value,
- Investments relating to any special purpose Wholly Owned Subsidiary of
DeCrane Aircraft organized in connection with a Receivables Facility that,
in the good faith determination of the board of directors of DeCrane
Aircraft, are necessary or advisable to effect such Receivables Facility
and
- the Management Loans and Global Technology Loans.
"PERMITTED LIENS" means:
- Liens on property of a person existing at the time such person is merged
into or consolidated with DeCrane Aircraft or any Restricted Subsidiary,
PROVIDED that such Liens were not incurred in contemplation of such merger
or consolidation and do not secure any property or assets of DeCrane
Aircraft or any Restricted Subsidiary other than the property or assets
subject to the Liens prior to such merger or consolidation;
- Liens existing on the date of the indenture;
- Liens securing Indebtedness consisting of Capitalized Lease Obligations,
purchase money Indebtedness, mortgage financings, industrial revenue bonds
or other monetary obligations, in each case incurred solely for the
purpose of financing all or any part of the purchase price or cost of
construction or installation of assets used in the business of DeCrane
Aircraft or its Restricted Subsidiaries, or repairs, additions or
improvements to such assets, PROVIDED that
- such Liens secure Indebtedness in an amount not in excess of the
original purchase price or the original cost of any such assets or
repair, additional or improvement thereto, plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness,
- such Liens do not extend to any other assets of DeCrane Aircraft or its
Restricted Subsidiaries, and, in the case of repair, addition or
improvements to any such assets, such Lien extends only to the assets
and improvements thereto or thereon repaired, added to or improved,
- the Incurrence of such Indebtedness is permitted by "--Principal
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
and
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- such Liens attach within 365 days of such purchase, construction,
installation, repair, addition or improvement;
- Liens to secure any refinancings, renewals, extensions, modification or
replacements, such events are collectively referred to as "refinancing,"
or successive refinancings, in whole or in part, of any Indebtedness
secured by Liens referred to in the clauses above so long as such Lien
does not extend to any other property other than improvements thereto;
- Liens securing letters of credit entered into in the ordinary course of
business and consistent with past business practice;
- Liens on and pledges of the capital stock of any Unrestricted Subsidiary
securing Non-Recourse Debt of such Unrestricted Subsidiary;
- Liens securing Indebtedness and Obligations under the bank credit
facility; and
- other Liens securing indebtedness that is permitted by the terms of the
Indenture to be outstanding having an aggregate principal amount at any
one time outstanding not to exceed $50.0 million.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of DeCrane
Aircraft or any of its Restricted Subsidiaries issued within 60 days after
repayment of, in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund other Indebtedness of DeCrane
Aircraft or any of its Restricted Subsidiaries; PROVIDED that
- the principal amount accreted value, if applicable of such Permitted
Refinancing Indebtedness does not exceed the principal amount of accreted
value, if applicable, plus premium, if any, and accrued interest on the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded, plus the amount of reasonable expenses incurred in connection
therewith,
- such Permitted Refinancing Indebtedness has a final maturity date no
earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded, and
- if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness is subordinated in right of
payment to, the notes on terms at least as favorable, taken as a whole, to
the holders of notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PRINCIPALS" means DLJ Merchant Banking Partners II, L.P. and its
Affiliates.
"PUBLIC EQUITY OFFERING" means any issuance of common stock by DeCrane
Aircraft, other than to DeCrane Holdings and other than Disqualified Stock, or
common stock or preferred stock by DeCrane Holdings, other than Disqualified
Stock, registered pursuant to the Securities Act, other than issuances
registered on Form S-8 and issuances registered on Form S-4, excluding issuances
of common stock pursuant to employee benefit plans of DeCrane Holdings or
DeCrane Aircraft or otherwise as compensation to employees of DeCrane Aircraft
or DeCrane Holdings.
"QUALIFIED PROCEEDS" means any of the following or any combination of the
following:
- cash;
- Cash Equivalents;
- assets that are used or useful in a Permitted Business; and
- the Capital Stock of any person engaged in a Permitted Business if, in
connection with the receipt by DeCrane Aircraft or any Restricted
Subsidiary of DeCrane Aircraft of such Capital Stock,
- such Person becomes a Restricted Subsidiary of DeCrane Aircraft or any
Restricted Subsidiary of DeCrane Aircraft or
- such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, DeCrane Aircraft or any Restricted Subsidiary of
DeCrane Aircraft.
88
<PAGE>
"RECEIVABLES FACILITY" means one or more receivables financing facilities,
as amended from time to time, pursuant to which DeCrane Aircraft or any of its
Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable
Subsidiary.
"RECEIVABLES FEES" means distributions or payments made directly or by means
of discounts with respect to any participation interests issued or sold in
connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"RELATED PARTY" means, with respect to any Principal, any controlling
stockholder or partner of such Principal on the date of the indenture, or any
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding directly or
through one or more Subsidiaries a 51% or more controlling interest of which
consist of the Principals and/or such other persons referred to in the
immediately preceding clauses.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such person that
is not an Unrestricted Subsidiary.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"SPOT RATE" means, for any currency, the spot rate at which such currency is
offered for sale against United States dollars as determined by reference to the
New York foreign exchange selling rates, as published in The Wall Street Journal
on such date of determination for the immediately preceding business day or, if
such rate is not available, as determined in any publicly available source of
similar market data.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any person,
- any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled without
regard to the occurrence of any contingency to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of that person or a combination thereof and
- any partnership or limited liability company
- the sole general partner or the managing general partner or managing
member of which is such Person or a Subsidiary of such person or
- the only general partners or managing members of which are such person
or of one or more Subsidiaries of such Person or any combination
thereof.
"TAX SHARING AGREEMENT" means any tax sharing agreement or arrangement
between DeCrane Aircraft and DeCrane Holdings, as the same may be amended from
time to time; PROVIDED that in no event shall the amount permitted to be paid
pursuant to all such agreements and/or arrangements exceed the amount DeCrane
Aircraft would be required to pay for income taxes were it to file a
consolidated tax return for itself and its consolidated Restricted Subsidiaries
as if it were a corporation that was a parent of a consolidated group.
"TOTAL ASSETS" means the total consolidated assets of DeCrane Aircraft and
its Restricted Subsidiaries, as shown on the most recent balance sheet,
excluding the footnotes of DeCrane Aircraft prepared in accordance with GAAP.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
board of directors as an Unrestricted Subsidiary pursuant to a board resolution,
but only to the extent that such Subsidiary:
- has no Indebtedness other than Non-Recourse Debt;
89
<PAGE>
- is not party to any agreement, contract, arrangement or understanding with
DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft unless
the terms of any such agreement, contract, arrangement or understanding
are no less favorable to DeCrane Aircraft or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of DeCrane Aircraft;
- a person with respect to which neither DeCrane Aircraft nor any of its
Restricted Subsidiaries has any direct or indirect obligation
- to subscribe for additional Equity Interests other than Investments
described in clause (g) of the definition of Permitted Investments or
- to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels, of operating results; and
- has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of DeCrane Aircraft or any of its Restricted
Subsidiaries. Any such designation by the board of directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of
the board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described under "--Principal
Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
DeCrane Aircraft as of such date and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described
under "--Principal Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," DeCrane Aircraft shall be in default of such covenant.
The board of directors of DeCrane Aircraft may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such
designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of DeCrane Aircraft of any outstanding Indebtedness
of such Unrestricted Subsidiary and such designation shall only be
permitted if such Indebtedness is permitted under the covenant described
under "--Principal Covenants--Incurrence of Indebtedness and Issuance
Preferred of Stock," and no Default or Event of Default would be in
existence following such designation.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(a) the sum of the products obtained by multiplying the amount of each
then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by the number of years calculated to the nearest one-twelfth that
will elapse between such date and the making of such payment, by
(b) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such person
all of the outstanding Capital Stock or other ownership interests of which other
than directors' qualifying shares shall at the time be owned by such person or
by one or more Wholly Owned Subsidiaries of such person.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any person means a Restricted
Subsidiary of such person all the outstanding Capital Stock or other ownership
interests of which other than directors' qualifying shares shall at the time be
owned by such person or by one or more Wholly Owned Restricted Subsidiaries of
such person or by such person and one or more Wholly Owned Restricted
Subsidiaries of such person.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights Agreement without charge by writing to us, or obtaining from
public sources a copy of the exhibits to the registration statement of which
this prospectus is a part. See "Where You Can Get More Information" at the end
of the "Business" section.
90
<PAGE>
PLAN OF DISTRIBUTION
This prospectus is to be used by DLJ Securities Corporation in connection
with offers and sales of the new notes in market-making transactions effected
from time to time. DLJ Securities Corporation may act as a principal or agent
for one party when acting as principal or as agent for both parties, and may
receive compensation in the form of discounts and commissions, including from
both parties when it acts as agent for both. Those sales will be made at
prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices.
DLJ Merchant Banking Partners II, L.P. and certain of its affiliates
beneficially own approximately 83.7% of the common stock of DeCrane Holdings, on
a fully diluted basis assuming exercise of all outstanding warrants and options.
Thompson Dean, Susan C. Schnabel and Timothy J. White, each of whom is a
principal of DLJ Merchant Banking, are members of the Board of Directors of
DeCrane Holdings and the issuer of the notes, DeCrane Aircraft. DLJ Capital
Funding, Inc. acted as syndication agent in connection with our bank credit
facility, for which it received certain customary fees and expenses. DLJ Bridge
Finance Inc. purchased certain bridge notes which were refinanced by the initial
offering of old notes, for which it received customary fees and expenses. DLJ
Securities Corporation acted as dealer/manager in connection with the tender
offer for our common stock in the DLJ acquisition, as arranger in connection
with our prior bank credit facility, and as the initial purchaser of the old
notes, and is the financial advisor to DeCrane Holdings and DeCrane Aircraft.
DLJ Merchant Banking, DLJ Capital Funding, Inc. and DLJ Bridge Finance, Inc. are
affiliates of DLJ Securities Corporation.
DLJ Securities Corporation currently makes a market in the notes. However,
DLJ Securities Corporation is not obligated to do so and it may discontinue or
interrupt any such market-making at any time without notice. Any such
market-making activity is also subject to the limits imposed by the Securities
Act and the Securities Exchange Act of 1934. We cannot assure you that any
market for the notes will continue, or about your ability to sell the notes or
the price at which you may be able to sell them. See "Risk Factors--Trading
Market for the Notes."
DLJ Securities Corporation has, from time to time, provided investment
banking and other financial advisory services to us, for which it has received
customary compensation, and will provide such services and financial advisory
services to us in the future. DLJ Securities Corporation was the initial
purchaser in the initial offering of the old notes and received an underwriting
discount of approximately $3.3 million in connection therewith. See "Related
Party Transactions."
We have entered into a registration rights agreement with DLJ Securities
Corporation regarding its use of this prospectus. Pursuant to such agreement, we
have agreed to bear all registration expenses incurred under that agreement, and
to indemnify DLJ Securities Corporation against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the new notes offered hereby was passed upon for DeCrane
Aircraft by Spolin & Silverman LLP, Santa Monica, California and Davis, Polk &
Wardwell, New York, New York.
91
<PAGE>
EXPERTS
The following financial statements included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting:
- the consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of operations, of stockholders' equity and of cash
flows for the years ended December 31, 1996 and 1997, the eight months
ended August 31, 1998 and the four months ended December 31, 1998 of
DeCrane Aircraft Holdings, Inc.;
- the balance sheets as of September 30, 1996 and 1997 and the statements of
income, of stockholder's equity and of cash flows for each of the three
years in the period ended September 30, 1997 of Avtech Corporation;
- the consolidated balance sheets as of June 30, 1997 and 1998 and the
consolidated statements of operations, of stockholders' equity and of cash
flows for the years then ended of PATS, Inc.;
- the balance sheets as of December 31, 1997 and 1998 and the statements of
income, of stockholders' equity and of cash flows for the years then ended
of Custom Woodwork & Plastics, Inc.; and
- the balance sheets as of December 31, 1998 and September 30, 1999 and the
statements of income, of partners' equity and of cash flows for the year
ended December 31, 1998 and the nine months ended September 30, 1999 of
The Infinity Partners, Ltd.
The following financial statements included in this prospectus have been so
included in reliance on the report of Baird, Kurtz & Dobson, independent
accountants, given on the authority of said firm as experts in auditing and
accounting:
- the consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of income, stockholders' equity and cash flows for
the period from June 12, 1997 to December 31, 1997 and the year ended
December 31, 1998 of PPI Holdings, Inc., and the consolidated statements
of income, stockholders' equity and cash flows for the year ended
December 31, 1996 and for the period from January 1, 1997 to June 11, 1997
of Precision Pattern Inc., the predecessor to PPI Holdings, Inc.; and
- the balance sheets as of December 31, 1997 and 1998 and the statements of
income, of stockholders' equity and of cash flows for the years then ended
of PCI NewCo, Inc.
92
<PAGE>
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Basis of Presentation............................................................................................ P-2
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1999.......................................... P-3
Unaudited Pro Forma Consolidated Statement of Operations for the:
Twelve months ended September 30, 1999......................................................................... P-4
Year ended December 31, 1998................................................................................... P-5
Nine months ended September 30, 1998........................................................................... P-6
Nine months ended September 30, 1999........................................................................... P-7
Notes to Unaudited Pro Forma Consolidated Financial Data......................................................... P-8
</TABLE>
P-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
BASIS OF PRESENTATION
The following unaudited pro forma consolidated financial data for DeCrane
Aircraft is based on our historical financial statements adjusted to reflect:
- DLJ's 1998 acquisition of us;
- our 1998 Avtech and Dettmers acquisitions;
- our 1999 PATS, PPI and Custom Woodwork acquisitions, which were completed
prior to September 30, 1999; and
- our 1999 PCI NewCo, International Custom Interiors and Infinity
acquisitions, which were completed subsequent to September 30, 1999.
For additional information on the 1998 acquisitions, see the notes to our
audited 1998 consolidated financial statements included elsewhere in this
prospectus. For additional information on the 1999 acquisitions, see the notes
to our unaudited 1999 consolidated financial statements included elsewhere in
this prospectus.
Unaudited pro forma consolidated statements of operations are presented for
the twelve months ended September, 30, 1999, the year ended December 31, 1998
and the nine months ended September 30, 1998 and 1999. The statements reflect
the DLJ acquisition and all of our acquisitions as if they had occurred as of
January 1, 1998. The unaudited pro forma consolidated balance sheet reflects the
PCI NewCo, International Custom Interiors and Infinity acquisitions as of
September 30, 1999; all of the 1998 acquisitions and the 1999 PATS, PPI and
Custom Woodwork acquisitions had occurred by that date and are therefore
reflected in our historical balance sheet.
The pro forma adjustments are based upon available information and
assumptions management believes are reasonable under the circumstances. The
unaudited pro forma consolidated financial data and accompanying notes should be
read in conjunction with our historical audited and unaudited financial
statements and related notes and the historical audited financial statements and
related notes of the companies we acquired included elsewhere in this
prospectus. The pro forma financial data does not purport to represent what our
actual results of operations or actual financial position would have been if the
transactions described above in fact occurred on such dates or to project our
results of operations or financial position for any future period or date.
P-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
COMPANIES ACQUIRED SUBSEQUENT
DECRANE TO SEPTEMBER 30,1999(2)
AIRCRAFT ------------------------------
HISTORICAL(1) HISTORICAL(3) ADJUSTMENTS PRO FORMA
------------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................. $ 3,139 $1,182 $ 209 (4) $ 4,530
Accounts receivable, net.................. 40,074 3,634 -- 43,708
Inventories............................... 51,290 2,197 111 (5) 53,598
Deferred income taxes..................... 2,916 -- -- 2,916
Prepaid expenses and other current
assets.................................. 2,847 1,233 (1,128)(6) 2,952
-------- ------ -------- --------
Total current assets.................... 100,266 8,246 (808) 107,704
-------- ------ -------- --------
Property and equipment, net................. 36,531 1,431 -- 37,962
-------- ------ -------- --------
Other assets, principally intangibles, net
Goodwill and other intangibles............ 309,729 -- 23,513 (7) 333,242
Deferred financing costs.................. 10,699 -- 1,700 (8) 12,399
Other assets.............................. 1,538 3 -- 1,541
-------- ------ -------- --------
Net other assets, principally
intangibles........................... 321,966 3 25,213 347,182
-------- ------ -------- --------
Total assets.......................... $458,763 $9,680 $ 24,405 $492,848
======== ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term borrowings..................... $ 401 $ -- $ -- $ 401
Current portion of long-term
obligations............................. 3,682 660 20 (9) 4,362
Accounts payable.......................... 8,749 764 -- 9,513
Accrued expenses.......................... 23,740 1,396 -- 25,136
Income taxes payable...................... 4,638 298 -- 4,936
-------- ------ -------- --------
Total current liabilities............... 41,210 3,118 20 44,348
-------- ------ -------- --------
Long-term obligations
Senior revolving credit facility.......... 13,500 -- (13,500)(10) --
Senior term facility...................... 165,950 -- 44,350 (10) 210,300
Senior subordinated notes................. 100,000 -- -- 100,000
Other long-term obligations............... 1,644 772 (675)(10) 1,741
-------- ------ -------- --------
Total long-term obligations............. 281,094 772 30,175 312,041
-------- ------ -------- --------
Deferred income taxes....................... 21,522 -- -- 21,522
Other long-term liabilities................. 4,904 -- -- 4,904
Stockholder's equity........................ 110,033 5,790 (5,790)(11) 110,033
-------- ------ -------- --------
Total liabilities and stockholder's
equity.............................. $458,763 $9,680 $ 24,405 $492,848
======== ====== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data.
P-3
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS (13)
DECRANE ----------------------------
AIRCRAFT HISTORICAL
HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA
-------------- ----------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $222,180 $73,095 $ (382)(15) $294,893
Cost of sales................................ 149,740 49,741 (5,277)(16) 194,204
-------- ------- -------- --------
Gross profit............................. 72,440 23,354 4,895 100,689
Selling, general and administrative
expenses................................... 34,611 6,009 -- 40,620
Nonrecurring charges......................... -- 262 (262)(18) --
Nonrecurring bonuses and employment contract
termination expenses....................... -- 360 (360)(19) --
Amortization of intangible assets............ 11,852 209 2,864 (21) 14,925
-------- ------- -------- --------
Operating income......................... 25,977 16,514 2,653 45,144
Interest expense............................. 24,971 516 7,932 (22) 33,419
Other income................................. (157) (24) -- (181)
-------- ------- -------- --------
Income (loss) before provision for income
taxes and extraordinary item............... 1,163 16,022 (5,279) 11,906
Provision for income taxes (benefit)......... 507 (287) 6,984 (24) 7,204
-------- ------- -------- --------
Income (loss) before extraordinary item
(25)....................................... $ 656 $16,309 $(12,263) $ 4,702
======== ======= ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data.
P-4
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS (13)
DECRANE ----------------------------
AIRCRAFT HISTORICAL
HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA
-------------- ----------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $150,433 $118,495 $ (458)(15) $268,470
Cost of sales................................ 102,840 81,494 541 (16) 184,875
-------- -------- -------- --------
Gross profit (loss)...................... 47,593 37,001 (999) 83,595
Selling, general and administrative
expenses................................... 25,993 13,650 (1,728)(17) 37,915
Nonrecurring charges......................... 3,632 1,479 (5,111)(18) --
Nonrecurring bonuses and employment contract
termination expenses....................... -- 4,072 (4,072)(19) --
ESOP contribution............................ -- 530 (530)(20) --
Amortization of intangible assets............ 4,495 328 10,151 (21) 14,974
-------- -------- -------- --------
Operating income......................... 13,473 16,942 291 30,706
Interest expense............................. 9,202 1,354 24,595 (22) 35,151
Other expenses (income)...................... 1,182 (35) (600)(23) 547
-------- -------- -------- --------
Income (loss) before provision for income
taxes and extraordinary item............... 3,089 15,623 (23,704) (4,992)
Provision for income taxes (benefit)......... 224 578 (415)(24) 387
-------- -------- -------- --------
Income (loss) before extraordinary item
(25)....................................... $ 2,865 $ 15,045 $(23,289) $ (5,379)
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data.
P-5
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS(13)
DECRANE -----------------------------
AIRCRAFT HISTORICAL
HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $106,089 $91,191 $ (377)(15) $196,903
Cost of sales................................. 71,181 63,474 3,911 (16) 138,566
-------- ------- -------- --------
Gross profit (loss)....................... 34,908 27,717 (4,288) 58,337
Selling, general and administrative
expenses.................................... 18,889 11,402 (1,728)(17) 28,563
Nonrecurring charges.......................... 3,632 1,417 (5,049)(18) --
Nonrecurring bonuses and employment contract
termination expenses........................ -- 3,832 (3,832)(19) --
ESOP contribution............................. -- 530 (530)(20) --
Amortization of intangible assets............. 2,149 243 8,840 (21) 11,232
-------- ------- -------- --------
Operating income (loss)................... 10,238 10,293 (1,989) 18,542
Interest expense.............................. 4,115 992 21,503 (22) 26,610
Other expenses (income)....................... 1,028 (40) (600)(23) 388
-------- ------- -------- --------
Income (loss) before provision for income
taxes and extraordinary item................ 5,095 9,341 (22,892) (8,456)
Provision for income taxes (benefit).......... 2,386 38 (3,937)(24) (1,513)
-------- ------- -------- --------
Income (loss) before extraordinary item
(25)........................................ $ 2,709 $ 9,303 $(18,955) $ (6,943)
======== ======= ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data.
P-6
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS(13)
DECRANE -----------------------------
AIRCRAFT HISTORICAL
HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $177,836 $45,791 $ (301)(15) $223,326
Cost of sales................................. 118,081 31,721 (1,907)(16) 147,895
-------- ------- ------- --------
Gross profit.............................. 59,755 14,070 1,606 75,431
Selling, general and administrative
expenses.................................... 27,507 3,761 -- 31,268
Nonrecurring charges.......................... -- 200 (200)(18) --
Nonrecurring bonuses and employment contract
termination expenses........................ -- 120 (120)(19) --
Amortization of intangible assets............. 9,506 124 1,553 (21) 11,183
-------- ------- ------- --------
Operating income.......................... 22,742 9,865 373 32,980
Interest expense.............................. 19,884 154 4,840 (22) 24,878
Other income.................................. (311) (29) -- (340)
-------- ------- ------- --------
Income (loss) before provision for income
taxes and extraordinary item................ 3,169 9,740 (4,467) 8,442
Provision for income taxes (benefit).......... 2,669 (827) 3,462 (24) 5,304
-------- ------- ------- --------
Income (loss) before extraordinary item....... $ 500 $10,567 $(7,929) $ 3,138
======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data.
P-7
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects our financial position subsequent to our 1998 Avtech and Dettmers
acquisitions, the 1998 DLJ acquisition and our 1999 PATS, PPI and Custom
Woodwork acquisitions. Excludes the effect of our PCI NewCo, International
Custom Interiors and Infinity acquisitions that occurred subsequent to
September 30, 1999 and the effect of an approximate $9.5 million pre-tax
charge we will incur in the fourth quarter of 1999 in connection with the
Hollingsead and Elsinore Engineering restructuring.
(2) Reflects our acquisition of the following companies subsequent to September
30, 1999:
- substantially all of the assets of PCI NewCo on October 6, 1999;
- all of the common stock of International Custom Interiors on October 8,
1999; and
- substantially all of the assets of Infinity on December 17, 1999.
Concurrently with the Infinity acquisition, we also increased our term debt
borrowings and repaid borrowings existing under our revolving credit
facility. Pro forma sources and uses of funds for the acquisitions and
senior term debt borrowings, had they occurred on September 30, 1999, are
as follows:
<TABLE>
<CAPTION>
HISTORICAL RECLASSIFICATION(C) PRO FORMA
---------- ------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SOURCES:
Senior credit facility:
Working capital revolving credit facility (a)......... $ 491 $ (491) $ --
Acquisition revolving credit facility (a)............. 11,500 (11,500) --
Term A facility (b)................................... 5,000 -- 5,000
Term D facility (b)................................... 40,000 -- 40,000
------- -------- -------
Total sources....................................... $56,991 $(11,991) $45,000
======= ======== =======
USES:
Purchase of net assets and common stock................. $28,091 $-- $28,091
Acquisition fees and expenses........................... 1,500 -- 1,500
Senior credit facility:.................................
Acquisition revolving credit facility (c)............. 25,000 (11,500) 13,500
Working capital revolving credit facility (c)......... 700 (700) --
Financing fees and expenses........................... 1,700 -- 1,700
Excess cash (c)....................................... -- 209 209
------- -------- -------
Total uses.......................................... $56,991 $(11,991) $45,000
======= ======== =======
</TABLE>
- ------------------------
(a) Reflects borrowings for our PCI NewCo and International Custom Interiors
acquisitions.
(b) Reflects senior term debt borrowings.
(c) A portion of the proceeds from the senior term debt borrowings in
December 1999 was used to repay then existing working capital revolving
credit facility borrowings. The pro forma balance sheet reflects the
repayment of $13.5 million of acquisition revolving credit facility
borrowings outstanding as of September 30, 1999 and the excess funds as
cash.
P-8
<PAGE>
(3) Reflects the historical financial position of companies acquired subsequent
to September 30, 1999 as follows:
<TABLE>
<CAPTION>
INTERNATIONAL
PCI CUSTOM
NEWCO INTERIORS INFINITY TOTAL
-------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 410 $ 168 $ 604 $1,182
Accounts receivable, net......................... 1,116 494 2,024 3,634
Inventories...................................... 764 341 1,092 2,197
Prepaid expenses and other current assets........ 56 421 756 1,233
------ ------ ------ ------
Total current assets........................... 2,346 1,424 4,476 8,246
------ ------ ------ ------
Property and equipment, net........................ 304 80 1,047 1,431
Other assets....................................... -- 3 -- 3
------ ------ ------ ------
Total assets................................... $2,650 $1,507 $5,523 $9,680
====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities
Current portion of long-term obligations......... $-- $ 228 $ 432 $ 660
Accounts payable................................. 94 64 606 764
Accrued expenses................................. 224 32 1,140 1,396
Income taxes payable............................. -- 298 -- 298
------ ------ ------ ------
Total current liabilities...................... 318 622 2,178 3,118
Other long-term obligations........................ -- -- 772 772
Stockholders' and partners' equity................. 2,332 885 2,573 5,790
------ ------ ------ ------
Total liabilities and equity................... $2,650 $1,507 $5,523 $9,680
====== ====== ====== ======
</TABLE>
(4) Reflects excess cash received in connection with the senior term debt
borrowings.
(5) Reflects the increase in PCI NewCo's inventory to its estimated fair value
as of the acquisition date.
(6) Reflects the elimination of notes receivable not acquired, which were due
from former International Custom Interiors stockholders and an Infinity
partner.
(7) Reflects the excess of the PCI NewCo, International Custom Interiors and
Infinity purchase prices over the fair value of the assets acquired. For
purposes of this pro forma consolidated financial data, we allocated the
excess purchase prices to goodwill and amortized the amounts on a
straight-line basis over 30 years. Such allocations are preliminary and may
change upon completion of the final valuations of the assets acquired.
(8) Reflects financing fees and expenses for the December 1999 senior term debt
borrowings.
(9) Reflects the net increase in the current portion of our long-term
obligations caused by:
- a $650,000 increase to reflect the current portion of our $45.0 million
of senior term debt borrowings; offset by
- a $630,000 decrease to reflect the elimination of International Custom
Interiors and Infinity debt not assumed.
(10) Reflects the net increase in the long-term portion or our long-term
obligations caused by:
- our $45.0 million of senior term debt borrowings for our PCI NewCo,
International Custom Interiors and Infinity acquisitions; offset by
- the $13.5 million of senior revolving credit facility borrowings repaid;
and
- a $675,000 decrease to reflect the elimination of International Custom
Interiors and Infinity debt not assumed.
The terms of the senior credit facility are described in our historical
consolidated financial statements
included elsewhere in this prospectus.
P-9
<PAGE>
(11) Reflects the elimination of PCI NewCo, International Custom Interiors and
Infinity stockholders' and partners' equity upon acquisition.
(12) For the twelve months and the nine months ended September 30, 1999,
reflects our historical results of operations subsequent to our
acquisition by DLJ (successor). For the year ended December 31, 1998,
reflects our historical results of operations for the eight months ended
August 31, 1998 prior to our acquisition by DLJ (predecessor) and the four
months ended December 31, 1998 subsequent to our acquisition by DLJ
(successor) as summarized in the table below. For the nine months ended
September 30, 1998, reflects our historical results of operations for the
eight months ended August 31, 1998 prior to our acquisition by DLJ
(predecessor) and the one month ended September 30, 1998 subsequent to our
acquisition by DLJ (successor) as summarized in the table below. The data
was derived from our historical audited and unaudited consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECRANE AIRCRAFT HISTORICAL
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------- ---------------------------------------
EIGHT FOUR TWELVE EIGHT ONE NINE
MONTHS MONTHS MONTHS MONTHS MONTH MONTHS
(PREDECESSOR) (SUCCESSOR) TOTAL (PREDECESSOR) (SUCCESSOR) TOTAL
------------- ----------- -------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $90,077 $60,356 $150,433 $90,077 $16,012 $106,089
Cost of sales.................. 60,101 42,739 102,840 60,101 11,080 71,181
------- ------- -------- ------- ------- --------
Gross profit................... 29,976 17,617 47,593 29,976 4,932 34,908
Selling, general and
administrative expenses...... 15,719 10,274 25,993 15,719 3,170 18,889
Nonrecurring charges........... 3,632 -- 3,632 3,632 -- 3,632
Amortization of intangible
assets....................... 1,347 3,148 4,495 1,347 802 2,149
------- ------- -------- ------- ------- --------
Operating income............... 9,278 4,195 13,473 9,278 960 10,238
Interest expense............... 2,350 6,852 9,202 2,350 1,765 4,115
Other expenses................. 847 335 1,182 847 181 1,028
------- ------- -------- ------- ------- --------
Income (loss) before provision
for income taxes and
extraordinary item........... 6,081 (2,992) 3,089 6,081 (986) 5,095
Provision for income taxes
(benefit).................... 2,892 (2,668) 224 2,892 (506) 2,386
------- ------- -------- ------- ------- --------
Income (loss) before
extraordinary item........... $ 3,189 $ (324) $ 2,865 $ 3,189 $ (480) $ 2,709
======= ======= ======== ======= ======= ========
</TABLE>
(13) Reflects the historical results of operations for companies we acquired
and adjustments for DLJ's acquisition of us for the periods not included
in our historical results.
(14) Reflects the results of operations of companies we acquired that are not
included in our historical results. The results of operations for the
companies we acquired are for the periods from the beginning of the period
presented to the dates indicated below. For periods subsequent to those
dates, their respective results of operations are included in our
historical results.
(a) Avtech--June 25, 1998;
(b) Dettmers--June 29, 1998;
(c) PATS--January 21, 1999;
(d) PPI--April 22, 1999;
(e) Custom Woodwork--August 4, 1999;
(f) PCI NewCo--September 30, 1999;
(g) International Custom Interiors--September 30, 1999; and
(h) Infinity--September 30, 1999.
P-10
<PAGE>
Tables summarizing the acquired companies' results of operations for the
twelve months ended September 30, 1999, the year ended December 31, 1998
and the nine months ended September 30, 1998 and 1999 are summarized below.
<TABLE>
<CAPTION>
INTERNATIONAL
CUSTOM PCI CUSTOM
PATS PPI WOODWORK NEWCO INTERIORS INFINITY
(C) (D) (E) (F) (G) (H) TOTAL
-------- -------- ---------- -------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
TWELVE MONTHS ENDED SEPTEMBER 30, 1999
Revenues................................ $10,459 $22,869 $6,133 $8,869 $4,724 $20,041 $73,095
Cost of sales........................... 8,962 13,261 2,801 6,282 3,531 14,904 49,741
------- ------- ------ ------ ------ ------- -------
Gross profit............................ 1,497 9,608 3,332 2,587 1,193 5,137 23,354
Selling, general and administrative
expenses.............................. 1,226 1,659 381 667 504 1,572 6,009
Nonrecurring charges.................... 262 -- -- -- -- -- 262
Nonrecurring bonuses and employment
contract termination expenses......... 360 -- -- -- -- -- 360
Amortization of intangible assets....... -- 209 -- -- -- -- 209
------- ------- ------ ------ ------ ------- -------
Operating income (loss)................. (351) 7,740 2,951 1,920 689 3,565 16,514
Interest expense (income)............... 123 384 (16) 8 (21) 38 516
Other expenses (income)................. 16 (28) (2) (6) (4) -- (24)
------- ------- ------ ------ ------ ------- -------
Income (loss) before provision for
income taxes and extraordinary item... (490) 7,384 2,969 1,918 714 3,527 16,022
Provision for income taxes (benefit).... (575) -- -- -- 288 -- (287)
------- ------- ------ ------ ------ ------- -------
Income before extraordinary item........ $ 85 $ 7,384 $2,969 $1,918 $ 426 $ 3,527 $16,309
======= ======= ====== ====== ====== ======= =======
</TABLE>
- ------------------------
Notes (c) through (h) appear at the beginning of this note.
<TABLE>
<CAPTION>
CUSTOM PCI
AVTECH DETTMERS PATS PPI WOODWORK NEWCO
(A) (B) (C) (D) (E) (F)
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues............................... $20,984 $2,013 $33,348 $37,714 $4,480 $7,933
Cost of sales.......................... 13,267 1,454 24,321 24,376 2,358 5,807
------- ------ ------- ------- ------ ------
Gross profit (loss).................... 7,717 559 9,027 13,338 2,122 2,126
Selling, general and administrative
expenses............................. 3,695 760 4,906 2,218 397 536
Nonrecurring charges................... 1,229 -- 250 -- -- --
Nonrecurring bonuses and employment
contract termination expenses........ 3,592 -- 480 -- -- --
ESOP contribution...................... 300 -- 230 -- -- --
Amortization of intangible assets...... -- -- -- 328 -- --
------- ------ ------- ------- ------ ------
Operating income (loss)................ (1,099) (201) 3,161 10,792 1,725 1,590
Interest expense (income).............. (60) 13 296 1,096 (35) 35
Other expenses (income)................ (35) -- -- 5 (2) (7)
------- ------ ------- ------- ------ ------
Income (loss) before provision for
income taxes and extraordinary
item................................. (1,004) (214) 2,865 9,691 1,762 1,562
Provision for income taxes (benefit)... (322) -- 1,013 -- -- --
------- ------ ------- ------- ------ ------
Income (loss) before extraordinary
item................................. $ (682) $ (214) $ 1,852 $ 9,691 $1,762 $1,562
======= ====== ======= ======= ====== ======
<CAPTION>
INTERNATIONAL
CUSTOM
INTERIORS INFINITY
(G) (H) TOTAL
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues............................... $1,887 $10,136 $118,495
Cost of sales.......................... 1,913 7,998 81,494
------ ------- -------
Gross profit (loss).................... (26) 2,138 37,001
Selling, general and administrative
expenses............................. 422 716 13,650
Nonrecurring charges................... -- -- 1,479
Nonrecurring bonuses and employment
contract termination expenses........ -- -- 4,072
ESOP contribution...................... -- -- 530
Amortization of intangible assets...... -- -- 328
------ ------- -------
Operating income (loss)................ (448) 1,422 16,942
Interest expense (income).............. (2) 11 1,354
Other expenses (income)................ 4 -- (35)
------ ------- -------
Income (loss) before provision for
income taxes and extraordinary
item................................. (450) 1,411 15,623
Provision for income taxes (benefit)... (113) -- 578
------ ------- -------
Income (loss) before extraordinary
item................................. $ (337) $ 1,411 $15,045
====== ======= =======
</TABLE>
- ------------------------
Notes (a) through (h) appear at the beginning of this note.
P-11
<PAGE>
<TABLE>
<CAPTION>
CUSTOM PCI
AVTECH DETTMERS PATS PPI WOODWORK NEWCO
(A) (B) (C) (D) (E) (F)
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues............................... $20,984 $2,013 $23,340 $27,602 $3,319 $5,756
Cost of sales.......................... 13,267 1,454 16,588 19,550 1,760 4,272
------- ------ ------- ------- ------ ------
Gross profit........................... 7,717 559 6,752 8,052 1,559 1,484
Selling, general and administrative
expenses............................. 3,695 760 3,971 1,503 278 389
Nonrecurring charges................... 1,229 -- 188 -- -- --
Nonrecurring bonuses and employment
contract termination expenses........ 3,592 -- 240 -- -- --
ESOP contribution...................... 300 -- 230 -- -- --
Amortization of intangible assets...... -- -- -- 243 -- --
------- ------ ------- ------- ------ ------
Operating income (loss)................ (1,099) (201) 2,123 6,306 1,281 1,095
Interest expense (income).............. (60) 13 196 839 (30) 25
Other expenses (income)................ (35) -- (5) -- -- (4)
------- ------ ------- ------- ------ ------
Income (loss) before provision for
income taxes and extraordinary
item................................. (1,004) (214) 1,932 5,467 1,311 1,074
Provision for income taxes (benefit)... (322) -- 344 -- -- --
------- ------ ------- ------- ------ ------
Income (loss) before extraordinary
item................................. $ (682) $ (214) $ 1,588 $ 5,467 $1,311 $1,074
======= ====== ======= ======= ====== ======
<CAPTION>
INTERNATIONAL
CUSTOM
INTERIORS INFINITY
(G) (H) TOTAL
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues............................... $1,916 $ 6,261 $91,191
Cost of sales.......................... 1,439 5,144 63,474
------ ------- -------
Gross profit........................... 477 1,117 27,717
Selling, general and administrative
expenses............................. 410 396 11,402
Nonrecurring charges................... -- -- 1,417
Nonrecurring bonuses and employment
contract termination expenses........ -- -- 3,832
ESOP contribution...................... -- -- 530
Amortization of intangible assets...... -- -- 243
------ ------- -------
Operating income (loss)................ 67 721 10,293
Interest expense (income).............. -- 9 992
Other expenses (income)................ 4 -- (40)
------ ------- -------
Income (loss) before provision for
income taxes and extraordinary
item................................. 63 712 9,341
Provision for income taxes (benefit)... 16 -- 38
------ ------- -------
Income (loss) before extraordinary
item................................. $ 47 $ 712 $ 9,303
====== ======= =======
</TABLE>
- ------------------------
Notes (a) through (h) appear at the beginning of this note.
<TABLE>
<CAPTION>
INTERNATIONAL
CUSTOM PCI CUSTOM
PATS PPI WOODWORK NEWCO INTERIORS INFINITY
(C) (D) (E) (F) (G) (H) TOTAL
-------- -------- ---------- -------- ------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues................................ $ 451 $12,757 $4,972 $6,692 $4,753 $16,166 $45,791
Cost of sales........................... 1,229 8,435 2,203 4,747 3,057 12,050 31,721
------- ------- ------ ------ ------ ------- -------
Gross profit (loss)..................... (778) 4,322 2,769 1,945 1,696 4,116 14,070
Selling, general and administrative
expenses.............................. 291 944 262 520 492 1,252 3,761
Nonrecurring charges.................... 200 -- -- -- -- -- 200
Nonrecurring bonuses and employment
contract termination expenses......... 120 -- -- -- -- -- 120
Amortization of intangible assets....... -- 124 -- -- -- -- 124
------- ------- ------ ------ ------ ------- -------
Operating income (loss)................. (1,389) 3,254 2,507 1,425 1,204 2,864 9,865
Interest expense (income)............... 23 127 (11) (2) (19) 36 154
------- ------- ------ ------ ------ ------- -------
Other expenses (income)................. 11 (33) -- (3) (4) -- (29)
------- ------- ------ ------ ------ ------- -------
Income (loss) before provision for
income taxes and extraordinary item... (1,423) 3,160 2,518 1,430 1,227 2,828 9,740
Provision for income taxes (benefit).... (1,244) -- -- -- 417 -- (827)
------- ------- ------ ------ ------ ------- -------
Income (loss) before extraordinary
item.................................. $ (179) $ 3,160 $2,518 $1,430 $ 810 $ 2,828 $10,567
======= ======= ====== ====== ====== ======= =======
</TABLE>
- ------------------------
Notes (c) through (h) appear at the beginning of this note.
P-12
<PAGE>
(15) Reflects the elimination of intercompany sales.
(16) Reflects the net change in cost of sales attributable to the following:
<TABLE>
<CAPTION>
NINE MONTHS
TWELVE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
1999 1998 1998 1999
------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Increase (decrease) in cost of goods sold (a):
DLJ acquisition....................................... $(3,289) $ -- $ 3,289 $ --
PPI, Custom Woodwork and PCI NewCo acquisitions....... (1,606) 1,717 1,717 (1,606)
Decrease in depreciation expense (b).................... -- (658) (658) --
Elimination of intercompany sales....................... (382) (458) (377) (301)
Work force reductions attributable to merging the
companies acquired.................................... -- (60) (60) --
------- ------- ------- -------
Net increase (decrease) in cost of sales $(5,277) $ 541 $ 3,911 $(1,907)
======= ======= ======= =======
</TABLE>
- ------------------------
(a) To reflect cost of goods sold based on the fair value of inventory
acquired in conjunction with the DLJ acquisition and the companies we
acquired as if all occurred on January 1, 1998.
(b) To reflect a decrease in depreciation expense resulting from the fair
value and remaining economic useful lives of depreciable assets acquired
in connection with the DLJ acquisition.
(17) Reflects the net decrease in selling, general and administrative expenses
attributable to the following:
<TABLE>
<CAPTION>
NINE MONTHS
TWELVE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
1999 1998 1998 1999
------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Decrease in compensation expense (a).................... $ -- $(1,775) $(1,775) $ --
Decrease in investor relations expenses (b)............. -- (221) (221) --
Other, net (c).......................................... -- 268 268 --
------- ------- ------- ------
Net decrease in selling, general and administrative
expenses.............................................. $ -- $(1,728) $(1,728) $ --
======= ======= ======= ======
</TABLE>
- ------------------------
(a) To reflect the resignation of some former employees and changes to
employment agreements for several employees of the companies we acquired.
(b) To reflect the decrease in investor relations expenses associated with
becoming a privately held company as a result of the DLJ acquisition.
(c) To reflect an increase in depreciation expense resulting from the fair
value and remaining economic useful lives of depreciable assets we
assigned in connection with the DLJ acquisition, net of cost savings
attributable to employee benefit plans implemented at the companies we
acquired.
(18) Reflects a reduction for nonrecurring charges incurred by DeCrane Aircraft
on behalf of its stockholders related to the DLJ acquisition, and by Avtech
and PATS on behalf of their stockholders related to their respective
acquisitions by us. Excludes an approximate $9.5 million pre-tax charge we
will incur in the fourth quarter of 1999 in connection with the Hollingsead
and Elsinore Engineering restructuring.
(19) Reflects a reduction in expense attributable to employment contract
termination expenses and nonrecurring bonuses awarded prior to, and in
anticipation of, our acquisitions of Avtech and PATS.
(20) Reflects a reduction in expense attributable to the termination of the
Employee Stock Ownership Plans in conjunction with our acquisitions of
Avtech and PATS.
P-13
<PAGE>
(21) Reflects a net increase in amortization expense pertaining to the
amortization of goodwill and other intangible assets related to the DLJ
acquisition and our acquisitions on a straight-line basis as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS TWELVE MONTHS ENDED
INTANGIBLE ESTIMATED ENDED YEAR ENDED SEPTEMBER 30,
ASSET USEFUL SEPTEMBER 30, DECEMBER 31, -------------------
AMOUNT LIFE 1999 1998 1998 1999
---------- --------- -------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Elimination of predecessor basis
amortization:
DeCrane Aircraft........................ $ -- $(1,347) $(1,347) $ --
PPI..................................... (209) (328) (243) (124)
DLJ acquisition amortization (a):
Goodwill................................ $166,675 30 -- 3,704 3,704 --
FAA certifications...................... 30,391 15 -- 1,351 1,351 --
Engineering drawings.................... 9,138 15 -- 406 406 --
Assembled workforce..................... 6,588 7 -- 627 627 --
Tradenames, trademarks and patents...... 3,908 5 to 12 -- 269 269 --
Adjustment of intangible asset value
(b)................................... 29 -- (29) --
Amortization attributable to our
acquisitions (c):
Goodwill................................ 109,396 30 2,345 3,646 2,735 1,434
Customer contracts...................... 8,515 7 405 1,216 912 101
FAA certifications...................... 2,000 15 44 133 100 11
Engineering drawings.................... 2,624 15 69 175 131 25
Assembled workforce..................... 2,090 7 181 299 224 106
------ ------- ------- ------
Net increase in amortization.......... $2,864 $10,151 $ 8,840 $1,553
====== ======= ======= ======
</TABLE>
- ------------------------
(a) For the twelve months and nine months ended September 30, 1999,
amortization is reflected in our historical results. For the year ended
December 31, 1998 and the nine months ended September 30, 1998,
amortization is reflected for the period from January 1, 1998 to August
31, 1998, the date the DLJ acquisition occurred; subsequent to that date,
amortization is reflected in our historical results.
(b) Reflects adjustment upon completion of the final valuation of the assets
acquired.
(c) Reflects adjustments for the all of our 1999 acquisitions from the
beginning of the period presented to their respective acquisition dates;
subsequent to those dates, amortization is included in our historical
results. The Avtech and Dettmers acquisitions occurred prior to the DLJ
acquisition; therefore, their intangible asset amortization is included
in the DLJ acquisition amortization amounts. Amortization may change upon
completion of the final valuation of the net assets acquired.
(22) Reflects the net increase in interest expense, including deferred financing
cost amortization and commitment fees, as a result of our 1998 Avtech and
Dettmers acquisitions, the 1998 DLJ acquisition, all of our 1999
acquisitions and the December 1999 senior term debt borrowings as if they
all had occurred on January 1, 1998.
P-14
<PAGE>
Pro forma interest expense consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
TWELVE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
RATE OR TERM AMOUNT 1999 1998 1998 1999
------------------- -------- -------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Senior credit facility (a):
Revolving credit facilities........ LIBOR (b) + 2.75% $ (c) $ 494 $ 1,393 $ 1,176 $ 277
Term facilities:
Term A............................. LIBOR (b) + 2.75% (d) 3,185 3,378 2,557 2,364
Term B........................... LIBOR (b) + 3.00% (e) 5,329 5,612 4,248 3,965
Term C........................... LIBOR (b) + 3.25% (f) 5,894 6,220 4,707 4,381
Term D........................... LIBOR (b) + 3.75% (g) 3,568 3,756 2,841 2,653
Senior subordinated notes............ 12.00% 100,000 12,000 12,000 9,000 9,000
Customer advance..................... 7.50% (h) 292 380 288 200
Other long-term obligations.......... 4.34% to 18.08% (i) 324 150 107 281
Deferred financing cost amortization:
Senior revolving credit
facilities....................... 6 years (j) 1,277 213 213 160 160
Senior term facilities:
Term A........................... 6 years (k) 894 198 200 150 148
Term B........................... 7 years (k) 2,043 315 317 238 236
Term C........................... 7 years (k) 2,168 334 337 253 250
Term D........................... 6 years (k) 1,700 262 264 198 196
Senior subordinated notes.......... 10 years (k) 5,810 581 581 436 436
Commitment fees and expenses......... 430 350 251 331
------- ------- ------- -------
Pro forma interest expense (l)... $33,419 $35,151 $26,610 $24,878
======= ======= ======= =======
</TABLE>
- ------------------------
(a) Reflects the senior credit facility established in conjunction with the
DLJ acquisition, as amended for all of our 1999 acquisitions and the
December 1999 senior term debt borrowings, as if all events had occurred
on January 1, 1998.
(b) Calculations based on the historical LIBOR rates charged during the
respective periods. The weighted average historical LIBOR rates were as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
1999 1998 1998 1999
------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revolving credit facilities................... 5.220% 5.588% 5.633% 5.120%
Term A facility............................... 5.287% 5.694% 5.775% 5.231%
Term B facility............................... 5.292% 5.666% 5.735% 5.236%
Term C facility............................... 5.266% 5.669% 5.738% 5.199%
Term D facility............................... 5.272% 5.676% 5.743% 5.205%
</TABLE>
(c) Reflects revolving credit facility borrowings for the DLJ acquisition
and all of our 1999 acquisitions reduced by revolving credit facility
borrowings repaid with a portion of the senior term debt borrowings as of
January 1, 1998. The pro forma weighted average borrowings outstanding
under the revolving credit facilities were: $6.2 million for the twelve
months ended September 30, 1999; $16.7 million for the twelve months
ended December 31, 1998; $18.7 million for the nine months ended
September 30, 1998; and $4.7 million for the nine months ended September
30, 1999.
(d) Reflects Term A facility borrowings of $35.0 million for the DLJ
acquisition and $5.0 million for our Infinity acquisition and to repay
then existing acquisition related revolving credit facility borrowings as
of January 1, 1998, reduced by quarterly principal payments of $500,000
commencing March 31, 1999. The pro forma weighted average borrowings
outstanding under the Term A facility were: $39.6 million for the twelve
months ended September 30, 1999; $40.0 million for the twelve months
ended December 31, 1998; $40.0 million for the nine months ended
September 30, 1998; and $39.5 million for the nine months ended September
30, 1999.
(e) Reflects Term B facility borrowings of $65.0 million for the DLJ
acquisition and our PATS acquisition as of January 1, 1998, reduced by
quarterly principal payments of $163,000 commencing March 31, 1998. The
pro forma weighted average borrowings outstanding under the Term B
facility were: $64.3 million for the twelve months ended September 30,
1999; $64.8 million for the twelve
P-15
<PAGE>
months ended December 31, 1998; $64.8 million for the nine months ended
September 30, 1998; and $64.2 million for the nine months ended September
30, 1999.
(f) Reflects Term C facility borrowings of $70.0 million for our PPI
acquisition and to repay then existing acquisition related revolving
credit facility borrowings as of January 1, 1998, reduced by quarterly
principal payments of $175,000 commencing March 31, 1998. The pro forma
weighted average borrowings outstanding under the Term C facility were:
$69.2 million for the twelve months ended September 30, 1999; $69.7
million for the twelve months ended December 31, 1998; $69.8 million for
the nine months ended September 30, 1998; and $69.1 million for the nine
months ended September 30, 1999.
(g) Reflects Term D facility borrowings of $40.0 million for our Infinity
acquisition and to repay then existing acquisition related revolving
credit facility borrowings as of January 1, 1998, reduced by quarterly
principal payments of $100,000 commencing March 31, 1998. The pro forma
weighted average borrowings outstanding under the Term C facility were:
$39.6 million for the twelve months ended September 30, 1999; $39.9
million for the twelve months ended December 31, 1998; $39.9 million for
the nine months ended September 30, 1998; and $39.5 million for the nine
months ended September 30, 1999.
(h) Reflects a $5.0 million customer advance related to our PATS
acquisition, pro forma as of January 1, 1998, reduced by principal
payments of $975,000 on November 30, 1998 and $1.2 million on May 31,
1999. The pro forma weighted average advance outstanding was: $3.8
million for the twelve months ended September 30, 1999; $4.9 million for
the twelve months ended December 31, 1998; $5.0 million for the nine
months ended September 30, 1998; and $3.5 million for the nine months
ended September 30, 1999.
(i) Reflects historical interest expense related to capital lease
obligations and equipment term debt financing.
(j) Deferred financing costs are amortized on a straight-line basis over the
term of the agreement.
(k) Deferred financing costs are amortized using the effective interest
method.
(l) A 0.125% change in the interest rates charged on variable rate
borrowings would change interest expense and income (loss) before
extraordinary item by:
<TABLE>
<CAPTION>
NINE MONTHS
TWELVE MONTHS YEAR ENDED
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
1999 1998 1998 1999
------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense..................................... $292 $299 $226 $219
Income (loss) before extraordinary item.............. 178 182 137 133
</TABLE>
(23) Reflects adjustment for nonrecurring charges associated with a terminated
debt offering in June 1998. Such offering was terminated upon initiation of
the DLJ acquisition.
(24) Represents an increase in the provision for income taxes as a result of a
change in pro forma taxable income, a provision for income taxes on the
income of Dettmers, PPI, Custom Woodwork, PCI NewCo and Infinity which were
taxed as S Corporations or partnerships prior to their acquisitions, and
elimination of the $2.6 million one time benefit caused by reversal of our
deferred tax valuation allowance. The effective tax rate differs from the
U.S. federal statutory rate primarily due to goodwill amortization related
to acquisitions not deductible for income tax purposes and state and foreign
income taxes.
(25) In conjunction with the DLJ acquisition, deferred financing costs of
$347,000, net of income tax benefit, were written off as an extraordinary
charge as a result of the termination of our prior senior credit facility.
In conjunction with the sale of the senior subordinated notes described in
the prospectus, deferred financing costs of $1.9 million, net of income tax
benefit, were written off as an extraordinary charge as a result of the
termination of the bridge notes. These amounts have not been reflected in
the unaudited pro forma consolidated statement of operations for the twelve
months ended September 30, 1999, the year ended December 31, 1998 and the
nine months ended September 30, 1998.
P-16
<PAGE>
(26) Supplemental pro forma financial information is as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, --------------------
1999 1998 1998 1999
------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used for):
Operating activities......................... $ 24,799 $ 2,667 $ (3,624) $ 18,508
Investing activities......................... (11,234) (237,409) (235,275) (9,100)
Financing activities......................... (15,266) 237,118 237,944 (14,440)
EBITDA (a)..................................... 67,051 57,491 39,905 49,465
Depreciation and amortization (b).............. 20,873 20,284 15,066 15,655
Capital expenditures:
Paid in cash................................. 7,695 7,212 5,028 5,511
Financed with capital lease obligations...... 1,515 224 176 1,467
Cash interest expense.......................... 31,516 33,239 25,175 23,452
Ratio of earnings to fixed charges (c)......... 1.3x -- -- 1.3x
</TABLE>
- ------------------------
(a) EBITDA equals operating income plus depreciation, amortization, parent
company management fees and certain non-cash and other acquisition
related costs. EBITDA is not a measure of performance or financial
condition under generally accepted accounting principles. EBITDA is not
intended to represent cash flow from operations and should not be
considered as an alternative to income from operations or net income
computed in accordance with generally accepted accounting principles, as
an indicator of our operating performance, as an alternative to cash flow
from operating activities or as a measure of liquidity. The funds
depicted by EBITDA are not available for our discretionary use due to
funding requirements for working capital, capital expenditures, debt
service, income taxes and other commitments and contingencies. We believe
that EBITDA is a standard measure of liquidity commonly reported and
widely used by analysts, investors and other interested parties in the
financial markets. However, not all companies calculate EBITDA using the
same method, and the EBITDA numbers set forth above may not be comparable
to EBITDA reported by other companies.
(b) Reflects depreciation and amortization of plant and equipment, goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts, which are classified as a component of interest
expense.
(c) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interest in
the income of majority-owned subsidiaries, extraordinary items and fixed
charges. Fixed charges consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount relating to any indebtedness,
whether expensed or capitalized; and
- one-third of rental expense under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to fixed charges of $4.9 million for
the year ended December 31, 1998 and $8.4 million for the nine months
ended September 30, 1998.
P-17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1998.................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997, the eight months ended
August 31, 1998 and the four months ended December 31,
1998.................................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996 and 1997, the eight months
ended August 31, 1998 and the four months ended
December 31, 1998....................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997, the eight months ended
August 31, 1998 and the four months ended December 31,
1998.................................................... F-8
Notes to Consolidated Financial Statements................ F-9
UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited).......................... F-41
Consolidated Statements of Operations for the eight months
ended August 31, 1998, the one month ended September 30,
1998 (unaudited) and the nine months ended September 30,
1999 (unaudited)........................................ F-42
Consolidated Statements of Stockholder's Equity for the
nine months ended September 30, 1999 (unaudited)........ F-43
Consolidated Statements of Cash Flows for the eight months
ended August 31, 1998, the one month ended September 30,
1998 (unaudited) and the nine months ended September 30,
1999 (unaudited)........................................ F-44
Condensed Notes to Consolidated Financial Statements
(unaudited)............................................. F-45
FINANCIAL STATEMENTS OF COMPANIES ACQUIRED
AVTECH CORPORATION
Report of Independent Accountants......................... F-59
Balance Sheets as of September 30, 1996 and 1997 and
June 25, 1998 (unaudited)............................... F-60
Statements of Income for the years ended September 30,
1995, 1996 and 1997 and the nine months ended June 30,
1997 and June 25, 1998 (unaudited)...................... F-61
Statements of Stockholders' Equity for the years ended
September 30, 1995, 1996 and 1997 and the nine months
ended June 25, 1998 (unaudited)......................... F-62
Statements of Cash Flows for the years ended
September 30, 1995, 1996 and 1997 and the nine months
ended June 30, 1997 and June 25, 1998 (unaudited)....... F-63
Notes to Financial Statements............................. F-64
PATS, INC. AND SUBSIDIARIES
Report of Independent Accountants......................... F-70
Consolidated Balance Sheets as of June 30, 1997 and 1998
and December 31, 1998 (unaudited)....................... F-71
Consolidated Statements of Operations for the years ended
June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited).................. F-72
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1997 and 1998 and the six months
ended December 31, 1998 (unaudited)..................... F-73
Consolidated Statements of Cash Flows for the years ended
June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited).................. F-74
Notes to Consolidated Financial Statements................ F-75
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PPI HOLDINGS, INC. AND SUBSIDIARY
Report of Independent Accountants......................... F-80
Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999 (unaudited) F-81
Consolidated Statements of Income for the year ended
December 31, 1996, the period from January 1, 1997 to
June 11, 1997, the period from June 12, 1997 to December
31, 1997, the year ended December 31, 1998 and the three
months ended March 31, 1998 and 1999 (unaudited)........ F-82
Consolidated Statements of Stockholders' Equity for the
year ended December 31, 1996, the period from January 1,
1997 to June 11, 1997, the period from June 12, 1997 to
December 31, 1997, the year ended December 31, 1998 and
the three months ended March 31, 1999 (unaudited)....... F-83
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the period from January 1, 1997 to
June 11, 1997, the period from June 12, 1997 to December
31, 1997, the year ended December 31, 1998 and the three
months ended March 31, 1998 and 1999 (unaudited)........ F-84
Note to Consolidated Financial Statements................. F-85
CUSTOM WOODWORK & PLASTICS, INC.
Report of Independent Accountants......................... F-89
Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999 (unaudited).................................... F-90
Statements of Income for the years ended December 31, 1997
and 1998 and the six months ended June 30, 1998 and 1999
(unaudited)............................................. F-91
Statements of Stockholders' Equity for years ended
December 31, 1997 and 1998 and the six months ended June
30, 1999 (unaudited).................................... F-92
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 and
1999 (unaudited)........................................ F-93
Notes to the Financial Statements......................... F-94
PCI NEWCO, INC.
Report of Independent Accountants......................... F-97
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited).......................... F-98
Statements of Income for the years ended December 31, 1997
and 1998 and the nine months ended September 30, 1998
and 1999 (unaudited).................................... F-99
Statements of Stockholders' Equity for years ended
December 31, 1997 and 1998 and the nine months ended
September 30, 1999 (unaudited).......................... F-100
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the nine months ended September 30,
1998 and 1999 (unaudited)............................... F-101
Notes to the Financial Statements......................... F-102
THE INFINITY PARTNERS, LTD.
Report of Independent Accountants......................... F-106
Balance Sheets as of December 31, 1998 and September 30,
1999.................................................... F-107
Statements of Income for the year ended December 31, 1998,
the nine months ended
September 30, 1998 (unaudited) and the nine months ended
September 30, 1999...................................... F-108
Statements of Partners' Equity for year ended December 31,
1998 and the nine months ended September 30, 1999....... F-109
Statements of Cash Flows for the year ended December 31,
1998, the nine months ended
September 30, 1998 (unaudited) and the nine months ended
September 30, 1999...................................... F-110
Notes to the Financial Statements......................... F-111
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of DeCrane
Aircraft Holdings, Inc. and its subsidiaries at December 31, 1997 and 1998 and
the results of their operations and their cash flows for the years ended
December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four
months ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 19, 1999
F-3
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................. $ 206 $ 3,518
Accounts receivable, net.............................................. 18,152 30,441
Inventories........................................................... 25,976 34,281
Deferred income taxes................................................. -- 4,300
Prepaid expenses and other current assets............................. 782 3,897
--------- ---------
Total current assets................................................ 45,116 76,437
Property and equipment, net............................................. 14,054 28,160
Other assets, principally intangibles, net.............................. 39,967 226,330
--------- ---------
Total assets...................................................... $ 99,137 $ 330,927
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings................................................. $ 568 $ 283
Current portion of long-term obligations.............................. 858 1,529
Accounts payable...................................................... 8,032 6,383
Accrued expenses...................................................... 6,911 18,466
Income taxes payable.................................................. 3,975 3,743
--------- ---------
Total current liabilities........................................... 20,344 30,404
--------- ---------
Long-term liabilities
Long-term obligations................................................. 37,412 184,953
Deferred income taxes................................................. 1,758 16,990
Other long-term liabilities........................................... 96 659
--------- ---------
Total long-term liabilities......................................... 39,266 202,602
--------- ---------
Commitments and contingencies (Note 15)................................. -- --
--------- ---------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value, 8,314,018
shares authorized; none issued and outstanding as of December 31,
1997 and 1998....................................................... -- --
Undesignated preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding as of December 31, 1997 and
1998................................................................ -- --
Common stock, no par value, 4,253,550 shares authorized; none issued
and outstanding as of December 31, 1997 and 1998.................... -- --
Common stock, $.01 par value, 9,924,950 and 100 shares authorized as
of December 31, 1997 and 1998, respectively; 5,318,563 and 100
shares issued and outstanding as of December 31, 1997 and 1998,
respectively........................................................ 53 --
Additional paid-in capital............................................ 51,057 100,200
Accumulated deficit................................................... (11,444) (2,553)
Accumulated other comprehensive income (loss)......................... (139) 274
--------- ---------
Total stockholders' equity.......................................... 39,527 97,921
--------- ---------
Total liabilities and stockholders' equity........................ $ 99,137 $ 330,927
========= =========
</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 OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER
1998 31, 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Revenues............................................. $ 65,099 $ 108,903 $ 90,077 $ 60,356
Cost of sales........................................ 49,392 80,247 60,101 42,739
--------- --------- --------- ---------
Gross profit................................... 15,707 28,656 29,976 17,617
--------- --------- --------- ---------
Operating expenses
Selling, general and administrative expenses....... 10,747 15,756 15,719 10,274
Nonrecurring charges............................... -- -- 3,632 --
Amortization of intangible assets.................. 709 905 1,347 3,148
--------- --------- --------- ---------
Total operating expenses......................... 11,456 16,661 20,698 13,422
--------- --------- --------- ---------
Income from operations............................... 4,251 11,995 9,278 4,195
Other expenses
Interest expense................................... 4,248 3,154 2,350 6,852
Terminated debt offering expenses.................. -- -- 600 --
Other expenses..................................... 108 243 247 335
--------- --------- --------- ---------
Income (loss) before provision for income taxes and
extraordinary item................................. (105) 8,598 6,081 (2,992)
Provision (benefit) for income taxes................. 712 3,344 2,892 (2,668)
--------- --------- --------- ---------
Income (loss) before extraordinary item.............. (817) 5,254 3,189 (324)
Extraordinary loss from debt refinancing, net of
income tax benefit................................. -- 2,078 -- 2,229
--------- --------- --------- ---------
Net income (loss).................................... $ (817) $ 3,176 $ 3,189 $ (2,553)
========= ========= ========= =========
</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 STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
ACCUMULATED
NO PAR VALUE $.01 PAR VALUE OTHER
CUMULATIVE --------------- ----------------- COMPRE-
CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- HENSIVE
PREFERRED OF OF PAID-IN ULATED INCOME
PREDECESSOR: STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
- ------------------------------ ----------- ------- ------ --------- ------ ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995...................... $ 5,549 85,593 $ 58 -- $-- $ -- $ (7,807) $ 503 $(1,697)
-------
Comprehensive loss
Net loss.................. -- -- -- -- -- -- (817) -- (817)
Translation adjustment.... -- -- -- -- -- -- -- (382) (382)
-------
(1,199)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants..... -- -- -- -- -- -- (4,320) -- (4,320)
Issuance of cumulative
convertible preferred
stock, net................ 8,301 -- -- -- -- -- -- -- 8,301
Mandatorily redeemable
common stock warrants
issued pursuant to
anti-dilution
provisions................ -- -- -- -- -- -- (7) -- (7)
Stock option compensation
expense................... -- -- 158 -- -- -- -- -- 158
-------- ------- ----- --------- --- -------- -------- ----- -------
Balance, December 31,
1996...................... 13,850 85,593 216 -- -- -- (12,951) 121 1,236
-------
Comprehensive income
Net income................ -- -- -- -- -- -- 3,176 -- 3,176
Translation adjustment.... -- -- -- -- -- -- -- (260) (260)
-------
2,916
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) -- (2,203)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
ACCUMULATED
NO PAR VALUE $.01 PAR VALUE OTHER
CUMULATIVE --------------- ----------------- COMPRE-
CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- HENSIVE
PREFERRED OF OF PAID-IN ULATED INCOME
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recapitalization
Conversion of preferred
stock into common
stock................... (13,850) -- -- 1,941,804 19 13,831 -- -- --
Cashless exercise and
conversion of
warrants................ -- -- -- 524,293 6 6,097 -- -- 6,103
Cancellation of
mandatorily redeemable
common stock warrants... -- -- -- -- -- -- 1,143 -- 1,143
Initial Public Offering
Proceeds from the
offering, net........... -- -- -- 2,700,000 27 28,229 -- -- 28,256
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment and
reclassification of
warrants no longer
redeemable.............. -- -- -- -- -- 1,836 -- -- 1,836
Common shares issued
pursuant to
anti-dilution
provisions.............. -- -- -- 50,743 -- 609 (609) -- --
Cashless exercise of common
stock warrants............ -- -- -- 16,130 -- -- -- -- --
Stock option compensation
expense................... -- -- -- -- -- 240 -- -- 240
-------- ------- ----- --------- --- -------- -------- ----- -------
Balance, December 31,
1997...................... -- -- -- 5,318,563 53 51,057 (11,444) (139) 39,527
-------
Comprehensive income
Net income................ -- -- -- -- -- -- 3,189 -- 3,189
Translation adjustment.... -- -- -- -- -- -- -- 94 94
-------
3,283
Exercise of stock options... -- -- -- 575,692 6 8,206 -- -- 8,212
Sale of common stock........ -- -- -- 2,206,177 22 34,793 -- -- 34,815
-------- ------- ----- --------- --- -------- -------- ----- -------
Balance, August 31, 1998.... $ -- -- $-- 8,100,432 $81 $ 94,056 $ (8,255) $ (45) $85,837
======== ======= ===== ========= === ======== ======== ===== =======
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR:
- ------------------------------
Sale of common stock........ $ -- -- $-- 100 $-- $ 99,000 $ -- $-- $99,000
-------
Comprehensive loss
Net loss.................. -- -- -- -- -- -- (2,553) -- (2,553)
Translation adjustment.... -- -- -- -- -- -- -- 274 274
-------
(2,279)
Value of warrants issued in
connection with debt
offering.................. -- -- -- -- -- 1,200 -- -- 1,200
-------- ------- ----- --------- --- -------- -------- ----- -------
Balance, December 31,
1998...................... $ -- -- $-- 100 $-- $100,200 $ (2,553) $ 274 $97,921
======== ======= ===== ========= === ======== ======== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ----------
Cash flows from operating activities
Net income (loss)..................................................... $ (817) $ 3,176 $ 3,189 $ (2,553)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities
Depreciation and amortization..................................... 4,343 5,372 4,454 4,983
Extraordinary loss from debt refinancing.......................... -- 2,078 -- 2,229
Deferred income taxes............................................. 88 (1,281) (2,339) (5,072)
Other, net........................................................ 188 654 (360) (97)
Changes in assets and liabilities
Accounts receivable........................................... (3,069) (3,159) (3,621) (2,929)
Inventories................................................... (2,665) (4,956) (2,017) 4,313
Prepaid expenses and other assets............................. (3) (136) (58) (562)
Accounts payable.............................................. 1,891 (361) (1,127) (1,754)
Accrued expenses.............................................. 2,477 (1,041) 3,519 2,342
Income taxes payable.......................................... 525 4,295 1,374 108
--------- --------- --------- ----------
Net cash provided by operating activities................. 2,958 4,641 3,014 1,008
--------- --------- --------- ----------
Cash flows from investing activities
Cash paid for acquisitions, net of cash acquired...................... (18,200) (23,597) (85,808) --
Capital expenditures.................................................. (5,821) (3,842) (1,745) (1,813)
Other, net............................................................ 5 (370) 175 --
--------- --------- --------- ----------
Net cash used for investing activities.................... (24,016) (27,809) (87,378) (1,813)
--------- --------- --------- ----------
Cash flows from financing activities
Acquisition of Predecessor
Proceeds from senior credit facility and bridge notes............... -- -- -- 191,722
Proceeds from sale of common stock.................................. -- -- -- 99,000
Proceeds from stock options exercised............................... -- -- -- 4,314
Purchase of shares outstanding...................................... -- -- -- (186,310)
Repayment of existing senior credit facility........................ -- -- -- (93,000)
Transaction fees and expenses....................................... -- -- -- (15,726)
Common stock offerings and application of the net proceeds
Net proceeds from sale of common stock.............................. -- 28,933 34,815 --
Borrowings under credit facility.................................... -- 12,312 -- --
Repayment of debt................................................... -- (42,160) (34,815) --
Financing of acquisitions
Revolving line of credit borrowings................................. 6,399 23,597 85,808 --
Proceeds from issuance of cumulative convertible preferred stock and
mandatorily redeemable common stock warrants, net................. 8,805 -- -- --
Senior term loan borrowings......................................... 5,000 -- -- --
Convertible subordinated note borrowings from related parties....... 3,000 -- -- --
Promissory note principal payments.................................. -- (1,095) -- --
Net borrowings under revolving line of credit agreements.............. 1,191 2,906 5,453 (1,103)
Principal payments on capitalized lease and other long-term
obligations......................................................... (2,001) (1,675) (1,317) (458)
Other, net............................................................ (1,343) 139 (73) (36)
--------- --------- --------- ----------
Net cash provided by (used for) financing activities...... 21,051 22,957 89,871 (1,597)
--------- --------- --------- ----------
Effect of foreign currency translation on cash.......................... 22 97 26 181
--------- --------- --------- ----------
Net increase (decrease) in cash and cash equivalents.................... 15 (114) 5,533 (2,221)
Cash and cash equivalents at beginning of period........................ 305 320 206 5,739
--------- --------- --------- ----------
Cash and cash equivalents at end of period.............................. $ 320 $ 206 $ 5,739 $ 3,518
========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<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, regional and high-end
corporate jet aircraft industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to conform
to the current year presentation.
As a result of the DLJ Acquisition (Note 2) in August 1998, the Company has
presented its financial position, results of operations, changes in
stockholders' equity and cash flows on a predecessor/successor basis.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at the Company's allocated fair value for
assets acquired through purchase acquisitions and at cost for all new additions,
and are depreciated using the straight-line method over their estimated useful
lives. Useful lives for machinery and equipment range from two to twenty years.
Building and building improvements are depreciated using the straight-line
method over their estimated useful lives of forty years. Leasehold improvements
are amortized using the straight-line method over their estimated useful lives
or remaining lease term, whichever is less. Expenditures for maintenance and
repairs are expensed as incurred. The costs for improvements are capitalized.
Upon retirement or disposal, the cost and accumulated depreciation of property
and equipment are reduced and any gain or loss is recorded in income or expense.
OTHER ASSETS
Goodwill is amortized on a straight-line basis over thirty years. Other
intangibles are amortized on a straight-line basis over their estimated useful
lives, ranging from five to fifteen years. Deferred financing costs are
amortized using either a straight-line or effective interest method, over the
term of the related debt.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
F-9
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED WARRANTIES
Two of the Company's subsidiaries sell a majority of their products to
customers with various repair or replacement warranties. The terms of the
warranties vary according to the customer and/or the product involved. The most
common warranty period is the earlier of; (a) 12 to 60 months from the date of
delivery to the operator; or (b) 42 months from the date of manufacture.
Provisions for estimated future warranty costs are made in the period
corresponding to the sale of the product and such costs have been within
management's expectations. Classification between short and long-term warranty
obligations is estimated based on historical trends.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes. If necessary, valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts at December 31, 1997 and 1998 either because of the short
maturity of the instrument, or based on their effective interest rates compared
to current market rates for similar long-term obligations. The estimated fair
value of the Company's long-term obligations is based on either quoted market
prices or current rates for similar issues for debt of the same remaining
maturities. The estimated fair value of foreign currency forward exchange
contracts is based on quotes obtained from various financial institutions that
deal in this type of instrument.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's U.K. and Swiss subsidiaries have
been translated into U.S. dollars from their functional currencies, pounds
sterling and Swiss francs, respectively, in the consolidated financial
statements. Assets and liabilities have been translated at the exchange rate on
the balance sheet date and income statement amounts have been translated at
average exchange rates in effect during the period. The net translation
adjustment is reflected as a component of accumulated comprehensive income or
loss within stockholders' equity.
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $71,000, $(72,000),
$(411,000) and $(262,000) for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs were
$1,195,000 and $832,000 for the eight months ended August 31, 1998 and the four
months ended December 31, 1998, respectively. Research and development costs
were not significant for the years ended December 31, 1996 and 1997.
F-10
<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 ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Refer to Note 14 for information
concerning the pro forma effect on results of operations assuming the fair value
method of measuring compensation expense was utilized.
REVENUE RECOGNITION
Revenues from the sale of manufactured products, except for products
manufactured under long-term contracts, are recorded when products are shipped.
Revenues on long-term contracts are recognized using the
percentage-of-completion method based on costs incurred to date compared with
total estimated costs at completion. Reimbursements for nonrecurring engineering
costs, which are expensed as incurred, are included in revenues at the time a
negotiated settlement is reached with the customer. Unbilled accounts receivable
were $654,000 and $4,156,000 at December 31, 1997 and 1998, respectively.
Unbilled accounts receivable are expected to be billed and collected during the
succeeding twelve-month period.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. For the Company,
comprehensive income consists of its reported net income or loss and the change
in the foreign currency translation adjustment during a period. The Company
adopted SFAS 130 for the period ended December 31, 1998 and has reclassified
earlier periods to reflect application of the statement.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement establishes standards
for reporting financial and descriptive information about operating segments.
Under SFAS No. 131, information pertaining to an entity's operating segments
must be reported on the basis that is used internally for evaluating segment
performance and making resource allocation determinations. The Company adopted
SFAS 131 for the period ended December 31, 1998 and has restated disclosure
information in earlier periods to reflect application of the statement
(Note 17).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. It also requires that gains or losses resulting from changes in the
values of those derivatives be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Adoption of SFAS No.
133 is required for the fiscal year beginning January 1, 2000. Management
believes the adoption of SFAS No. 133 will not have a material impact on the
Company's consolidated financial position or results of operations.
NOTE 2 - THE DLJ ACQUISITION
In July 1998, a newly incorporated entity, DeCrane Holdings Co., and two
other holding companies were organized by DLJ Merchant Banking Partners II, L.P.
and affiliated funds and entities to carry out a tender offer for all the shares
of the Company's common stock, including options to purchase shares which
F-11
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - THE DLJ ACQUISITION (CONTINUED)
became immediately vested, for $23.00 per share. At the completion of the tender
offer in August 1998, the two other holding companies merged with the Company.
All of the Company's old outstanding shares which were tendered were cancelled,
non-tendering shareholders were paid out, and as a result the Company became a
wholly-owned subsidiary of DeCrane Holdings. This transaction, referred to
herein as the DLJ Acquisition, resulted in a predecessor entity and a successor
entity for purposes of reporting the financial results included in the
accompanying financial statements.
As a result of the tender offer, the Company terminated a debt offering
which was in process at that time and recorded a $0.6 million pre-tax charge for
the eight months ended August 31, 1998 for the estimated costs incurred. The
gross purchase price for the Company's shares and options was $186.3 million.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values based on an independent appraisal and, accordingly, historical
values were increased as follows: (a) $4.4 million to inventory;
(b) $2.6 million to fixed assets; and (c) $50.0 million to certain identifiable
intangible assets. The excess of the purchase price over the fair value of the
net assets acquired totalling $70.0 million was allocated to goodwill. The
increase in inventory value was expensed as the inventory was sold during the
four months ended December 31, 1998. The intangible assets, other than goodwill,
are being amortized on a straight-line basis over periods between five and
fifteen years. Goodwill is being amortized on a straight-line basis over a
period of thirty years.
At the completion of the tender offer, the Company was required to repay all
of its borrowings under its previous credit facility (Note 10). In order to fund
the purchase of the shares in the tender offer, repay the credit facility and
pay expenses incurred in connection therewith, the Company: (a) issued
$100.0 million of senior subordinated increasing rate notes (the Bridge Notes)
which were subsequently replaced by $100.0 million of 12% Senior Subordinated
Notes due 2008 (the Notes) from the Company's "Units" offering (Note 10);
(b) entered into a new syndicated senior secured loan facility; and
(c) received a $99.0 million equity contribution from DeCrane Holdings. In
conjunction with the debt repayment and refinancing of the Bridge Notes, the
Company incurred a $2.2 million extraordinary charge, net of income tax benefit
of $1.5 million for the four months ended December 31, 1998.
The Bridge Notes were purchased by an affiliate of DLJ and accrued interest
at 10%. The terms of the issue called for floating rate increases to the prime
rates plus 2.5% after six months, and increases of 0.5% every three months
subject to a 17.0% maximum, as long as the Bridge Notes remained outstanding.
The Bridge Notes were to mature on August 28, 1999, but were refinanced in
October 1998 (Note 10).
The equity contribution from DeCrane Holdings represents DeCrane Holdings'
net proceeds from the sale of all of the shares of its common stock for
$65.0 million and shares of its senior redeemable exchangeable preferred stock
due 2009 for $34.0 million, along with warrants to purchase 150,000 common
shares, to the DLJ funds. Preferred stock dividends are payable quarterly at a
rate of 14% per annum. Prior to September 30, 2003, dividends are not paid in
cash but instead accrete in liquidation value which, in turn, increases the
redemption obligation. On or after September 30, 2003, preferred stock dividends
are paid in cash. Since the Company is DeCrane Holdings' only operating
subsidiary and source of cash, the Company may be required to fund DeCrane
Holdings' preferred stock dividend and redemption requirements in the future.
The Company incurred non-recurring charges totaling approximately
$3.6 million (pre-tax) during the eight months ended August 31, 1998 in
conjunction with the DLJ Acquisition.
NOTE 3 - ACQUISITIONS
AVTECH
On June 26, 1998, the Company purchased substantially all of the common
stock of Avtech Corporation. Avtech is a manufacturer of avionics components and
an avionics systems integrator for the commercial and high-end corporate jet
aircraft industries.
F-12
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
The total purchase price was $84,693,000 in cash at closing, including
$1,250,000 of acquisition related costs. The acquisition was financed with
borrowings under the Company's credit facility. The acquisition was accounted
for as a purchase and the $57,911,000 difference between the purchase price and
the fair value of the net assets acquired was recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
The consolidated results of operations for the eight months ended
August 31, 1998 and the four months ended December 31, 1998 include the
operating results of Avtech subsequent to June 25, 1998.
DETTMERS
On June 30, 1998, the Company purchased certain assets, subject to certain
liabilities assumed, of Dettmers Industries Inc. Dettmers is a manufacturer of
seats for high-end corporate jet aircraft.
The total purchase price was $2,314,000 in cash at closing, including
$205,000 of acquisition related costs, plus contingent consideration aggregating
a maximum of $2,000,000 payable over four years based on future attainment of
defined performance criteria during each of the years in the four-year period
ending December 31, 2002. The acquisition was financed with borrowings under the
Company's credit facility. The acquisition was accounted for as a purchase and
the $2,068,000 difference between the purchase price, excluding the contingent
consideration, and the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 30 years. The
amount of contingent consideration paid in the future, if any, will increase
goodwill and will be amortized prospectively over the remaining period of the
initial 30-year term.
The consolidated results of operations for the eight months ended
August 31, 1998 and the four months ended December 31, 1998 include the
operating results of Dettmers subsequent to June 29, 1998.
AUDIO INTERNATIONAL
On November 14, 1997, the Company purchased all of the outstanding stock of
Audio International, Inc. Audio International provides premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market.
The total purchase price was $24,726,000 in cash at closing, including
$726,000 in acquisition related costs, plus contingent consideration aggregating
a maximum of $6,000,000 payable over two years based on future attainment of
defined performance criteria. During 1998, Audio International attained the
required performance criteria and the Company increased the purchase price by
$3,000,000, resulting in a corresponding increase to goodwill. The acquisition
was funded with borrowings under the Company's revolving line of credit
facility.
The acquisition was accounted for as a purchase and the $20,110,000
difference between the purchase price, excluding the contingent consideration,
and the fair value of the net assets acquired was recorded as goodwill and is
being amortized over 30 years. The amount of contingent consideration paid in
the future, if any, will increase goodwill and will be amortized prospectively
over the remaining period of the initial 30-year term.
The consolidated results of operations for the year ended December 31, 1997
include the operating results of Audio International subsequent to November 13,
1997.
MINORITY STOCKHOLDER'S 25% INTEREST
On February 20, 1996, the Company purchased the remaining 25% of a
subsidiary's stock it did not already own from the subsidiary's minority
stockholder for a total purchase price of $5,748,000, including $334,000 of
acquisition related costs and expenses. The purchase price consisted of
$4,873,000 paid in cash at closing and a $600,000 non-interest bearing
obligation payable to the minority stockholder. The cash portion
F-13
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
of the purchase price was funded with the proceeds from the sale of preferred
stock and redeemable warrants.
The acquisition was accounted for as a purchase and the $5,498,000
difference between the purchase price and 25% of the fair value of the net
assets acquired was recorded as goodwill and is being amortized over 26 years,
representing the remaining useful life of the goodwill recorded upon the initial
75% acquisition in October 1991.
The consolidated results of operations for the year ended December 31, 1996
include 100% of the operating results of the subsidiary subsequent to
February 20, 1996. For the periods prior to February 20, 1996, the consolidated
results of operations include a charge for the minority stockholder's 25%
ownership interest.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased for cash substantially all of
the assets, subject to certain liabilities assumed, of the Aerospace Display
Systems division of Allard Industries, Inc. The total purchase price was
$13,395,000, including $402,000 in acquisition related costs. ADS develops and
manufactures dichroic liquid crystal displays and modules for commercial and
military avionics systems.
The acquisition was funded with the proceeds from the sale of preferred
stock, convertible subordinated notes and redeemable warrants, borrowings under
the Company's revolving line of credit and a $2,000,000 non-interest bearing
obligation payable to certain Allard stockholders.
The acquisition was accounted for as a purchase and the $7,425,000
difference between the purchase price and the fair value of the net assets
acquired was recorded as goodwill and is being amortized over 30 years.
The consolidated results of operations for the year ended December 31, 1996
include the operating results of ADS subsequent to September 18, 1996.
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division of Elsinore, L.P., collectively
referred to as Elsinore. Elsinore provides engineering services to the
commercial aircraft industry. The total purchase price was $2,443,000, including
$300,000 of acquisition related costs. The purchase price consisted of
$1,000,000 paid in cash at closing and a $1,250,000 15% promissory note payable
to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
PATS
In January 1999, the Company acquired all of the outstanding stock of PATS,
Inc. for a purchase price of $41.5 million (including the assumption of debt)
subject to adjustments for changes to its net working capital, and reserves for
environmental and other indemnities made by the shareholders. PATS is a
Maryland-based designer, manufacturer and installer of aircraft and avionics
systems. Among other things, PATS is the principal supplier of auxiliary fuel
tank systems to the Boeing Business Jet program. The transaction will be
accounted for as a purchase and the difference between the purchase price and
the fair value of the net assets acquired will be recorded as goodwill and
amortized on a straight-line basis over thirty years.
F-14
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for the years ended December 31, 1997 and 1998 and are pro forma for
the DLJ and other acquisitions, excluding the 1999 PATS acquisition, as if they
were consummated at the beginning of each year.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR ENDED DECEMBER
31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues..................................................................................... $ 160,054 $ 173,297
Loss before extraordinary item............................................................... (10,000) (3,548)
</TABLE>
The above information reflects adjustments for inventory step-up,
depreciation, amortization, general and administrative expenses, and interest
expense based on the new cost basis and debt structure of the Company. In 1997
and 1998, income excludes the effect of a $2,078,000 and $2,229,000
extraordinary loss, respectively incurred in connection with the Company's debt
refinancings (Notes 2 and 14).
NOTE 5 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $487,000
and $581,000 at December 31, 1997 and 1998, respectively.
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
commercial and high-end corporate jet aircraft industries. Generally, the
Company does not require collateral or other security to support accounts
receivable subject to credit risk. Under certain circumstances, deposits or
cash-on-delivery terms are required. The Company maintains reserves for
potential credit losses and generally, such losses have been within management's
expectations.
SIGNIFICANT CUSTOMERS
Two customers each accounted for more than 10% of the Company's consolidated
revenues, as follows:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
DECEMBER 31, EIGHT MONTHS ENDED
-------------------- ENDED AUGUST DECEMBER 31,
31, 1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Customer A............................................... 15.8% 19.0% 17.3% 20.1%
Customer B............................................... 7.2% 11.2% 7.6% 5.6%
</TABLE>
Complete loss of Customer A could have a significant adverse impact on the
results of operations expected in future periods. During the year ended
December 31, 1997, Customer A acquired another customer of the Company. The
above amounts for Customer A include the Company's revenue from the acquired
customer after its acquisition. For the year ended December 31, 1997, revenue
from Customer A would have been 20.9% had the acquisition been consummated on
January 1, 1997.
F-15
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INVENTORIES
Inventories are comprised of the following as of December 31, 1997 and 1998
(amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Raw material............................................................. $ 14,224 $ 19,221
Work-in process.......................................................... 4,655 7,231
Finished goods........................................................... 7,097 7,829
--------- ---------
Total inventories...................................................... $ 25,976 $ 34,281
========= =========
</TABLE>
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $125,000 and $897,000 at December 31, 1997
and 1998, respectively.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1997 and
1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................. $ 18,151 $ 12,576
Tooling.................................................................. 3,133 2,162
Computer equipment, furniture and fixtures............................... 3,660 3,230
Land, buildings and leasehold improvements............................... 3,580 11,967
--------- ---------
Total cost............................................................. 28,524 29,935
Accumulated depreciation and amortization.............................. (14,470) (1,775)
--------- ---------
Net property and equipment........................................... $ 14,054 $ 28,160
========= =========
</TABLE>
Property and equipment under capital leases included above consists of the
following as of December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................. $ 1,160 $ 693
Computer equipment, furniture and fixtures............................... 455 243
--------- ---------
Total cost............................................................. 1,615 936
Accumulated depreciation and amortization.............................. (523) (204)
--------- ---------
Net property and equipment........................................... $ 1,092 $ 732
========= =========
</TABLE>
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
F-16
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - OTHER ASSETS
Other assets includes the following as of December 31, 1997 and 1998 and is
net of accumulated amortization for the respective periods as parenthetically
noted (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Goodwill (net of $1,682 and $1,839)...................................... $ 38,592 $ 167,836
Deferred financing costs (net of $64 and $343)........................... 399 8,787
Other intangibles (net of $194 and $1,317)............................... 596 48,708
Other non-amortizable assets............................................. 380 999
--------- ---------
Other assets, net...................................................... $ 39,967 $ 226,330
========= =========
</TABLE>
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 1997 and
1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Salaries, wages, compensated absences and payroll related taxes.......... $ 3,410 $ 6,147
Additional acquisition consideration..................................... -- 3,000
Accrued interest......................................................... 152 2,946
Other accrued expenses................................................... 3,349 6,373
--------- ---------
Total accrued expenses................................................. $ 6,911 $ 18,466
========= =========
</TABLE>
NOTE 10 - BORROWINGS
SHORT-TERM BORROWINGS--The Company's Swiss subsidiary has a short-term
revolving line of credit with a Swiss bank under which Swiss franc denominated
borrowings of $568,000 and $283,000 were outstanding at December 31, 1997 and
1998, respectively. Interest on the line accrues at the bank's prime rate (5.25%
and 4.875% at December 31, 1997 and 1998, respectively) plus 0.25%. The line of
credit is guaranteed by the Company.
LONG-TERM BORROWINGS--Long-term obligations outstanding include the
following as of December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C>
Credit facilities
Revolving lines of credit.............................................. $ 36,000 $ 5,800
Term debt.............................................................. -- 79,888
12% Senior Subordinated Notes due 2008, with interest payable
semi-annually commencing on March 30, 1999............................. -- 100,000
Capital lease obligations and equipment term financing, with interest
at
4.34 % to 18.08%, secured by equipment............................... 547 367
Other.................................................................... 1,723 427
--------- ---------
Total long-term obligations........................................ 38,270 186,482
Less current portion............................................... (858) (1,529)
--------- ---------
Long-term obligations, less current portion...................... $ 37,412 $ 184,953
========= =========
</TABLE>
F-17
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - BORROWINGS (CONTINUED)
PREDECESSOR CREDIT FACILITY
Prior to August 31, 1998, the Company had a credit facility with a group of
banks for a $105 million senior revolving line of credit. Borrowings under the
credit facility were secured by the Company's assets.
The Company, at its option, could elect to pay interest on the credit
facility borrowings based on either the prime rate or interbank offered rate
("IBOR") plus defined margins. The Company was required to pay a commitment fee,
up to a maximum 0.375%, on the unused portion of the credit facility. The
weighted-average interest rate on borrowings outstanding was 7.03% as of
December 31, 1997.
SUCCESSOR CREDIT FACILITY
In connection with the DLJ Acquisition, the Company was required to repay
all of its borrowings under the predecessor credit facility and entered into a
new credit facility. The new credit facility provides for term loan borrowings
in the aggregate principal amount of $80.0 million and revolving loan borrowings
up to an aggregate principal amount of $50.0 million. Principal payments under
the term loan borrowings are due in increasing amounts over the next seven years
and all borrowings under the revolving loan facility must be repaid within six
years. Loans under the new credit facility generally bear interest based on a
margin over, at the Company's option, the prime rate or the Euro-Dollar rate.
Currently, the applicable margins are 1.50%-1.75% for prime rate borrowings and
2.75%-3.00% for Euro-Dollar borrowings. Borrowings under the new credit facility
are secured by substantially all of the assets of the Company. The Company is
subject to certain commitment fees under the facility as well as the maintenance
of certain financial ratios, cash flow results and other restrictive covenants.
In January 1999, term loan borrowings were increased to $99.9 million to
fund the acquisition of PATS, Inc. (Note 3).
12% SENIOR SUBORDINATED NOTES
On October 5, 1998 (subsequent to the DLJ Acquisition and financing), the
Bridge Notes were repaid with the net proceeds from the Units offering. Each
Unit consists of $1,000 principal amount of the Notes and one warrant
(collectively, the "Warrants") to purchase shares of common stock of DeCrane
Holdings ("Holdings Common Stock"). The Notes will mature on September 30, 2008.
Interest on the Notes is payable semi-annually on March 30 and September 30 of
each year, commencing on March 30, 1999. The Notes are unsecured general
obligations of the Company and are subordinated in right of payment to all
existing and future senior indebtedness of the Company, including indebtedness
pursuant to the credit facility. Prior to the Notes maturing, the Company may
redeem all or some of the Notes at a redemption price which may include a
premium. In the event of a change in control, the holders may require the
Company to repurchase the Notes for a redemption price which may also include a
premium. Each Warrant entitles the holder thereof, subject to certain
conditions, to purchase 1.55 shares of Holdings Common Stock at an exercise
price of $23.00 per share. The Warrants, valued at $1,200,000, will be
exercisable at the time they are registered and, unless earlier exercised, will
expire on September 30, 2008.
F-18
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - BORROWINGS (CONTINUED)
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, --------
<S> <C>
1999.................................................................................................. 1,529
2000.................................................................................................. 2,722
2001.................................................................................................. 4,866
2002.................................................................................................. 7,905
2003.................................................................................................. 10,522
Thereafter............................................................................................ 158,938
----------
Total long-term obligations....................................................................... $ 186,482
==========
</TABLE>
NOTE 11 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Domestic............................................ $ (855) $ 7,509 $ 5,637 $ (3,345)
Foreign............................................. 750 1,089 444 353
--------- --------- --------- ---------
Total............................................. $ (105) $ 8,598 $ 6,081 $ (2,992)
========= ========= ========= =========
</TABLE>
The provisions for income taxes (benefit) are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Current
U.S. federal...................................... $ 269 $ 3,231 $ 3,835 $ 1,560
State and local................................... 194 968 1,275 699
Foreign........................................... 161 426 121 145
--------- --------- --------- ---------
Total current................................... 624 4,625 5,231 2,404
--------- --------- --------- ---------
Deferred
U.S. federal...................................... 70 (1,021) (1,932) (4,150)
State and local................................... 21 (279) (435) (816)
Foreign........................................... (3) 19 28 (106)
--------- --------- --------- ---------
Total deferred.................................. 88 (1,281) (2,339) (5,072)
--------- --------- --------- ---------
Total provision................................. $ 712 $ 3,344 $ 2,892 $ (2,668)
========= ========= ========= =========
</TABLE>
F-19
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Income tax (benefit) at U.S. statutory rates......... $ (36) $ 2,923 $ 2,068 $ (1,017)
Increase (decrease) resulting from
Book benefit not provided for net operating loss
carryforwards.................................... 172 -- -- --
Amortization of assets and other expenses not
deductible for income tax purposes............... 137 441 594 782
Decrease in deferred tax asset valuation
allowance........................................ -- (488) -- (2,575)
State income taxes, net of federal benefit......... 157 482 550 (25)
Tax on earnings of subsidiary not consolidated for
tax purposes..................................... 92 -- -- --
Lower tax rates on earnings of foreign
subsidiaries..................................... (65) (116) (50) (36)
Other, net......................................... 255 102 (270) 203
--------- --------- --------- ---------
Income tax (benefit) at effective rates.......... $ 712 $ 3,344 $ 2,892 $ (2,668)
========= ========= ========= =========
</TABLE>
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
<S> <C> <C> <C> <C>
Gross deferred tax liabilities
Intangible assets........................................................ $ 308 $ 18,320
Tax effect on earnings of subsidiary not consolidated for tax purposes... 2,688 --
Property and equipment................................................... 688 4,531
Other.................................................................... 409 416
--------- ---------
Gross deferred tax liabilities......................................... 4,093 23,267
--------- ---------
Gross deferred tax (assets)
Inventory................................................................ (2,811) (2,396)
Loss carryforwards....................................................... (865) (6,183)
Accrued expenses......................................................... (697) (1,657)
Other.................................................................... (537) (341)
--------- ---------
Gross deferred tax (assets)............................................ (4,910) (10,577)
--------- ---------
Deferred tax assets valuation allowance.................................... 2,575 --
--------- ---------
Net deferred tax liability............................................... $ 1,758 $ 12,690
========= =========
</TABLE>
F-20
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The balance sheet classification of the net deferred tax liabilities as of
December 31, 1997 and 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
(PREDECESSOR) (SUCCESSOR)
--------- ---------
Noncurrent deferred tax liability......................................... $ 1,758 $ 16,990
<S> <C> <C>
Current deferred tax asset................................................ -- (4,300)
--------- ---------
Net deferred tax liability.............................................. $ 1,758 $ 12,690
========= =========
</TABLE>
Prior to 1997, the Company incurred losses and accordingly provided a
valuation allowance for its domestic deferred net tax assets. The deferred tax
asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount
of federal and state tax loss carryforwards utilized to reduce 1997 current
income taxes.
During the eight months ended August 31, 1998 and the four months ended
December 31, 1998, the Company incurred net operating losses for tax purposes of
approximated $1,528,000 and $486,000, respectively. The losses were caused by an
$8,880,000 tax deduction for stock options exercised, $3,632,000 of nonrecurring
charges and a $3,724,000 pre-tax extraordinary charge. The net operating loss
tax benefits for both periods were carried back to 1997 for federal income tax
purposes and carried forward for state income tax purposes. The 1998 net
operating losses resulted in $2,545,000 of taxes being refundable as of
December 31, 1998 and are included in prepaid expenses and other current assets.
Even though the Company incurred tax losses during 1998, management believes
that it is more likely than not that the Company will generate taxable income
sufficient to realize the tax benefit associated with the future deductible
deferred tax assets and loss carryforwards prior to their expiration. As a
result, the Company reduced the valuation allowance by $2,575,000 during the
four months ended December 31, 1998.
The Company has approximately $17,400,000 and $600,000 of total loss
carryforwards, which include net operating losses acquired in the Avtech
aquisition, available for federal and state income tax purposes, respectively.
In conjunction with the Avtech acquisition, the Company acquired federal loss
carryforwards of $13,700,000 that are subject to separate return limitation
rules, as defined in the Internal Revenue Code, and expire in 2018. The
remaining federal and state carryforwards expire in varying amounts through 2010
and 2018, respectively. The amount of federal loss carryforwards that may be
utilized in the future are subject to limitations because of the occurrence of
changes in control, as defined in the Internal Revenue Code.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks.
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general economic hedge against foreign inventory
procurement and manufacturing costs. Market value gains and losses on forward
foreign exchange contracts are recognized in the consolidated statements of
operations and aggregated a realized net gain (loss) of ($316,000), ($487,000),
$323,000 and $146,000 for the years ended December 31, 1996 and 1997, the eight
months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
At December 31, 1998, the Company had no open forward exchange contracts.
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
F-21
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - SUCCESSOR CAPITAL STRUCTURE
In connection with the DLJ Acquisition, all of the Company's old outstanding
shares which were tendered were cancelled and non-tendering shareholders were
paid out. The Company was authorized to issue 100 new common shares ($.01 par
value) all of which are issued and outstanding at December 31, 1998.
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company. Completion of the recapitalization
was a condition to the consummation of the Company's initial public offering
(the "IPO") and, was effective concurrent therewith. The IPO was consummated on
April 16, 1997.
The recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock into
1,941,804 shares of common stock; (ii) the cashless exercise and conversion of
all 52,784 and 9,355 issued and outstanding preferred stock warrants and common
stock warrants, respectively, into a total of 16,585 shares of common stock;
(iii) the cashless exercise of 508,497 mandatorily redeemable common stock
warrants (the "Redeemable Warrants") into a total of 507,708 shares of common
stock; and (iv) the cancellation of 95,368 Redeemable Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the recapitalization and the IPO and application of
the net proceeds therefrom. Concurrent with the consummation of the IPO, the
mandatory redemption feature of these warrants was terminated and, as a result,
the value ascribed thereto was reclassified to stockholders' equity as
additional paid-in capital.
On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares
of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net
of $2,268,000 for underwriting discounts and commissions, together with
approximately $12,775,000 of proceeds from borrowings under a new credit
facility were used to repay amounts due under the Company's senior revolving
line of credit, senior term notes, senior subordinated notes and convertible
notes.
FOLLOW-ON EQUITY OFFERING
In April 1998, the Company sold 2,206,177 shares of common stock for $17.00
per share. Net proceeds from the offering of $34,815,000 were used to partially
repay borrowings outstanding under the Company's senior credit facility.
F-22
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO, together with
approximately $12,775,000 of proceeds from borrowings under a credit facility,
to repay the following: (i) senior revolving line of credit borrowings of
$15,356,000; (ii) senior term notes aggregating $16,531,000; (iii) senior
subordinated notes payable to related parties aggregating $7,000,000; and
(iv) convertible notes payable to related parties aggregating $3,000,000. In
conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a
$1,149,000 write-off of unamortized original issued discounts; and (iii) a
$344,000 charge for a prepayment penalty and other related expenses.
MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
The table below summarizes Redeemable Warrant transactions during the years
ended December 31, 1996, and 1997 (amounts in thousands, except share data).
<TABLE>
<CAPTION>
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
<S> <C> <C>
Balance, December 31, 1995....................................................................... $ 1,633 446,296
Issued in conjunction with sale of Preferred Stock to finance Minority Interest acquisition...... 492 194,618
Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS
acquisition.................................................................................... 248 98,158
Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock..................... 7 2,868
Issued in conjunction with debt agreement amendment.............................................. 179 70,893
Adjustment to estimated redemption value......................................................... 4,320 --
--------- ---------
Balance, December 31, 1996....................................................................... 6,879 812,833
Adjustment to redemption value to reflect the IPO per share price................................ 2,203 --
Cashless exercise and conversion pursuant to the Recapitalization................................ (6,103) (508,497)
Cancelled pursuant to the Recapitalization....................................................... (1,143) (95,368)
Cancelled upon debt repayment with IPO proceeds.................................................. (1,657) (138,075)
Reclassification of warrants no longer mandatorily redeemable to additional paid-in capital...... (179) (70,893)
--------- ---------
Balance, December 31, 1997....................................................................... $ -- --
========= =========
</TABLE>
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which included, in part, an earnings multiple. The Redeemable
Warrants' value was subsequently adjusted to reflect estimated redemption value.
Concurrent with the consummation of the recapitalization and IPO, the Company
increased the redemption value by $2,203,000 to reflect the $12.00 per share IPO
price. The adjustments to redemption value were charged (credited) to
accumulated deficit.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its preferred stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of preferred stock
were converted into .28357 of a share of common stock. The
F-23
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
recapitalization also provided for the cashless exercise and conversion of all
preferred stock warrants into 10,206 common shares. There were no shares of
preferred stock or warrants to purchase preferred stock outstanding as of
December 31, 1997.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the
Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable
Warrants to purchase 194,618 common shares to a related party (Note 19).
Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable
Warrants to reflect their estimated fair market value on the issuance date. The
proceeds from the sale, net of issuance costs of $558,000, were used to fund the
Minority Interest Acquisition.
On September 18, 1996, the Company sold 750,000 preferred shares at $4.00
per share and issued Redeemable Warrants to purchase 49,079 common shares to
related parties (Note 19). Proceeds from the sale aggregating $124,000 were
ascribed to the Redeemable Warrants to reflect their estimated fair market value
on the issuance date. The proceeds from the sale, net of issuance costs of
$137,000, were used to fund the ADS acquisition.
COMMON STOCK
On February 19, 1997, in conjunction with reorganizing as a Delaware
corporation, the Company established a $.01 par value for its common stock and
increased to 9,924,950 the number of common shares authorized. As of
December 31, 1997, a total of 527,156 common shares were reserved for issuance
upon exercise of stock options outstanding under the Company's stock option
plan.
As part of the recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. Redeemable Warrants to purchase 70,893 common shares at an
exercise price of $14.11 per share remained after the recapitalization.
Concurrent with the consummation of the IPO, the mandatory redemption feature of
these warrants was terminated and, consequently, became non-redeemable warrants.
In December 1997, the holders of these warrants elected to exercise all of the
warrants on a cashless basis and convert the warrants into 16,130 common shares.
No non-redeemable warrants were outstanding as of December 31, 1997.
During 1998 in connection with the DLJ Acquisition all stock options became
100% vested and were either exercised or cancelled as of August 31, 1998. The
following table summarizes the status of the Company's stock option plan at
December 31, 1996, 1997, and 1998 and the activity for the years ended
December 31, 1996 and 1997, and the eight months ended August 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year.............................................. 208,423 $ 0.529 355,001 $ 1.724 501,260 $ 6.089
Granted............................................ 147,031 3.413 163,662 15.574 75,000 16.85
Exercised.......................................... -- -- -- -- (575,692) 7.496
Cancelled.......................................... (453) 0.529 (17,403) 6.228 (568) 1.234
--------- --------- ----------
Options outstanding at end of year................. 355,001 1.724 501,260 6.089 -- --
========= ========= ========== =========
Options exercisable at end of year................. 141,845 0.633 200,444 0.921 -- --
========= ========= ========== =========
</TABLE>
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 (through August 31, 1998)
approximated the fair market value of the underlying common stock on the grant
date. The exercise price of certain options granted from February 1996 to
F-24
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
January 1997 were deemed to be below the fair market value of the underlying
common stock on the grant date and such difference is being recognized as
additional compensation expense in the consolidated financial statements on a
straight line basis over the vesting period of the underlying options.
Compensation expense recognized was $158,000, $240,000 and $332,000 for the
years ended December 31, 1996 and 1997 and the eight months ended August 31,
1998, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS 123, the Company's net income (loss) would have been as follows
(amounts in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ AUGUST 31,
1996 1997 1998
(PREDECESSOR) (PREDECESSOR)
------------------------ -------------
<S> <C> <C> <C>
Net income (loss)
As reported................................................................... $ (817) $ 3,176 $ 3,189
Pro forma..................................................................... (822) 3,129 2,699
Weighted-average fair value of options granted
Compensatory stock options.................................................... 5.91 5.70 5.70
Non-compensatory stock options................................................ 0.10 5.08 5.08
</TABLE>
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%; expected life of 2.5 years; and expected stock price volatility of
39.9%. The fair value for options granted prior to the IPO was estimated on the
dates of grant using a minimum value method, assuming a risk-free interest rate
of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option
pricing models, the minimum value method excludes stock price volatility, which
could not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS 123 in providing the pro
forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LITIGATION
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company
F-25
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
intends to deny any liability, and further believes that it is indemnified with
respect to any such liabilities. The Company and two of its subsidiaries have
confirmed that they are indemnified for any liability in the action filed by
American International Airways; and for the further cost of defense of the
action. A third subsidiary was named as a defendant but has been dismissed from
the case without prejudice.
On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware
Chancery Court on behalf of a purported class of stockholders of the Company
against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and
certain of its affiliates ("DLJ"), alleging, among other things, that the
directors had breached their fiduciary duties by entering into the merger
agreement related to the DLJ Acquisition without engaging in an auction or
"active market check" and, therefore, agreed to terms that were unfair and
inadequate from the standpoint of the Company's stockholders. On July 24, 1998,
the plaintiffs amended the complaint by repeating the allegations in the initial
complaint and adding allegations that: (i) the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 (the "14D-9") contained
material misstatements or omissions; (ii) the termination fees were
unreasonable; and (iii) the directors who approved the DLJ Acquisition had
conflicts of interest. The complaint sought a preliminary and permanent
injunction barring defendants from proceeding with the transaction or, if the
transaction is consummated, an order rescinding it or awarding damages, together
with interest, and an award of attorneys' fees and litigation expenses. Without
admitting any wrongdoing in the action, in order to avoid the burden and expense
of further litigation, the Company, DLJ, and the individual defendants reached
an agreement in principle with the plaintiffs which contemplates settlement of
the action. The Company, DLJ and the individual defendants and the plaintiffs
entered into a memorandum of understanding (the "Memorandum of Understanding"),
pursuant to which the parties would, subject to certain facts being confirmed
through discovery which has not been completed, enter into a settlement
agreement which would be subject to approval by the Court of Chancery. The
Memorandum of Understanding required the Company to provide additional
disclosures in an amendment to the 14D-9 which has occurred, and for a complete
release and settlement of all claims, whether asserted directly, derivatively or
otherwise, against defendants, or any of their affiliates, directors, officers,
employees or agents arising out of the facts set forth in the complaint. The
Memorandum of Understanding contemplates that, in connection with the benefit
conferred, plaintiffs' counsel will apply to the Court of Chancery for an award
of attorney's fees and litigation expenses in an amount not exceeding $375,000,
which application, the defendants have agreed not to oppose.
On August 5, 1998, the Company and its chief executive officer were served
in an action filed in state court in California by the Company's chief financial
officer and secretary claiming that he is due additional compensation in the
form of stock options, and claiming fraud, negligent misrepresentation and
breach of contract in connection therewith. On September 22, 1998, the plaintiff
amended the compliant by repeating the allegations in the initial compliant and
adding allegations of fraudulent misrepresentation in violation of certain
provisions of the California Labor Code (for which doubled damages are sought),
promissory estoppel, and wrongful discharge as a violation of public policy (as
a result of allegations made by the plaintiff of improprieties in connection
with the fairness opinion with respect to the DLJ Acquisition). The action seeks
not less than $1.5 million plus punitive damages and costs. Discovery has not
been completed. The Company intends to vigorously defend against such claim. The
plaintiff's employment with the Company was terminated.
The Canadian Transportation Safety Board has notified the Company that as
part of its investigation of the crash of Swissair Flight 111 on September 2,
1998, burned wire was found which was attached to the in-flight entertainment
system installed on certain Swissair aircraft by a subsidiary of the Company.
The Canadian Transportation Safety Board has advised the Company that it does
not have evidence that the system the Company installed malfunctioned or failed
during the flight. The Company has been requested by attorneys for families of
persons who died aboard the flight to put its insurance carrier on notice of a
potential claim by such families.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of these matters,
F-26
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998
(amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
Year ending December 31,
1999............................................................................................. $ 230 $ 3,181
2000............................................................................................. 99 2,758
2001............................................................................................. 41 2,246
2002............................................................................................. 17 2,195
2003............................................................................................. 9 1,941
2004 and thereafter.............................................................................. -- 4,811
--------- ---------
Total minimum payments required.................................................................. 396 $ 17,132
=========
Less amount representing future interest cost.................................................... (29)
---------
Recorded obligation under capital leases....................................................... $ 367
=========
</TABLE>
Total rental expense charged to operations for the years ended December 31,
1996 and 1997, the eight months ended August 31, 1998 and the four months ended
December 31, 1998 was $1,614,000, $2,065,000, $2,303,000 and $1,095,000
respectively.
NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
The Company paid the following amounts in cash (amounts in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
---------------------------- AUGUST 31, DECEMBER 31,
1996 1997 1998 1998
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
---------------------------- ------------- -----------
Interest......................................... $ 2,983 $ 2,842 $ 2,227 $ 3,706
<S> <C> <C> <C> <C>
Income taxes..................................... 132 300 4,825 1,328
</TABLE>
F-27
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred as follows
(amounts in thousands):
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1996 1997 1998 1998
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
-------------------- ----------- -----------
Refinancing of Bridge Notes with proceeds from Units
offering.............................................. $ -- $ -- $ -- $ 100,000
<S> <C> <C> <C> <C>
Additional acquisition consideration................... -- -- -- 3,000
Debt incurred for the acquisition of machinery and
equipment............................................. 414 182 116 48
Financing provided by sellers in connection with
acquisitions.......................................... 3,492 -- -- --
Detail of acquisitions:
Fair value of assets acquired, net of cash
acquired........................................... $ 20,887 $ 26,178 $ 90,377 --
Liabilities assumed.................................. (2,687) (2,581) (4,569) --
--------- --------- --------- ---------
Cash paid for acquisition, net of cash
acquired....................................... $ 18,200 $ 23,597 $ 85,808 --
========= ========= ========= =========
</TABLE>
NOTE 17 - FOREIGN OPERATIONS AND EXPORT REVENUES
FOREIGN OPERATIONS
The Company operates in one business segment - avionics components
manufacturing and integration services. Domestic and foreign operations consist
of the following (amounts in thousands):
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1996 1997 1998 1998
--------- --------- ----------- -----------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
Revenues
Gross revenues
United States..................................... $ 64,383 $ 109,490 $ 89,619 $ 60,785
Western Europe.................................... 10,882 12,240 7,940 4,510
--------- --------- --------- ---------
Total gross revenues............................ 75,265 121,730 97,559 65,295
--------- --------- --------- ---------
Less interarea transfers
United States..................................... (1,496) (2,448) (1,744) (1,350)
Western Europe.................................... (8,670) (10,379) (5,738) (3,589)
--------- --------- --------- ---------
Total interarea transfers....................... (10,166) (12,827) (7,482) (4,939)
--------- --------- --------- ---------
Net revenues
United States..................................... 62,887 107,042 87,875 59,435
Western Europe.................................... 2,212 1,861 2,202 921
--------- --------- --------- ---------
Total net revenues.............................. $ 65,099 $ 108,903 $ 90,077 $ 60,356
========= ========= ========= =========
Consolidated long-lived assets
United States....................................... $ 10,573 $ 13,230 $ 24,693 $ 26,455
Western Europe...................................... 1,614 824 543 1,705
--------- --------- --------- ---------
Total consolidated long-lived assets.............. $ 12,187 $ 14,054 $ 25,236 $ 28,160
========= ========= ========= =========
</TABLE>
The Company allocates its revenues on the basis of the location in which the
sale originated. Revenues in Western Europe are primarily from Switzerland.
Interarea sales are accounted for at prices that the
F-28
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - FOREIGN OPERATIONS AND EXPORT REVENUES (CONTINUED)
Company believes would be equivalent to unaffiliated customer sales. Interarea
transfers and eliminations reflect the shipment of raw component parts between
areas. Long-lived assets consists of the Company's property and equipment.
Corporate long-lived assets are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $6,484,000, $12,430,000,
$11,804,000 and $9,983,000 for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively. Export revenues are primarily derived from sales to customers
located in Western Europe, the Far East and Canada.
NOTE 18 - EMPLOYEE BENEFIT PLANS
The Company's Swiss subsidiary sponsors a defined contribution pension plan
covering substantially all of its employees as required by Swiss law.
Contributions and costs, which are shared equally by the Company and the
employees, are determined as a percentage of each covered employees' salary.
Company contributions and costs associated with the plan were $151,000,
$157,000, $102,000 and $51,000 for the years ended December 31, 1996 and 1997,
the eight months ended August 31, 1998 and the four months ended December 31,
1998, respectively.
Substantially all of the Company's domestic employees are eligible to
participate in a 401(k) defined contribution plan (the "Plan"). Participation in
the Plan is at the discretion of each individual employee who is eligible to
participate. Each participating employee is permitted to contribute up to a
maximum amount defined in the Plan. The Company and its subsidiaries may make
periodic discretionary matching contributions to the Plan. The Company made
matching contributions of $41,000, $128,000 and $95,000 during the year ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998, respectively. No matching contributions were made to
the plan during the year ended December 31, 1996. The costs associated with
administering the plan were not significant for any period presented.
F-29
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS FOUR MONTHS
DECEMBER 31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1996 1997 1998 1998
--------- --------- ------------- -----------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
DLJ
Transaction financing fees............................. $ -- $ -- $ -- $ 12,000
Credit facility outstanding borrowings................. -- -- -- 4,800
Credit facility interest expense....................... -- -- -- 282
Bridge notes interest expense.......................... -- -- -- 1,041
Global Technology Partners, LLC
Promissory note receivable............................. -- -- -- 352
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period............................. 983 358 -- --
Accrued and payable as of year end................... 43 -- -- --
Purchase of Convertible Notes, Preferred Stock and
Redeemable Warrants in conjunction with ADS
acquisition.......................................... 2,000 -- -- --
Fees and expenses earned............................... 36 -- -- --
Debt repaid with IPO proceeds
Senior subordinated debt............................. -- 7,000 -- --
Convertible Notes.................................... -- 1,000 -- --
Investors
Purchases of debt and equity securities
Preferred Stock and Redeemable Warrants in
conjunction with Minority Interest acquisition..... 6,500 -- -- --
Convertible Notes, Preferred Stock and Redeemable
Warrants in conjunction with ADS acquisition....... 4,000 -- -- --
Fees and expenses earned............................... 74 -- -- --
Convertible Notes
Interest earned during the period.................... 86 98 -- --
Interest accrued and payable as of year end.......... 86 -- -- --
Repaid with IPO proceeds............................. -- 2,000 -- --
</TABLE>
Each related party is described below:
DLJ -- The Company and its affiliates incurred fees payable to DLJ related
entities of approximately $12.0 million in connection with the DLJ Acquisition.
The Bridge Notes issued to finance the DLJ acquisition were also purchased by a
DLJ entity. In addition, DLJ is involved in making a market for the Notes and
may hold such Notes from time to time. The Company's credit facility is also
provided by a syndicate of lenders led by DLJ related entities.
Global Technology Partners, LLC ("GTP") -- Two members of the Company's
Board of Directors are also members of GTP. In December 1998, GTP purchased
approximately $704,000 of shares of common and preferred stock of DeCrane
Holdings. The Company loaned half of the purchase price for such shares to GTP
at an interest rate equal to the interest rate on the longest maturity senior
bank debt of the Company in effect from time to time, plus 1.0%. The loans are
repayable out of the proceeds from the sale of such stock, are secured by such
stock, and are included in other long-term assets. Upon collection of the notes,
funds will be advanced to Holdings.
F-30
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
Senior Subordinated Lenders - Own 8.9% of the Company's issued and
outstanding common stock at December 31, 1997, were represented on the Company's
Board of Directors in 1995 and 1996, and provided a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 10 and 14). The
ownership percentage reflects the cashless exercise and conversion of all
Preferred Stock, Preferred Stock warrants, common stock warrants and Redeemable
Warrants into 451,370 common shares in conjunction with the Recapitalization
(Note 14).
Investors - Own 16.4% of the Company's issued and outstanding common stock
at December 31, 1997, are represented on the Company's Board of Directors, and
provided a portion of the Company's Convertible Notes and Preferred Stock
financing (Notes 10 and 14). The ownership percentage reflects the cashless
exercise and conversion of all Preferred Stock and Redeemable Warrants into
840,808 common shares in conjunction with the Recapitalization (Note 14).
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
In conjunction with the Notes, Bridge Notes and credit facility described in
Note 2, the following summarized condensed consolidating financial information
is presented for the Company, segregating guarantor subsidiaries and
non-guarantor subsidiaries. The accompanying financial information in the
"Guarantor Subsidiaries" column reflects the financial position, results of
operations and cash flows for those subsidiaries which guarantee the Notes and
credit facility. The guarantor subsidiaries are wholly-owned subsidiaries of the
Company and the guarantees are full, unconditional, and joint and several.
Separate financial statements of the guarantor subsidiaries are not presented
because management believes that such financial statements would not be material
to investors.
Investments in subsidiaries in the following condensed consolidating
financial information are accounted for under the equity method of accounting.
Consolidating adjustments include the following:
(1) Elimination of investments in subsidiaries.
(2) Elimination of intercompany accounts.
(3) Elimination of intercompany sales between guarantor and
non-guarantor subsidiaries.
(4) Elimination of equity in earnings of subsidiaries.
F-31
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 (PREDECESSOR)
-----------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 16 $ 109 $ 81 $ -- $ 206
Accounts receivable, net......... -- 17,101 1,051 -- 18,152
Inventories...................... -- 24,399 1,577 -- 25,976
Other current assets............. 98 505 179 -- 782
------- ------- ------- -------- -------
Total current assets........... 114 42,114 2,888 -- 45,116
Property and equipment, net........ 290 12,928 836 -- 14,054
Other assets, principally
intangibles, net.................. 472 39,257 238 -- 39,967
Investments in subsidiaries........ 20,414 3,378 -- (23,792)(1) --
Intercompany receivables........... 60,946 659 4,357 (65,962)(2) --
------- ------- ------- -------- -------
$82,236 $98,336 $ 8,319 $(89,754) $99,137
======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term obligations........... $ 4 $ 801 $ 621 $ -- $ 1,426
Other current liabilities........ 4,333 12,780 1,805 -- 18,918
------- ------- ------- -------- -------
Total current liabilities...... 4,337 13,581 2,426 -- 20,344
------- ------- ------- -------- -------
Long-term liabilities
Long-term obligations............ 36,027 1,372 13 -- 37,412
Intercompany payable............. 873 64,430 659 (65,962)(2) --
Other long-term liabilities...... 1,333 96 425 -- 1,854
------- ------- ------- -------- -------
Total long-term liabilities.... 38,233 65,898 1,097 (65,962) 39,266
------- ------- ------- -------- -------
Stockholders' equity
Capital.......................... 51,110 12,418 1,194 (13,612)(1) 51,110
Retained earnings (deficit)...... (11,444) 6,439 3,741 (10,180)(1) (11,444)
Accumulated comprehensive income
(loss)......................... -- -- (139) -- (139)
------- ------- ------- -------- -------
Total stockholder's equity..... 39,666 18,857 4,796 (23,792) 39,527
------- ------- ------- -------- -------
$82,236 $98,336 $ 8,319 $(89,754) $99,137
======= ======= ======= ======== =======
</TABLE>
F-32
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (SUCCESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 2,458 $ 762 $ 298 $ -- $ 3,518
Accounts receivable, net......... -- 28,917 1,524 -- 30,441
Inventories...................... -- 32,624 1,657 -- 34,281
Other current assets............. 7,066 894 237 -- 8,197
-------- -------- ------- --------- --------
Total current assets........... 9,524 63,197 3,716 -- 76,437
Property and equipment, net........ 272 26,170 1,718 -- 28,160
Other assets, principally
intangibles, net.................. 12,105 200,383 13,842 -- 226,330
Investments in subsidiaries........ 239,101 4,373 -- (243,474)(1) --
Intercompany receivables........... 45,710 693 3,567 (49,970)(2) --
-------- -------- ------- --------- --------
$306,712 $294,816 $22,843 $(293,444) $330,927
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term obligations........... $ 892 $ 628 $ 292 $ -- $ 1,812
Other current liabilities........ 10,767 16,651 1,174 -- 28,592
-------- -------- ------- --------- --------
Total current liabilities...... 11,659 17,279 1,466 -- 30,404
-------- -------- ------- --------- --------
Long-term liabilities
Long-term obligations............ 184,822 131 -- -- 184,953
Intercompany payables............ (3,694) 53,388 276 (49,970)(2) --
Other long-term liabilities...... 16,278 658 713 -- 17,649
-------- -------- ------- --------- --------
Total long-term liabilities.... 197,406 54,177 989 (49,970) 202,602
-------- -------- ------- --------- --------
Stockholders' equity
Capital.......................... 100,200 214,823 15,440 (230,263)(1) 100,200
Retained earnings (deficit)...... (2,553) 8,537 4,674 (13,211)(1) (2,553)
Accumulated comprehensive income
(loss)......................... -- -- 274 -- 274
-------- -------- ------- --------- --------
Total stockholders' equity..... 97,647 223,360 20,388 (243,474) 97,921
-------- -------- ------- --------- --------
$306,712 $294,816 $22,843 $(293,444) $330,927
======== ======== ======= ========= ========
</TABLE>
F-33
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR)
-----------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $61,835 $11,934 $ (8,670)(3) $65,099
Cost of sales...................... -- 48,542 9,520 (8,670)(3) 49,392
------- ------- ------- -------- -------
Gross profit..................... -- 13,293 2,414 -- 15,707
Selling, general and administrative
expenses.......................... 2,461 7,240 1,046 -- 10,747
Amortization of intangible
assets............................ -- 695 14 -- 709
Interest expense................... 4,032 129 87 -- 4,248
Intercompany charges............... (2,182) 2,002 180 -- --
Equity in earnings of
subsidiaries...................... (2,820) (594) -- 3,414 (4) --
Other expenses (income)............ (3) 204 (93) -- 108
Provisions for income taxes........ (671) 1,225 158 -- 712
------- ------- ------- -------- -------
Net income (loss).................. $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817)
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $106,154 $13,128 $(10,379)(3) $108,903
Cost of sales...................... -- 81,115 9,511 (10,379)(3) 80,247
------- -------- ------- -------- --------
Gross profit..................... -- 25,039 3,617 -- 28,656
Selling, general and administrative
expenses.......................... 3,646 10,720 1,390 -- 15,756
Amortization of intangible
assets............................ -- 892 13 -- 905
Interest expense................... 2,888 220 46 -- 3,154
Intercompany charges............... (4,617) 4,432 185 -- --
Equity in earnings of
subsidiaries...................... (6,392) (999) -- 7,391 (4) --
Other expenses..................... -- 161 82 -- 243
Provision (benefit) for income
taxes............................. (779) 3,678 445 -- 3,344
Extraordinary charge, net of tax... 2,078 -- -- -- 2,078
------- -------- ------- -------- --------
Net income......................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176
======= ======== ======= ======== ========
</TABLE>
F-34
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $87,312 $ 8,503 $(5,738)(3) $90,077
Cost of sales...................... -- 59,252 6,587 (5,738)(3) 60,101
------- ------- ------- ------- -------
Gross profit..................... -- 28,060 1,916 -- 29,976
Selling, general and administrative
expenses.......................... 3,949 11,041 729 -- 15,719
Nonrecurring charges............... 3,632 -- -- -- 3,632
Amortization of intangible
assets............................ -- 1,337 10 -- 1,347
Interest expense (income).......... 2,343 7 -- -- 2,350
Intercompany charges............... (4,357) 4,229 128 -- --
Equity in earnings of
subsidiaries...................... (6,824) (489) -- 7,313 (4) --
Other expenses (income)............ 600 (164) 411 -- 847
Provision (benefit) for income
taxes............................. (2,532) 5,275 149 -- 2,892
------- ------- ------- ------- -------
Net income......................... $ 3,189 $ 6,824 $ 489 $(7,313) $ 3,189
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $58,904 $ 5,041 $(3,589) $60,356
Cost of sales...................... -- 42,691 3,637 (3,589) 42,739
------- ------- ------- ------- -------
Gross profit....................... -- 16,213 1,404 -- 17,617
Selling, general and administrative
expenses.......................... 1,741 8,124 409 -- 10,274
Nonrecurring charges............... -- -- -- -- --
Amortization of intangible
assets............................ 102 2,868 178 -- 3,148
Interest expense (income).......... 6,754 92 6 -- 6,852
Intercompany charges............... (3,088) 3,025 63 -- --
Equity in earnings of
subsidiaries...................... (7,753) (506) -- 8,259 (4) --
Other expenses (income)............ -- 132 203 -- 335
Provision for income taxes
(benefit)......................... 2,568 (5,275) 39 -- (2,668)
Extraordinary charge, net of tax... 2,229 -- -- -- 2,229
------- ------- ------- ------- -------
Net income (loss).................. $(2,553) $ 7,753 $ 506 $(8,259) $(2,553)
======= ======= ======= ======= =======
</TABLE>
F-35
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- --------- ---------- --------- ----------
Cash flows from operating activities
Net income (loss)............................ $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817)
Adjustments to net income (loss)
Non-cash adjustments to net income
(loss)................................... 1,093 2,623 903 -- 4,619
Equity in earnings of subsidiaries......... (2,820) (594) -- 3,414 (4) --
Changes in working capital................. (864) 1,525 (1,505) -- (844)
---------- --------- ---------- --------- ----------
Net cash provided by (used for) operating
activities............................. (3,408) 5,946 420 -- 2,958
---------- --------- ---------- --------- ----------
Cash flows from investing activities
Acquisition of companies, net of cash
acquired................................... (18,200) -- -- -- (18,200)
Capital expenditures and other............... (97) (5,353) (366) -- (5,816)
---------- --------- ---------- --------- ----------
Net cash used for investing activities... (18,297) (5,353) (366) -- (24,016)
---------- --------- ---------- --------- ----------
Cash flows from financing activities
Net proceeds from sale of equity............. 8,240 -- -- -- 8,240
Debt financing for acquisitions.............. 13,548 -- -- -- 13,548
Principal payments on long-term debt and
leases..................................... (1,500) (438) (63) -- (2,001)
Line of credit borrowings (repayments)....... 1,280 -- (89) -- 1,191
Other, net................................... 158 (85) -- -- 73
---------- --------- ---------- --------- ----------
Net cash provided by (used for) financing
activities............................. 21,726 (523) (152) -- 21,051
---------- --------- ---------- --------- ----------
Effect of foreign currency translation on
cash......................................... -- -- 22 -- 22
---------- --------- ---------- --------- ----------
Net increase (decrease) in cash and
equivalents.................................. 21 70 (76) -- 15
Cash and equivalents at beginning of period.... 16 17 272 -- 305
---------- --------- ---------- --------- ----------
Cash and equivalents at end of period.......... $ 37 $ 87 $ 196 $ -- $ 320
========== ========= ========== ========= ==========
</TABLE>
F-36
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- --------- ---------- --------- ----------
Cash flows from operating activities
Net income................................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176
Adjustments to net income
Non-cash adjustments to net income......... 1,307 4,687 829 -- 6,823
Equity in earnings of subsidiaries......... (6,392) (999) -- 7,391 (4) --
Changes in working capital................. 1,374 (4,530) (2,202) -- (5,358)
---------- --------- ---------- --------- ----------
Net cash provided by (used for) operating
activities............................. (535) 5,093 83 -- 4,641
---------- --------- ---------- --------- ----------
Cash flows from investing activities
Acquisition of companies, net of cash
acquired................................... (23,597) -- -- -- (23,597)
Capital expenditures and other............... (244) (3,823) (145) -- (4,212)
---------- --------- ---------- --------- ----------
Net cash used for investing activities... (23,841) (3,823) (145) -- (27,809)
---------- --------- ---------- --------- ----------
Cash flows from financing activities
Net proceeds from sale of equity............. 28,933 -- -- -- 28,933
Net debt repaid with equity offering
proceeds................................... (29,848) -- -- -- (29,848)
Debt financing for acquisitions.............. 23,597 -- -- -- 23,597
Principal payments on long-term debt and
leases..................................... (474) (1,147) (54) -- (1,675)
Line of credit borrowings (repayments)....... 1,907 -- (96) -- 1,811
Other, net................................... 240 (101) -- -- 139
---------- --------- ---------- --------- ----------
Net cash provided by (used for) financing
activities............................. 24,355 (1,248) (150) -- 22,957
---------- --------- ---------- --------- ----------
Effect of foreign currency translation on
cash......................................... -- -- 97 -- 97
---------- --------- ---------- --------- ----------
Net increase (decrease) in cash and
equivalents.................................. (21) 22 (115) -- (114)
Cash and equivalents at beginning of period.... 37 87 196 -- 320
---------- --------- ---------- --------- ----------
Cash and equivalents at end of period.......... $ 16 $ 109 $ 81 $ -- $ 206
========== ========= ========== ========= ==========
</TABLE>
F-37
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- --------- --------- --------- ----------
Cash flows from operating activities
Net income................................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189
Adjustments to net income
Non-cash adjustments to net income......... (2,222) 3,420 557 -- 1,755
Equity in earnings of subsidiaries......... (6,824) (489) -- 7,313(4) --
Changes in working capital................. 5,492 (7,393) (29) -- (1,930)
---------- --------- --------- --------- ----------
Net cash provided by (used for) operating
activities............................. (365) 2,362 1,017 -- 3,014
---------- --------- --------- --------- ----------
Cash flows from investing activities
Acquisition of companies, net of cash
acquired................................... (87,071) 1,263 -- -- (85,808)
Capital expenditures and other............... (44) (1,306) (220) -- (1,570)
---------- --------- --------- --------- ----------
Net cash used for investing activities... (87,115) (43) (220) -- (87,378)
---------- --------- --------- --------- ----------
Cash flows from financing activities
Net proceeds from sale of equity............. 34,815 -- -- -- 34,815
Net debt repaid with equity offering
proceeds................................... (34,815) -- -- -- (34,815)
Debt financing for acquisitions.............. 85,808 -- -- -- 85,808
Principal payments on long-term debt and
leases..................................... (3) (1,280) (34) -- (1,317)
Line of credit borrowings (repayments)....... 6,007 -- (554) -- 5,453
Other, net................................... 23 (96) -- -- (73)
---------- --------- --------- --------- ----------
Net cash provided by (used for) financing
activities............................. 91,835 (1,376) (588) -- 89,871
---------- --------- --------- --------- ----------
Effect of foreign currency translation on
cash......................................... -- -- 26 -- 26
---------- --------- --------- --------- ----------
Net increase in cash and equivalents........... 4,355 943 235 -- 5,533
Cash and equivalents at beginning of period.... 16 109 81 -- 206
---------- --------- --------- --------- ----------
Cash and equivalents at end of period.......... 4,371 $ 1,052 $ 316 $ -- $ 5,739
========== ========= ========= ========= ==========
</TABLE>
F-38
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- --------- --------- --------- ----------
Cash flows from operating activities
Net income...................................... $ (2,553) $ 7,753 $ 506 $ (8,259) $ (2,553)
Adjustments to net income
Non-cash adjustments to net income............ (2,647) 4,964 (274) -- 2,043
Equity in earnings of subsidiaries............ (7,753) (506) -- 8,259(4) --
Changes in working capital.................... 12,408 (10,272) (618) -- 1,518
---------- --------- --------- --------- ----------
Net cash provided by (used for) operating
activities................................ (545) 1,939 (386) -- 1,008
---------- --------- --------- --------- ----------
Cash flows from investing activities
Acquisition of companies, net of cash
acquired...................................... -- -- -- -- --
Capital expenditures and other.................. -- (1,746) (67) -- (1,813)
---------- --------- --------- --------- ----------
Net cash used for investing activities...... -- (1,746) (67) -- (1,813)
---------- --------- --------- --------- ----------
Cash flows from financing activities
Acquisition of Predecessor, net................. -- -- -- -- --
Net proceeds from sale of equity................ -- -- -- -- --
Net debt repaid with equity offering proceeds... -- -- -- -- --
Debt financing for acquisitions................. -- -- -- -- --
Principal payments on long-term debt and
leases........................................ (1) (447) (10) -- (458)
Line of credit borrowings (repayments).......... (1,367) -- 264 -- (1,103)
Other, net...................................... -- (36) -- -- (36)
---------- --------- --------- --------- ----------
Net cash provided by (used for) financing
activities................................ (1,368) (483) 254 -- (1,597)
---------- --------- --------- --------- ----------
Effect of foreign currency translation on cash.... -- -- 181 -- 181
---------- --------- --------- --------- ----------
Net increase (decrease) in cash and equivalents... (1,913) (290) (18) -- (2,221)
Cash and equivalents at beginning of period....... 4,371 1,052 316 -- 5,739
---------- --------- --------- --------- ----------
Cash and equivalents at end of period............. $ 2,458 $ 762 $ 298 $ -- $ 3,518
========== ========= ========= ========= ==========
</TABLE>
F-39
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - EVENT SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS REPORT (UNAUDITED)
In April 1999, the Company purchased all of the outstanding stock of PPI
Holdings, Inc. PPI is a manufacturer of interior furniture components primarily
for middle- and high-end corporate aircraft.
The purchase price was $60.2 million, less debt acquired, in cash at closing
and is subject to adjustment for changes in working capital. Additional
contingent consideration totaling $19.5 million is payable over two years based
on future attainment of defined performance criteria. The acquisition will be
accounted for as a purchase and the difference between the purchase price and
the fair value of the net assets acquired will be recorded as goodwill and
amortized on a straight-line basis over thirty years.
NOTE 22 - CONDENSED QUARTERLY DATA FOR 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
-------------------------------------------- ------------------------------------------------
(SUCCESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(TWO MONTHS (ONE MONTH
ENDED ENDED
AUGUST 31, SEPTEMBER 30,
1998) 1998)
1ST 2ND 3RD 4TH 1ST 2ND 3RD 3RD
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues................. $ 26,118 $ 28,130 $ 26,639 $ 28,016 $ 29,128 $ 29,854 $ 31,095 $ 16,012
Gross profit............. 6,011 7,214 6,998 8,433 8,987 9,720 11,269 4,932
Income (loss) before
extraordinary item...... 629 1,454 1,481 1,690 1,688 1,672 (171) (480)
Extraordinary loss from
debt refinancing........ -- (2,078) -- -- -- -- -- (296)
Net income (loss)........ 629 (624) 1,481 1,690 1,688 1,672 (171) (776)
<CAPTION>
<S> <C>
4TH
---------
Revenues................. $ 44,344
Gross profit............. 12,685
Income (loss) before
extraordinary item...... 156
Extraordinary loss from
debt refinancing........ (1,933)
Net income (loss)........ (1,777)
</TABLE>
F-40
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(SUCCESSOR)
---------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................... $ 3,518 $ 3,139
Accounts receivable, net................................................................ 30,441 40,074
Inventories............................................................................. 34,281 51,290
Deferred income taxes................................................................... 4,300 2,916
Prepaid expenses and other current assets............................................... 3,897 2,847
---------- -----------
Total current assets.................................................................. 76,437 100,266
Property and equipment, net............................................................... 28,160 36,531
Other assets, principally intangibles, net................................................ 226,330 321,966
---------- -----------
Total assets........................................................................ $ 330,927 $ 458,763
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term borrowings................................................................... $ 283 $ 401
Current portion of long-term obligations................................................ 1,529 3,682
Accounts payable........................................................................ 6,383 8,749
Accrued expenses........................................................................ 18,466 23,740
Income taxes payable.................................................................... 3,743 4,638
---------- -----------
Total current liabilities............................................................. 30,404 41,210
---------- -----------
Long-term obligations..................................................................... 184,953 281,094
Deferred income taxes..................................................................... 16,990 21,522
Other long-term liabilities............................................................... 659 4,904
---------- -----------
Commitments and contingencies (Note 7)
Stockholder's equity
Cumulative convertible preferred stock, $.01 par value, 8,314,018 shares authorized;
none issued and outstanding as of December 31, 1998 and September 30, 1999............ -- --
Undesignated preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
and outstanding as of December 31, 1998 and September 30, 1999........................ -- --
Common stock, $.01 par value, 9,924,950 shares authorized; 100 shares issued and
outstanding as of December 31, 1998 and September 30, 1999............................ -- --
Additional paid-in capital.............................................................. 100,200 112,700
Accumulated deficit..................................................................... (2,553) (2,053)
Accumulated other comprehensive income (loss)........................................... 274 (614)
---------- -----------
Total stockholder's equity............................................................ 97,921 110,033
---------- -----------
Total liabilities and stockholder's equity.......................................... $ 330,927 $ 458,763
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998
--------------------------
EIGHT MONTHS
ENDED ONE MONTH
ENDED
AUGUST 31 SEPTEMBER 30
(SUCCESSOR) 1999
(PREDECESSOR) (SUCCESSOR)
------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues..................................................................... $ 90,077 $ 16,012 $ 177,836
Cost of sales................................................................ 60,101 11,080 118,081
---------- ---------- ---------
Gross profit............................................................. 29,976 4,932 59,755
---------- ---------- ---------
Operating expenses
Selling, general and administrative expenses............................... 15,719 3,170 27,507
Nonrecurring charges....................................................... 3,632 -- --
Amortization of intangible assets.......................................... 1,347 802 9,506
---------- ---------- ---------
Total operating expenses................................................. 20,698 3,972 37,013
---------- ---------- ---------
Income from operations....................................................... 9,278 960 22,742
Other expenses (income)
Interest expense........................................................... 2,350 1,765 19,884
Terminated debt offering expenses.......................................... 600 -- --
Other expenses (income).................................................... 247 181 (311)
---------- ---------- ---------
Income (loss) before provision for income taxes and extraordinary item....... 6,081 (986) 3,169
Provision (benefit) for income taxes......................................... 2,892 (506) 2,669
---------- ---------- ---------
Income (loss) before extraordinary item...................................... 3,189 (480) 500
Extraordinary loss from debt refinancing, net of income tax benefit.......... -- 296 --
---------- ---------- ---------
Net income (loss)............................................................ $ 3,189 $ (776) $ 500
========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998................ -- $ -- 100 $ -- $ 100,200 $ (2,553)
Comprehensive income (loss)
Net income.............................. -- -- -- -- -- 500
Translation adjustment.................. -- -- -- -- -- --
Capital contribution...................... -- -- -- -- 12,500 --
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1999
(Unaudited)............................. -- $ -- 100 $ -- $ 112,700 $ (2,053)
========= ========= ========= ========= ========= =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
--------------- ---------
<S> <C> <C>
Balance, December 31, 1998................ $ 274 $ 97,921
Comprehensive income (loss)
Net income.............................. -- 500
Translation adjustment.................. (888) (888)
---------
(388)
---------
Capital contribution...................... -- 12,500
--------- ---------
Balance, September 30, 1999
(Unaudited)............................. $ (614) $ 110,033
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998
---------------------------
EIGHT MONTHS ONE MONTH
ENDED ENDED
AUGUST 31 SEPTEMBER 30
(PREDECESSOR) (SUCCESSOR) 1999
(SUCCESSOR)
------------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $ 3,189 $ (776) $ 500
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities
Depreciation and amortization............................................ 4,454 1,252 14,875
Deferred income taxes.................................................... (2,339) 345 462
Extraordinary loss from debt refinancing................................. -- 296 --
Other, net............................................................... (360) (61) 176
Changes in assets and liabilities, net of effect from acquisitions
Accounts receivable.................................................... (3,621) (975) (2,598)
Inventories............................................................ (2,017) 1,492 1,423
Prepaid expenses and other assets...................................... (58) (650) (1,276)
Accounts payable....................................................... (1,127) 1,514 (1,967)
Accrued expenses....................................................... 3,519 (1,525) (3,792)
Income taxes payable................................................... 1,374 (2,418) 2,342
Other long-term liabilities............................................ -- -- 77
----------- ---------- ---------
Net cash provided by (used for) operating activities................. 3,014 (1,506) 10,222
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of cash acquired............................ (85,808) -- (116,790)
Capital expenditures....................................................... (1,745) (307) (4,752)
Other, net................................................................. 175 -- 111
----------- ---------- ---------
Net cash used for investing activities............................... (87,378) (307) (121,431)
----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowings....................................................... -- -- 90,000
Net borrowings (repayments) under revolving line of credit agreements...... 56,446 (1,519) 7,700
Net proceeds from the sale of common stock................................. 34,815 -- --
Capital contribution....................................................... -- -- 12,500
Customer advance........................................................... -- -- 5,000
Other long-term borrowings................................................. -- -- 636
Deferred financing costs................................................... -- -- (3,062)
Principal payments on term debt, capitalized leases and other
obligations.............................................................. (1,317) (129) (1,824)
Acquisition of Predecessor
Proceeds from senior credit facility and bridge notes.................... -- 185,400 --
Proceeds from sale of common equity...................................... -- 99,000 --
Proceeds from stock options exercised.................................... -- 4,314 --
Purchase of shares outstanding........................................... -- (186,310) --
Repayment of existing credit facility.................................... -- (93,000) --
Transaction fees and expenses............................................ -- (7,398) --
Other, net................................................................. (73) -- (21)
----------- ---------- ---------
Net cash provided by financing activities............................ 89,871 358 110,929
----------- ---------- ---------
Effect of foreign currency translation on cash............................... 26 (17) (99)
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................... 5,533 (1,472) (379)
Cash and cash equivalents at beginning of period............................. 206 5,739 3,518
----------- ---------- ---------
Cash and cash equivalents at end of period................................... $ 5,739 $ 4,267 $ 3,139
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements included in this report are
unaudited. The Company believes the interim financial statements are presented
on a basis consistent with the audited financial statements. The Company also
believes that the interim financial statements contain all adjustments necessary
for a fair presentation of the results for such interim periods. All of these
adjustments are normal recurring adjustments. The results of operations for
interim periods do not necessarily predict the operating results for the full
year. The consolidated balance sheet as of December 31, 1998 and the
consolidated statements of operations and cash flows for the eight months ended
August 31, 1998 have been derived from audited financial statements but do not
include all disclosures required by generally accepted accounting principles as
permitted by interim reporting requirements. The information included in this
report should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the 1998 audited financial
statements and related notes included elsewhere in this prospectus. The Company
has made some reclassifications to prior periods' financial statements to
conform to the 1999 presentation.
NOTE 2 - ACQUISITIONS
ACQUIRED PRIOR TO SEPTEMBER 30, 1999
During the nine months ended September 30, 1999, the Company acquired:
- all of the common stock of PATS, Inc., a Maryland-based designer,
manufacturer and installer of auxiliary fuel tank systems and a
manufacturer of aircraft auxiliary power units, on January 22, 1999;
- all of the common stock of PPI Holdings, Inc., a Kansas-based designer and
manufacturer of interior furniture components for middle- and high-end
corporate aircraft, on April 23, 1999; and
- substantially all of the assets of Custom Woodwork & Plastics, Inc., a
Georgia-based designer and manufacturer of interior furniture components
for middle- and high-end corporate aircraft, on August 5, 1999.
The total purchase price was $116,035,000, plus contingent consideration
totaling a maximum of $19,250,000 payable over two years based on future
attainment of defined performance criteria as follows: 2000 - $10,625,000; and
2001 - $8,625,000. The total purchase price includes an estimated $3,080,000 of
acquisition related costs. The acquisitions were accounted for as purchases and
the assets acquired and liabilities assumed have been recorded at their
estimated fair values. As a result:
- the historical value of inventory acquired was increased by $1,606,000;
- identifiable intangible assets totaling $15,229,000 were recorded; and
- the $85,883,000 difference between the total purchase price and the fair
value of the net assets acquired was recorded as goodwill.
The purchase price allocations are preliminary and may change upon the
completion of the final valuations of the net assets acquired. The increase in
inventory value was charged to operations as the inventory was sold during the
nine months ended September 30, 1999. Identifiable intangible assets are being
amortized on a straight-line basis over their estimated useful lives, ranging
from seven and fifteen years. Goodwill is being amortized on a straight-line
basis over thirty years. The amount of contingent consideration paid in the
future, if any, will increase goodwill and will be amortized prospectively over
the remaining period of the initial thirty-year term. The consolidated balance
sheet as of September 30, 1999 reflects the financial position of the companies
acquired and the consolidated statements of operations for the three months and
nine months ended September 30, 1999 includes their operating results subsequent
to their respective acquisition dates.
F-45
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - ACQUISITIONS (CONTINUED)
The acquisitions were funded with borrowings under the Company's senior
credit facility as described in Note 5, a $12,500,000 equity contribution from
DeCrane Holdings and a $5,000,000 customer advance to be offset against amounts
receivable from future product deliveries.
ACQUIRED SUBSEQUENT TO SEPTEMBER 30, 1999
Subsequent to September 30, 1999, the Company acquired:
- substantially all of the assets of PCI NewCo, Inc., a Kansas-based
manufacturer of composite material and components for middle- and high-end
corporate aircraft, on October 6, 1999;
- all of the common stock of International Custom Interiors, Inc., a
Florida-based provider of upholstery services and manufacturer of
furniture for middle- and high-end corporate aircraft, on October 8, 1999;
and
- substantially all of the assets of The Infinity Partners, Ltd., a
Texas-based designer and manufacturer of interior furniture components for
middle- and high-end corporate aircraft, on December 17, 1999.
The total purchase price was $29,591,000, plus contingent consideration
totaling a maximum of $29,700,000 payable over five years based on future
attainment of defined performance criteria as follows: 2000--$15,700,000;
2001--$11,750,000; and 2002 through 2004--$750,000 per year. The total purchase
price includes an estimated $1,500,000 of acquisition related costs. The
acquisitions will be accounted for as purchases and the assets acquired and
liabilities assumed will be recorded at their estimated fair values. The
consolidated financial statements will reflect the financial position and
results of operations of the companies acquired for periods subsequent to their
respective acquisition dates.
The acquisitions were funded with borrowings under the Company's senior
credit facility as described in Note 5.
NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for nine months ended September 30, 1999 and 1998. The results of
operations reflect the Company's purchase by DLJ and other 1998 acquisitions
described in the Company's 1998 audited financial statements and the 1999 PATS,
PPI and Custom Woodwork acquisitions as if all of these transactions were
consummated as of January 1, 1998. The pro forma results exclude the effect of
the PCI NewCo, International Custom Interiors and Infinity acquisitions, which
were completed subsequent to September 30, 1999.
<TABLE>
<CAPTION>
PRO FORMA FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $183,214 $196,016
Income (loss) before extraordinary item..................... (5,618) 2,140
</TABLE>
The pro forma results of operations do not purport to represent what actual
results would have been if the transactions described above occurred on such
dates or to project the results of operations for any future period. The above
information reflects adjustments for inventory, depreciation, amortization,
general and administrative expenses and interest expense based on the new cost
basis and debt structure of the Company following the acquisitions. In 1998,
income excludes the effect of a $2,229,000 extraordinary loss incurred in
connection with debt refinancings of which $296,000 was incurred during the nine
months ended September 30, 1998.
F-46
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
(CONTINUED)
One customer, the Boeing Company, accounted for more than 10% of the
Company's 1998 consolidated revenues. If the Company had completed its 1998 and
1999 acquisitions at the beginning of 1998, three customers would have accounted
for 10% or more of the Company's consolidated revenues as follows:
<TABLE>
<CAPTION>
PRO FORMA FOR
THE
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Boeing...................................................... 24.1% 18.6%
Textron..................................................... 11.0% 17.2%
Bombardier.................................................. 3.8% 13.2%
</TABLE>
Complete loss of any of these customers could have a significant adverse
impact on the results of operations expected in future periods.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Raw material................................................ $19,221 $26,219
Work-in process............................................. 7,231 18,658
Finished goods.............................................. 7,829 6,413
------- -------
Total inventories......................................... $34,281 $51,290
======= =======
</TABLE>
NOTE 5 - BORROWINGS
Long-term obligations include the following amounts (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Senior credit facility
$25 million working capital revolving line of credit...... $ 5,800 $ --
$25 million acquisition revolving line of credit.......... -- 13,500
Term loans................................................ 79,888 169,050
12% senior subordinated notes............................... 100,000 100,000
Capital lease obligations and equipment term financing...... 367 1,776
Other....................................................... 427 450
-------- --------
Total long-term obligations 186,482 284,776
Less current portion...................................... (1,529) (3,682)
-------- --------
Long-term obligations, less current portion............. $184,953 $281,094
======== ========
</TABLE>
In conjunction with the January 1999 PATS acquisition, the Company borrowed
$14,918,000 under its acquisition revolving credit facility and amended its term
loan facility to provide for an additional $20,000,000 of term loan borrowings.
The interest rate margins, the rates charged above the current prime or
Euro-Dollar rates, were increased by 0.50% for all senior credit facility
borrowings. The amended interest
F-47
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - BORROWINGS (CONTINUED)
rate margins range between 1.50% to 1.75% for prime rate borrowings and 2.75% to
3.00% for Euro-Dollar borrowings, depending on the type of borrowing.
In April 1999, the term loan facility was further amended to provide for an
additional $70,000,000 of term loan borrowings. The Company used $50,000,000 of
the proceeds to fund the PPI acquisition and $20,000,000 to repay borrowings
under its acquisition and working capital revolving credit facilities. The
interest rate margins applicable to the $70,000,000 incremental term loan
borrowings are 2.00% for prime rate borrowings or 3.25% for Euro-Dollar
borrowings.
In conjunction with the August 1999 Custom Woodwork acquisition, the Company
borrowed $13,500,000 under its acquisition revolving credit facility.
SUBSEQUENT TO SEPTEMBER 30, 1999
Subsequent to September 30, 1999, the Company:
- borrowed $11,500,000 under its acquisition revolving credit facility in
conjunction with the October 1999 PCI NewCo and International Custom
Interiors acquisitions;
- further amended its term loan facility in December 1999 to provide for an
additional $45,000,000 of term loan borrowings; the interest rate margins
applicable to the incremental term loan borrowings are 2.50% for prime
rate borrowings or 3.75% for Euro-Dollar borrowings; and
- used the term loan proceeds to fund the Infinity acquisition and repay
$28,000,000 of acquisition and working capital revolving credit facility
borrowings.
NOTE 6 - INCOME TAXES
The provision for income taxes differs from the amount determined by
applying the applicable U.S. statutory federal rate to the income (loss) before
income taxes primarily due to the effects of state and foreign income taxes and
non-deductible expenses, principally goodwill amortization. The difference in
the effective tax rates between periods is mostly a result of higher goodwill
amortization.
NOTE 7 -- LITIGATION
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board notified the Company that they recovered burned wire which had been
attached to the in-flight entertainment system installed on some of Swissair's
aircraft by a subsidiary of the Company. At the request of the attorneys for
families of persons who died aboard the flight, the Company put its insurance
carrier on notice of a potential claim by those families. The Transportation
Safety Board has advised the Company that it has no evidence that the system
installed by the Company's subsidiary malfunctioned or failed during the flight.
The Company is fully cooperating with the investigation.
Families of persons who died aboard the flight have filed actions in federal
and state courts against the Company, our subsidiary, and many other parties
unaffiliated with the Company, including Swissair and Boeing. The actions claim
negligence, strict liability and breach of warranty relating to the installation
and testing of the in-flight entertainment system. The actions seek compensatory
and punitive damages and costs in an unstated amount. The Company intends to
vigorously defend against the claims.
In August 1998, the Company and its chief executive officer were served in
an action filed in state court in California by the Company's chief financial
officer claiming that he was due additional compensation in the form of stock
options, and claiming fraud, negligent misrepresentation and breach of contract
in connection therewith, fraudulent misrepresentation in violation of provisions
of the California Labor Code for which doubled damages are sought, promissory
estoppel, and wrongful discharge in violation of public policy
F-48
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 -- LITIGATION (CONTINUED)
as a result of his allegations of improprieties in connection with the DLJ
acquisition transactions. The plaintiff later amended his complaint to allege
breach of an implied contract as well. The action seeks not less than $1,500,000
plus punitive damages and costs. The Company intends to vigorously defend
against the claims. The plaintiff's employment with the Company was terminated.
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 all of the foregoing matters
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 8 -- CONSOLIDATED STATEMENTS OF CASH FLOWS
Assets acquired and liabilities assumed in connection with acquisitions are
as follows (amounts in thousands):
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998
-----------------------
EIGHT ONE MONTH
MONTHS ENDED
ENDED
AUGUST 31 SEPTEMBER
30 1999
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
---------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
1999 and 1998 acquisitions
Fair value of assets acquired............................. $91,640 $ -- $136,359
Liabilities assumed....................................... (4,569) -- (20,324)
------- ------- --------
Cash paid............................................... 87,071 -- 116,035
Less cash acquired...................................... (1,263) -- (2,245)
------- ------- --------
Net cash paid for 1999 and 1998 acquisitions.......... 85,808 -- 113,790
Contingent consideration paid in conjunction with the 1997
Audio International acquisition........................... -- -- 3,000
------- ------- --------
Net cash paid for acquisitions $85,808 $ -- $116,790
======= ======= ========
</TABLE>
NOTE 9 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Adoption of SFAS No. 133, as amended by SFAS
No. 137 in June 1999, is required for the fiscal year beginning January 1, 2001.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial position or results of operations.
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In conjunction with the senior credit facility and 12% senior subordinated
notes described in Note 5, the following condensed consolidating financial
information is presented for the Company, segregating guarantor and
non-guarantor subsidiaries. The accompanying financial information in the
"Guarantor Subsidiaries" column reflects the financial position, results of
operations and cash flows for those subsidiaries guaranteeing the senior credit
facility and the notes. The guarantor subsidiaries are wholly-owned subsidiaries
of the
F-49
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Company and their guarantees are full and unconditional on a joint and several
basis. There are no restrictions on the ability of the guarantor subsidiaries to
transfer funds to the issuer in the form of cash dividends, loans or advances.
Separate financial statements of the guarantor subsidiaries are not presented
because management believes that such financial statements would not be material
to investors.
Investments in subsidiaries in the following condensed consolidating
financial information are accounted for under the equity method of accounting.
Consolidating adjustments include the following:
(1) Elimination of investments in subsidiaries.
(2) Elimination of intercompany accounts.
(3) Elimination of intercompany sales between guarantor and non-guarantor
subsidiaries.
(4) Elimination of equity in earnings of subsidiaries.
F-50
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (UNAUDITED)
-------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....... $ 2,458 $ 762 $ 298 $ -- $ 3,518
Accounts receivable, net........ -- 28,917 1,524 -- 30,441
Inventories..................... -- 32,624 1,657 -- 34,281
Other current assets............ 7,066 894 237 -- 8,197
-------- -------- -------- --------- --------
Total current assets.......... 9,524 63,197 3,716 -- 76,437
Property and equipment, net....... 272 26,170 1,718 -- 28,160
Other assets, principally
intangibles, net................ 12,105 200,383 13,842 -- 226,330
Investments in subsidiaries....... 250,366 20,114 -- (270,480)(1) --
Intercompany receivables.......... 39,012 2,091 3,622 (44,725)(2) --
-------- -------- -------- --------- --------
Total assets................ $311,279 $311,955 $ 22,898 $(315,205) $330,927
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term obligations.......... $ 892 $ 628 $ 292 $ -- $ 1,812
Other current liabilities....... 10,767 16,651 1,174 -- 28,592
-------- -------- -------- --------- --------
Total current liabilities..... 11,659 17,279 1,466 -- 30,404
-------- -------- -------- --------- --------
Long-term obligations............. 184,822 131 -- -- 184,953
Intercompany payables............. 873 43,521 331 (44,725)(2) --
Other long-term liabilities....... 16,278 658 713 -- 17,649
-------- -------- -------- --------- --------
Stockholder's equity
Paid-in capital................... 100,200 210,787 15,440 (226,227)(1) 100,200
Retained earnings (deficit)....... (2,553) 39,579 4,674 (44,253)(1) (2,553)
Accumulated other
comprehensive
income (loss)............... -- -- 274 -- 274
-------- -------- -------- --------- --------
Total stockholder's
equity.................... 97,647 250,366 20,388 (270,480) 97,921
-------- -------- -------- --------- --------
Total liabilities and
stockholder's equity.... $311,279 $311,955 $ 22,898 $(315,205) $330,927
======== ======== ======== ========= ========
</TABLE>
F-51
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 (UNAUDITED)
-------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 807 $ 2,211 $ 121 $ -- $ 3,139
Accounts receivable, net........... -- 38,818 1,256 -- 40,074
Inventories........................ -- 49,578 1,712 -- 51,290
Other current assets............... 3,532 2,135 96 -- 5,763
-------- -------- -------- --------- --------
Total current assets............. 4,339 92,742 3,185 -- 100,266
Property and equipment, net.......... 1,262 32,853 2,416 -- 36,531
Other assets, principally
intangibles, net................... 16,208 292,935 12,823 -- 321,966
Investments in subsidiaries.......... 363,948 20,297 -- (384,245)(1) --
Intercompany receivables............. 38,808 331 3,902 (43,041)(2) --
-------- -------- -------- --------- --------
Total assets................... $424,565 $439,158 $ 22,326 $(427,286) $458,763
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term obligations............. $ 3,490 $ 164 $ 429 -- $ 4,083
Other current liabilities.......... 8,227 27,669 1,231 -- 37,127
-------- -------- -------- --------- --------
Total current liabilities........ 11,717 27,833 1,660 -- 41,210
-------- -------- -------- --------- --------
Long-term obligations.............. 280,416 636 42 -- 281,094
Intercompany payables.............. 873 41,837 331 (43,041)(2) --
Other long-term liabilities........ 20,912 4,904 610 -- 26,426
-------- -------- -------- --------- --------
Stockholder's equity
Paid-in capital.................... 112,700 300,450 15,440 (315,890)(1) 112,700
Retained earnings (deficit)........ (2,053) 63,498 4,857 (68,355)(1) (2,053)
Accumulated other comprehensive
income (loss)........................ -- -- (614) -- (614)
-------- -------- -------- --------- --------
Total stockholder's equity......... 110,647 363,948 19,683 (384,245) 110,033
-------- -------- -------- --------- --------
Total liabilities and stockholder's
equity........................... $424,565 $439,158 $ 22,326 $(427,286) $458,763
======== ======== ======== ========= ========
</TABLE>
F-52
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, (PREDECESSOR - UNAUDITED)
-------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $ 87,312 $ 8,503 $ (5,738)(3) $ 90,077
Cost of sales........................ -- 59,252 6,587 (5,738)(3) 60,101
-------- -------- -------- --------- --------
Gross profit......................... -- 28,060 1,916 -- 29,976
Selling, general and administrative
expenses........................... 3,949 11,041 729 -- 15,719
Nonrecurring charges................. 3,632 -- -- -- 3,632
Amortization of intangible assets.... -- 1,337 10 -- 1,347
Interest expense..................... 2,343 7 -- -- 2,350
Intercompany charges................. (4,357) 4,229 128 -- --
Equity in earnings of subsidiaries... (6,824) (489) -- 7,313(4) --
Other expenses (income).............. 600 (164) 411 -- 847
Provision (benefit) for income
taxes.............................. (2,532) 5,275 149 -- 2,892
-------- -------- -------- --------- --------
Net income........................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189
======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
ONE MONTHS ENDED SEPTEMBER 30, (SUCCESSOR - UNAUDITED)
-------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $ 15,659 $ 1,096 $ (743)(3) $ 16,012
Cost of sales........................ -- 10,975 848 (743)(3) 11,080
-------- -------- -------- --------- --------
Gross profit......................... -- 4,684 248 -- 4,932
Selling, general and administrative
expenses........................... 359 2,714 97 -- 3,170
Amortization of intangible assets.... 9 749 44 -- 802
Interest expense..................... 1,701 64 -- -- 1,765
Intercompany charges................. (576) 559 17 -- --
Equity in (earnings) loss of
subsidiaries....................... (2) 62 -- (60)(4) --
Other expenses (income).............. -- (7) 188 -- 181
Provision (benefit) for income
taxes.............................. (1,011) 541 (36) -- (506)
Extraordinary charge, net of tax..... 296 -- -- -- 296
-------- -------- -------- --------- --------
Net income (loss).................... $ (776) $ 2 $ (62) $ 60 $ (776)
======== ======== ======== ========= ========
</TABLE>
F-53
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 (SUCCESSOR - UNAUDITED)
-----------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ -- $ 174,583 $ 8,591 $ (5,338)(3) $ 177,836
Cost of sales................................. -- 116,546 6,873 (5,338)(3) 118,081
----------- --------- ---------- ----------- ----------
Gross profit.................................. -- 58,037 1,718 -- 59,755
Selling, general and administrative
expenses.................................... 4,981 21,402 1,124 -- 27,507
Amortization of intangible assets............. 116 9,015 375 -- 9,506
Interest expense.............................. 17,407 2,444 33 -- 19,884
Intercompany charges.......................... (3,603) 3,475 128 -- --
Equity in earnings of subsidiaries............ (11,619) (363) -- 11,982(4) --
Other expenses (income)....................... -- 61 (372) -- (311)
Provision (benefit) for income taxes.......... (7,782) 10,384 67 -- 2,669
----------- --------- ---------- ----------- ----------
Net income.................................... $ 500 $ 11,619 $ 363 $ (11,982) $ 500
=========== ========= ========== =========== ==========
</TABLE>
F-54
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR - UNAUDITED)
-----------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189
Adjustments to net income
Non-cash net income
adjustments............................. (2,222) 3,420 557 -- 1,755
Equity in earnings of
subsidiaries............................ (6,824) (489) -- 7,313(4) --
Changes in working capital 5,492 (7,393) (29) -- (1,930)
----------- --------- ---------- ----------- ----------
Net cash provided by (used for) operating
activities.............................. (365) 2,362 1,017 -- 3,014
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash
acquired.................................. (87,071) 1,263 -- -- (85,808)
Capital expenditures and other.............. (44) (1,306) (220) -- (1,570)
----------- --------- ---------- ----------- ----------
Net cash used for investing activities.... (87,115) (43) (220) -- (87,378)
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net revolving line of credit borrowings..... 57,000 -- (554) -- 56,446
Net proceeds from sale of common stock........ 34,815 -- -- -- 34,815
Principal payments on long-term debt and
leases.................................... (3) (1,280) (34) -- (1,317)
Other, net.................................. 23 (96) -- -- (73)
----------- --------- ---------- ----------- ----------
Net cash provided by (used for)
financing activities.................... 91,835 (1,376) (588) -- 89,871
----------- --------- ---------- ----------- ----------
Effect of foreign currency translation on
cash........................................ -- -- 26 -- 26
----------- --------- ---------- ----------- ----------
Net increase in cash and equivalents.......... 4,355 943 235 -- 5,533
Cash and equivalents at beginning of period... 16 109 81 -- 206
----------- --------- ---------- ----------- ----------
Cash and equivalents at end of
period...................................... $ 4,371 $ 1,052 $ 316 $ -- $ 5,739
=========== ========= ========== =========== ==========
</TABLE>
F-55
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
ONE MONTH ENDED SEPTEMBER 30, 1998 (SUCCESSOR - UNAUDITED)
-----------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................... $ (776) $ 2 $ (62) $ 60 $ (776)
Adjustments to net income (loss)
Non-cash net income adjustments........... 750 1,020 62 -- 1,832
Equity in earnings of subsidiaries........ (2) 62 -- (60)(4) --
Changes in working capital.................. (1,681) (711) (170) -- (2,562)
----------- --------- ---------- ----------- ----------
Net cash provided by (used for) operating
activities.............................. (1,709) 373 (170) -- (1,506)
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures and other.............. -- (240) (67) -- (307)
----------- --------- ---------- ----------- ----------
Net cash used for investing activities.... -- (240) (67) -- (307)
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of Predecessor, net............. 2,006 -- -- -- 2,006
Net revolving line of credit repayments..... (1,600) -- 81 -- (1,519)
Principal payments on long-term debt and
leases.................................... (1) (118) (10) -- (129)
----------- --------- ---------- ----------- ----------
Net cash provided by (used for)
financing activities.................... 405 (118) 71 -- 358
----------- --------- ---------- ----------- ----------
Effect of foreign currency translation on
cash........................................ -- -- (17) -- (17)
----------- --------- ---------- ----------- ----------
Net increase (decrease) in cash and
equivalents................................. (1,304) 15 (183) -- (1,472)
Cash and equivalents at beginning of period... 4,371 1,052 316 -- 5,739
----------- --------- ---------- ----------- ----------
Cash and equivalents at end of period......... $ 3,067 $ 1,067 $ 133 $ -- $ 4,267
=========== ========= ========== =========== ==========
</TABLE>
F-56
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 (SUCCESSOR - UNAUDITED)
-----------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 500 $ 11,619 $ 363 $ (11,982) $ 500
Adjustments to net income
Non-cash net income adjustments........... 1,851 13,041 621 -- 15,513
Equity in earnings of subsidiaries........ (11,619) (363) -- 11,982(4) --
Changes in working capital.................. 20,073 (25,286) (578) -- (5,791)
----------- --------- ---------- ----------- ----------
Net cash provided by (used for) operating
activities.............................. 10,805 (989) 406 -- 10,222
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash
acquired.................................. (119,035) 2,245 -- -- (116,790)
Capital expenditures and other.............. (66) (3,952) (623) -- (4,641)
----------- --------- ---------- ----------- ----------
Net cash used for investing activities.... (119,101) (1,707) (623) -- (121,431)
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowings........................ 90,000 -- -- -- 90,000
Capital contribution........................ 12,500 -- -- -- 12,500
Net revolving line of credit borrowings..... 7,700 -- -- -- 7,700
Customer advance............................ -- 5,000 -- -- 5,000
Other long-term borrowings.................. 636 -- -- -- 636
Deferred financing costs.................... (3,062) -- -- -- (3,062)
Principal payments on long-term debt and
leases.................................... (1,129) (675) (20) -- (1,824)
Other, net.................................. -- (180) 159 -- (21)
----------- --------- ---------- ----------- ----------
Net cash provided by financing
activities.............................. 106,645 4,145 139 -- 110,929
=========== ========= ========== =========== ==========
Effect of foreign currency translation on
cash........................................ -- -- (99) -- (99)
----------- --------- ---------- ----------- ----------
Net increase (decrease) in cash and
equivalents................................. (1,651) 1,449 (177) -- (379)
Cash and equivalents at beginning of period... 2,458 762 298 -- 3,518
----------- --------- ---------- ----------- ----------
Cash and equivalents at end of period......... $ 807 $ 2,211 $ 121 $ -- $ 3,139
=========== ========= ========== =========== ==========
</TABLE>
F-57
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11 -- OTHER EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999
REORGANIZATION AND RESTRUCTURING CHARGE
In December 1999, the Company announced a plan to reorganize and restructure
the operations of two of its subsidiaries, Hollingsead and Elsinore Engineering.
In conjunction with this restructuring, the Company expects to record a
nonrecurring pre-tax charge of approximately $9,500,000 in the fourth quarter of
1999, resulting in a net loss for the quarter and year ending December 31, 1999.
MANAGEMENT STOCK PURCHASE
In December 1999, our management purchased 171,295 shares of DeCrane
Holdings common stock for $23.00 per share. The total purchase price was
$3,940,000, of which one-half was paid in cash at closing and one-half was
loaned to management by the Company with interest at applicable federal rates.
STOCK OPTION PLAN
The DeCrane Holdings qualified management incentive stock option plan
provides for the granting of options to employees of the Company to purchase
356,257 common shares of DeCrane Holdings and expires in 2009. The options
generally vest based upon future attainment of defined performance criteria,
although alternate vesting schedules may be authorized. In December 1999,
options to purchase 279,662 shares at $23.00 per share were granted, of which
options to purchase approximately 28,000 shares immediately vested. DeCrane
Holdings' believes the per share exercise price of the options granted
approximated the fair market value of the underlying common stock on the grant
date.
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Avtech Corporation
In our opinion, the accompanying balance sheets and the related statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Avtech Corporation at
September 30, 1996 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
June 12, 1998
F-59
<PAGE>
AVTECH CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- JUNE 25,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,052 $ 4,136 $ 1,093
Accounts receivable, net of allowance for doubtful
accounts of $20, $20 and $20 at September 30, 1996 and
1997 and June 25, 1998, respectively.................... 7,398 4,928 5,321
Inventories............................................... 4,233 5,254 5,832
Prepaid expenses and other assets......................... 69 183 57
Income taxes refundable................................... -- -- 4,368
Deferred income taxes..................................... -- 247 1,613
------- ------- -------
Total current assets.................................... 12,752 14,748 18,284
------- ------- -------
Property, plant and equipment
Land...................................................... 431 791 791
Buildings and improvements................................ 2,411 4,685 5,176
Machinery and equipment................................... 2,764 3,005 3,477
Furniture, computer and other equipment................... 3,216 3,426 3,555
------- ------- -------
8,822 11,907 12,999
Less: Accumulated depreciation............................ (6,523) (7,050) (7,380)
------- ------- -------
2,299 4,857 5,619
Other assets
Patents, net of amortization.............................. 5 4 4
Deferred income taxes..................................... -- 629 3,239
------- ------- -------
Total assets............................................ $15,056 $20,238 $27,146
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 768 $ 1,388 $ 1,396
Accrued expenses.......................................... 2,120 4,043 1,955
Deferred income taxes..................................... 389 -- --
------- ------- -------
Total current liabilities............................... 3,277 5,431 3,351
------- ------- -------
Long-term liabilities
Deferred compensation..................................... 1,229 1,385 --
Other..................................................... 438 472 472
------- ------- -------
1,667 1,857 472
------- ------- -------
Commitments and contingencies (Note 8)...................... -- -- --
------- ------- -------
Stockholders' equity
Common stock, no par value, 1,500,000 shares authorized;
323,541, 318,929 and 468,929 shares outstanding at
September 30, 1996 and 1997 and June 25, 1998,
respectively............................................ 237 232 10,519
Retained earnings......................................... 9,875 12,718 12,804
------- ------- -------
10,112 12,950 23,323
------- ------- -------
$15,056 $20,238 $27,146
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
AVTECH CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, -------------------
------------------------------ JUNE 30, JUNE 25,
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales............................................... $21,020 $28,797 $32,619 $24,071 $30,634
Cost of sales....................................... 12,333 15,967 20,422 14,667 19,643
------- ------- ------- ------- -------
Gross profit.................................... 8,687 12,830 12,197 9,404 10,991
------- ------- ------- ------- -------
Operating expenses
General and administrative........................ 1,991 1,992 2,758 1,915 2,448
Selling expenses.................................. 1,257 1,559 1,295 880 1,180
Research, development and engineering............. 2,853 2,697 2,707 2,040 2,013
Employee stock ownership plan..................... 1,200 1,000 1,200 900 600
Nonrecurring bonus and employment contract
termination expenses............................ -- -- -- -- 3,592
------- ------- ------- ------- -------
7,301 7,248 7,960 5,735 9,833
------- ------- ------- ------- -------
Income from operations.............................. 1,386 5,582 4,237 3,669 1,158
------- ------- ------- ------- -------
Other income (expense)
Interest expense.................................. (8) (8) (6) -- --
Gain on disposal of equipment..................... -- 14 -- -- --
Interest income................................... 46 30 269 197 169
Rental income, net................................ -- -- 32 -- 62
Stockholder transaction expenses.................. -- -- -- -- (1,229)
------- ------- ------- ------- -------
38 36 295 197 (998)
------- ------- ------- ------- -------
Income before provision for federal income tax...... 1,424 5,618 4,532 3,866 160
Provision for federal income tax.................... 493 1,934 1,518 1,352 74
------- ------- ------- ------- -------
Net income.......................................... $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
AVTECH CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STATED
NUMBER OF VALUE OF
SHARES COMMON RETAINED
OUTSTANDING STOCK EARNINGS
----------- -------- --------
<S> <C> <C> <C>
Balance at September 30, 1994............................... 323,541 $ 237 $ 5,260
Net income.................................................. -- -- 931
------- ------- -------
Balance at September 30, 1995............................... 323,541 237 6,191
Net income.................................................. -- -- 3,684
------- ------- -------
Balance at September 30, 1996............................... 323,541 237 9,875
Stock redemption............................................ (4,612) (5) (171)
Net income.................................................. -- -- 3,014
------- ------- -------
Balance at September 30, 1997............................... 318,929 232 12,718
Exercise of stock options (Unaudited)....................... 150,000 2,683 --
Tax benefit of stock options exercised (Unaudited).......... -- 7,604 --
Net income (Unaudited)...................................... -- -- 86
------- ------- -------
Balance at June 25, 1998 (Unaudited)........................ 468,929 $10,519 $12,804
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
AVTECH CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, ---------------------
------------------------------ JUNE 30, JUNE 25,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities
Depreciation and amortization.................... 587 582 528 363 405
Gain on sale of property and equipment........... -- (14) -- -- --
Deferred income tax provision.................... 54 947 (1,265) (1,150) 334
Changes in assets and liabilities:
Accounts receivable............................ (1,797) (2,990) 2,470 2,899 (393)
Inventories.................................... (1,504) 198 (1,021) (1,216) (578)
Prepaid and other current assets............... 63 (20) (114) (86) 126
Accounts payable............................... 400 (152) 620 678 8
Accrued expenses............................... 1,620 (872) 2,153 1,209 (2,977)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities........................... 354 1,363 6,385 5,211 (2,989)
------- ------- ------- ------- -------
Cash flows from investing activities
Purchases of property and equipment................ (735) (509) (3,085) (370) (1,167)
Proceeds from sale of assets....................... -- 15 -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities............ (735) (494) (3,085) (370) (1,167)
------- ------- ------- ------- -------
Cash flows from financing activities
Exercise of stock options.......................... -- -- -- -- 1,143
Stock redemption................................... -- -- (176) (176) --
Capital lease obligations.......................... (36) (36) (40) (27) (30)
------- ------- ------- ------- -------
Net cash used in
financing activities........................... (36) (36) (216) (203) 1,113
------- ------- ------- ------- -------
Net (decrease) increase in cash and
equivalents........................................ (417) 833 3,084 4,638 (3,043)
Cash and equivalents at beginning
of the period...................................... 636 219 1,052 1,052 4,136
------- ------- ------- ------- -------
Cash and equivalents at end of
the period......................................... $ 219 $ 1,052 $ 4,136 $ 5,690 $ 1,093
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Avtech Corporation (the "Company") is a custom design and manufacturing firm
established in 1963 to produce high-quality equipment for the aircraft industry.
In 1970, the Company began to produce engineered products and has since focused
its engineering and product development efforts on responding to specifications
from original equipment aircraft manufacturers (OEMs). The Company's products
fall into five main categories:
1. Aircraft communication control equipment (including audio control units,
multiplexed audio systems and audio amplifiers).
2. Aircraft lighting controls (including ballasts, dimmers and flood lighting).
3. Power systems (including transformer rectifier units, power inverters and
battery chargers).
4. Airborne facsimile terminals (AvFax).
5. Special products (including PDX intercoms, liquid-gauging and fill control,
and frequency units).
FINANCIAL STATEMENT PRESENTATION
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
At September 30, 1996 and 1997, the Company maintained $549,000 and
$119,000, respectively, of its cash and cash equivalents balances at one bank.
At September 30, 1996 and 1997, the Company maintained $503,000 and $4,017,000,
respectively, in a money market funds and bankers' acceptances.
RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK
Accounts receivable from trade customers are generally due within thirty
days. The Company performs periodic credit evaluations of its customers'
financial conditions and generally does not require collateral. All of the
Company's sales are to businesses directly associated with the aviation industry
(airlines, aircraft manufacturers, etc.). Approximately 70% of the Company's
sales are to customers based in the United States.
PROPERTY AND EQUIPMENT
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed using the
straight-line and accelerated methods over the following estimated lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Buildings................................................................................... 20-39
Building improvements....................................................................... 10-39
Machinery and equipment..................................................................... 5
Furniture, computer and other equipment..................................................... 5-7
</TABLE>
F-64
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to operations when incurred. Additions
and improvements are capitalized. When property, plant and equipment are sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved, and any gain or loss is included in operations.
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Costs of manufactured inventories include all
direct materials, labor and an allocation of overhead. Market represents the
lower of replacement cost or estimated net realizable value.
REVENUE RECOGNITION
Revenues from the sale of manufactured products are recorded when shipped.
Reimbursements for nonrecurring engineering costs, which are expensed as
incurred, are included in revenues at the time a negotiated settlement is
reached with the customer. The Company's nonrecurring engineering revenues for
the years ended September 30, 1995, 1996 and 1997 were $1,257,000, $4,042,000
and $527,000, respectively. Included within accounts receivable at
September 30, 1996 are $3,384,000 of unbilled receivables which were collected
in fiscal year 1997.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes.
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards No., 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees".
ACCRUED WARRANTIES
The Company sells a majority of its products to customers along with various
repair or replacement warranties. The terms of the warranties vary according to
the customer and/or the product involved. The most common warranty period is the
earlier of:
a. 36 months from the date of delivery to the operator, or
b. 42 months from the date of manufacture.
Provisions for estimated future warranty costs are made in the period
corresponding to the sale of the product. Classification between short and
long-term warranty obligations is estimated based on historical trends.
UNAUDITED INTERIM RESULTS
The financial information as of June 25, 1998 and for the nine months ended
June 30, 1997 and June 25, 1998 is unaudited. In the opinion of the Company, the
unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim period. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
F-65
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVENTORIES
Inventories at September 30, 1996 and 1997 and June 25, 1998 (unaudited)
consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- JUNE 25,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials and components........................................................... $ 2,488 $ 2,617 $ 3,218
Work in process........................................................................ 1,285 2,014 1,912
Finished goods......................................................................... 460 623 702
--------- --------- ---------
$ 4,233 $ 5,254 $ 5,832
========= ========= =========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
The Company owns property located immediately adjacent to its main facility.
The property is not currently used for any rental or productive activity. In
1990, the property was condemned by the local authorities and is considered
unsuitable for habitation in its current state. The current carrying value of
$62,000 represents the original cost of the land and is lower than its estimated
net realizable value.
In 1997, the Company purchased a 20,275 square foot office building and an
adjacent vacant lot for investment purposes. The net book value of the property
was $2,134,000 at September 30, 1997. The Company leases the office space to
tenants under one to three-year noncancelable operating leases. At March 31,
1998, the building was fully occupied. Minimum future rentals to be received on
noncancelable leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- ------------------------------------------------------------------------
<S> <C>
1998.................................................................... $ 128
1999.................................................................... $ 20
</TABLE>
The Company leases equipment under a five-year lease term. Based on the
provisions of Statement No. 13, issued by the Financial Accounting Standards
Board, these leases meet the criteria of capital leases and, accordingly, have
been recorded as such. These assets are stated on the balance sheet at their
capitalized cost of $194,000. Depreciation of $161,000 has been recognized
through September 30, 1997.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses at September 30, 1996 and 1997 consist of the following
(amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Employee compensation and related taxes.............................................................. $ 875 $ 2,556
Employee stock option plan contribution.............................................................. 1,000 1,200
Current portion of warranty reserve.................................................................. 204 240
Other................................................................................................ 41 47
--------- ---------
$ 2,120 $ 4,043
========= =========
</TABLE>
NOTE 5 - DEFINED CONTRIBUTION PLANS
The Company sponsors an employee stock ownership plan (ESOP) for the benefit
of employees with twelve or more months of continuous service. Contributions are
made to the plan at the discretion of the Company's Board of Directors. The
Company's contributions for the years ended September 30, 1995, 1996 and 1997
were $1,200,000, $1,000,000 and $1,200,000, respectively.
F-66
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEFINED CONTRIBUTION PLANS (CONTINUED)
The Company also sponsors a cash or deferred compensation (401k) plan for
the benefit of eligible employees. Under the plan, employees may elect to defer
a portion of their compensation (subject to statutory limitations).
Discretionary contributions by the Company may be made when authorized by the
Board of Directors. No such contributions were made during the years ended
September 30, 1995, 1996 and 1997.
NOTE 6 - FEDERAL INCOME TAXES
The provision (benefit) for federal income taxes is comprised of the
following (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current...................................................................................... $ 439 $ 987 $ 2,783
Deferred..................................................................................... 54 947 (1,265)
--------- --------- ---------
$ 493 $ 1,934 $ 1,518
========= ========= =========
</TABLE>
The provision for federal income tax expense approximates the federal
statutory rate for all periods presented. The Company is not required to pay
state income taxes.
Deferred tax assets and liabilities at September 30, 1996 and 1997 include
the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Reserves.............................................................................................. $ 335 $ 393
Compensatory stock options............................................................................ 416 471
Capitalized inventories............................................................................... 10 12
--------- ---------
761 876
DEFERRED TAX LIABILITIES
Deferred revenue...................................................................................... (1,150) --
--------- ---------
$ (389) $ 876
========= =========
</TABLE>
The classification in the balance sheet between current and noncurrent
deferred tax assets is based on the classification of the related asset that
gives rise to the temporary difference. A deferred tax asset that is not related
to an asset is classified according to the expected reversal date of the
temporary difference.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has commitments based on open purchase orders arising out of its
normal business operations. As of September 30, 1996 and 1997, these commitments
were $5,080,000 and $6,760,000, respectively.
TERMINATION FOR CONVENIENCE CLAUSES
The Company routinely enters into contractual commitments with customers to
design and manufacture parts. These contracts contain "termination for
convenience" clauses that permit recovery of costs incurred by the Company if
the customer terminates the contract prior to its completion. These recoveries
are included in sales when billed.
F-67
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASING ARRANGEMENTS
The Company leases a building under a five-year operating lease. The lease
calls for monthly payments of $5,000 plus utilities, taxes and maintenance and
expires in April 2001. The lessor has the right to terminate the lease at
anytime by giving the Company at least twelve months written notice. The Company
subleases a portion of its facilities under an operating lease that expires
December 1998. The following is net rental expense under operating leases for
the years ended September 30, 1995, 1996 and 1997 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Rent expense.................................................................................... $ 60 $ 60 $ 60
Less: Sublease rentals.......................................................................... (7) (11) (10)
--------- --------- ---------
$ 53 $ 49 $ 50
========= ========= =========
</TABLE>
The following is a schedule by years of the future minimum rentals under
this lease (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, LESSEE SUBLEASE NET
- ------------------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
1998................................................................. $ 60 $ 10 $ 50
1999................................................................. 60 11 49
2000................................................................. 60 11 49
2001................................................................. 60 11 49
--------- --------- ---------
$ 240 $ 43 $ 197
========= ========= =========
</TABLE>
NOTE 8 - ECONOMIC DEPENDENCE
A material part of the Company's business is dependent on one customer, the
loss of which could have a material effect on the Company. For the years ended
September 30, 1995, 1996 and 1997, approximately 29.5%, 24% and 46.9%,
respectively, of revenues were attributable to this customer. At September 30,
1996 and 1997, accounts receivable from this customer represented approximately
41.1% and 23.4%, respectively, of total accounts receivable.
NOTE 9 - STOCK OPTION PLANS
Prior to 1993, the Company implemented a nonqualified compensatory stock
option plan with the President. Under this Plan, options to purchase 90,000
shares of the Company's stock were granted at an option price of $2.70 per
share. These options are currently exercisable by the President.
During the year ended September 30, 1994, the Company and three key
employees entered into employment contracts which voided all prior compensatory
stock option plans other than that of the President's. Under these new
contracts, the Company granted 20,000 shares to each of the three employees at
an exercise price of $15 per share. Fair market value was $28 per share at the
date of the grant. Each employee still employed at September 30, 1998, is
entitled to exercise his option to purchase 20,000 fully vested shares.
Accordingly, the Company has expensed $156,000 during each of the years ended
September 30, 1995, 1996 and 1997. These shares, when exercised, cannot be sold
until September 30, 2003. The Company has the first right to purchase the shares
upon exercise but is not obligated to do so.
The accumulated expense resulting from the difference between the exercise
prices and fair market values at the respective date of grant has been
classified as a long-term liability in deferred compensation.
F-68
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - ADDITIONAL CASH FLOW INFORMATION
Supplementary cash flow information for the years ended September 30, 1995,
1996 and 1997 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Capital leases.................................. $ 36 $ 36 $ 40
====== ====== ======
Interest........................................ $ 10 $ 7 $ 5
====== ====== ======
Income taxes.................................... $-- $1,449 $2,900
====== ====== ======
</TABLE>
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED)
In May 1998, the Company signed a definitive purchase agreement whereby all
of the outstanding shares of the Company would be acquired by DeCrane Aircraft
Holdings, Inc. The transaction was consummated on June 26, 1998. Prior to
closing the transaction, all outstanding stock options were exercised and the
income tax benefit resulting from the tax deduction allowed for the difference
between the exercise price and the fair market value of the stock was recorded.
The $7,604,000 income tax benefit from the stock options exercised is a noncash
transaction for purposes of the statement of cash flows for the nine months
ended June 25, 1998. Additionally, certain members of management were paid a
one-time bonus at closing and the balance due pursuant to their employment
contracts that were terminated immediately prior to closing.
F-69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
PATS, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of PATS, Inc. and
subsidiaries at June 30, 1997 and 1998 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
January 25, 1999
F-70
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------- -------------
1997 1998 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 401 $ 216 $ 2,504
Trade accounts receivable, net of allowance for doubtful
accounts of $362, $451 and $456, respectively........... 2,192 1,347 3,273
Inventories............................................... 6,586 6,582 7,146
Cost and estimated earnings in excess of billings......... -- 773 4,770
Prepaid expenses and other current assets................. 75 59 58
Deferred income taxes..................................... 107 132 132
------- ------- -------
Total current assets.................................. 9,361 9,109 17,883
------- ------- -------
Property and equipment...................................... 2,734 6,130 6,823
Less accumulated depreciation............................. (1,334) (1,745) (1,968)
------- ------- -------
1,400 4,385 4,855
------- ------- -------
Deferred income taxes, net.................................. 600 878 878
Notes receivable--stockholders.............................. 556 560 521
Other assets................................................ 24 24 --
------- ------- -------
Total assets.......................................... $11,941 $14,956 $24,137
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings from bank...................................... $ 800 $ 1,000 $ 4,900
Notes and lease payable--current.......................... 205 386 1,326
Trade accounts payable.................................... 1,106 2,468 2,559
Customer advances......................................... 3,668 1,792 2,943
Accrued expenses and other liabilities.................... 1,329 1,880 2,690
Income taxes payable...................................... 484 458 1,246
------- ------- -------
Total current liabilities............................. 7,592 7,984 15,664
------- ------- -------
Notes and lease payable--non-current........................ 591 3,678 3,501
------- ------- -------
Commitments and contingencies (Note 11)..................... -- -- --
------- ------- -------
Stockholders' equity
Common stock, $1 par value, 100,000 shares authorized,
18,000, 17,490 and 18,000 shares issued and outstanding
at June 30, 1997 and 1998 and December 31, 1998,
respectively............................................ 18 17 18
Additional paid-in capital................................ 429 -- 207
Retained earnings......................................... 3,311 3,277 4,747
------- ------- -------
3,758 3,294 4,972
------- ------- -------
$11,941 $14,956 $24,137
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ---------------------------
--------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
--------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales.................................................. $21,726 $23,464 $9,496 $19,380
Cost of sales.......................................... 15,573 16,992 6,905 14,234
------- ------- ------ -------
Gross profit......................................... 6,153 6,472 2,591 5,146
Operating expenses
Selling, general, and administrative................. 4,106 5,976 2,645 2,535
------- ------- ------ -------
Income from operations................................. 2,047 496 (54) 2,611
------- ------- ------ -------
Other expenses
Interest expense, net................................ (70) (166) (50) (180)
------- ------- ------ -------
Income before provision for income taxes............... 1,977 330 (104) 2,431
Provision (benefit) for income taxes................... 782 11 (41) 961
------- ------- ------ -------
Net income (loss)...................................... $ 1,195 $ 319 $ (63) $ 1,470
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996............................... 14,616 $15 $ 55 $2,116 $2,186
Net income.......................................... -- -- -- 1,195 1,195
Share issuance...................................... 3,000 3 514 -- 517
Share purchases..................................... (400) (1) (399) -- (400)
Shares issued under employee stock benefit plan..... 784 1 259 -- 260
------ --- ----- ------ ------
Balance, June 30, 1997.............................. 18,000 18 429 3,311 3,758
Net income.......................................... -- -- -- 319 319
Share purchases..................................... (510) (1) (429) (353) (783)
------ --- ----- ------ ------
Balance, June 30, 1998.............................. 17,490 17 -- 3,277 3,294
Net income (unaudited).............................. -- -- -- 1,470 1,470
Shares issued under employee stock benefit plan
(unaudited)......................................... 510 1 207 -- 208
------ --- ----- ------ ------
Balance, December 31, 1998 (unaudited).............. 18,000 $18 $ 207 $4,747 $4,972
====== === ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-73
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, ---------------------------
------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
-------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................... $ 1,195 $ 319 $ (63) $ 1,470
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation....................................... 306 411 155 223
Deferred tax (benefit) expense..................... 298 (303) -- --
Changes in operating assets and liabilities
Trade accounts receivable.......................... 604 845 (4,836) (1,926)
Inventories........................................ (1,042) 4 1,432 (564)
Cost and estimated earnings in excess of
billings......................................... -- (773) -- (3,997)
Prepaid expenses and other current assets.......... (18) 16 (44) 1
Other assets....................................... -- -- -- 24
Trade accounts payable............................. 250 1,362 (848) 90
Customer advances.................................. (3,684) (1,876) 2,938 1,151
Accrued expenses and other liabilities............. 895 551 (915) 811
Income taxes payable............................... 484 (26) (41) 788
------- ------- ------- -------
Net cash provided by (used in) operating activities.... (712) 530 (2,222) (1,929)
------- ------- ------- -------
Cash flows from investing activities
Decrease in investment securities available for
sale............................................... 312 -- -- --
Purchases of property and equipment.................. (248) (3,396) (2,482) (693)
------- ------- ------- -------
Net cash provided by (used in) investing activities.... 64 (3,396) (2,482) (693)
------- ------- ------- -------
Cash flows from financing activities
Advance to stockholders.............................. (342) (4) -- 39
Increase in line of credit borrowings................ 800 200 1,700 3,900
Increase (decrease) in notes and lease payable....... (233) 3,268 3,113 763
Stock purchases...................................... (400) (783) -- --
Proceeds from issuance of common stock............... 777 -- -- 208
------- ------- ------- -------
Net cash provided by financing activities.............. 602 2,681 4,813 4,910
------- ------- ------- -------
Net decrease in cash................................... (46) (185) 109 2,288
Cash at beginning of period............................ 447 401 401 216
------- ------- ------- -------
Cash at end of period................................ $ 401 $ 216 $ 510 $ 2,504
======= ======= ======= =======
Supplemental cash flow disclosures
Interest paid...................................... $ 70 $ 195 $ 60 $ 189
Income taxes paid.................................. $ 2 $ 376 $-- $ 168
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
PATS, Inc. (the "Company"), and its wholly-owned subsidiaries, design,
manufacture and service a variety of components for auxiliary power, cooling
systems and fuel systems for the corporate aircraft market. The Company
primarily operates in the U.S. market and approximately 45% of the Company's
sales for fiscal 1998 are to Boeing of Washington. The Company's customers are
principally concentrated in the corporate aircraft industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when products are shipped, except for products
manufactured under long-term contracts. Further, revenue associated with
manufactured products requiring customer acceptance is recognized only upon
receipt of such acceptance from the customer.
Revenue under long-term contracts is recognized under the percentage of
completion method. This method recognizes costs and estimated earnings as work
is performed. The basis used is the percentage of incurred costs to estimated
total costs after giving effect to management's most recent estimates. When
contract estimates indicate a loss, provision is made for the entire estimated
loss. Long-term contracts in progress are stated at cost plus estimated earnings
but not in excess of net realizable value.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO). Provision has been made for any obsolete
and/or slow-moving inventory.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Major renewals and betterments are capitalized and ordinary repairs and
maintenance are charged against operations in the year incurred. Depreciation is
computed using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. Estimated useful lives are
40 years for buildings and 3 to 7 years for machinery, equipment and vehicles.
Leasehold improvements are depreciated over the lease term or the estimated
useful life of the improvement, whichever is shorter.
INCOME TAXES
The Company follows the practice of providing for income taxes using the
asset and liability method specified under Statement of Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements and tax returns. In estimating future tax consequences under
SFAS 109, all expected future events other than enactments of changes in the tax
laws or rates are generally considered.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, receivables,
accounts payable and debt do not significantly differ from fair values as of
June 30, 1997 and 1998.
F-75
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The financial information as of December 31, 1998 and for the six months
ended December 31, 1997 and 1998 is unaudited. In the opinion of the Company,
the unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim period. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Buildings............................................................................................ $ -- $ 2,972
Machinery and equipment.............................................................................. 2,282 2,666
Leasehold improvements............................................................................... 452 492
--------- ---------
2,734 6,130
Less accumulated depreciation and amortization....................................................... 1,334 1,745
--------- ---------
$ 1,400 $ 4,385
========= =========
</TABLE>
Depreciation expense for the years ended June 30, 1997 and 1998 was $306,000
and $411,000, respectively.
NOTE 4 - INVENTORIES
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Raw materials........................................................................................ $ 3,609 $ 4,055
Work-in-process...................................................................................... 2,977 2,527
--------- ---------
$ 6,586 $ 6,582
========= =========
</TABLE>
Inventories were pledged to the extent of amounts received as customer
advances.
NOTE 5 - LONG-TERM CONTRACT
During 1998, the Company entered into a long-term contract with Boeing of
Washington to produce fuel tanks. The Company's policy is to account for such
contracts using the percentage of completion method.
F-76
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LONG-TERM CONTRACT (CONTINUED)
Unbilled amounts related to costs and estimated earnings in excess of billings
are expected to be billed and collected within one year (amounts in thousands).
<TABLE>
<CAPTION>
COSTS AND
ESTIMATED
EARNINGS IN
EXCESS OF BILLINGS
------------------
<S> <C>
Costs and estimated earnings........................................................................ $ 11,513
Less--progress billings............................................................................. 10,740
----------
$ 773
==========
</TABLE>
NOTE 6 - DEBT AND LINES OF CREDIT
Long-term debt consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Variable rate borrowings under the revolving credit facility......................................... $ 800 $ 1,000
Industrial revenue bonds variable rate borrowings at 3.75%........................................... -- 2,000
Fixed rates notes
11.00% note due through 1999....................................................................... 79 44
10.00% note due through 2015....................................................................... 385 379
8.51% note due through 1999........................................................................ 192 93
8.50% note due through 2001........................................................................ -- 237
8.35% note due through 2000........................................................................ 140 94
7.93% note due through 2002........................................................................ -- 344
6.00% note due through 2012........................................................................ -- 285
Other obligations (Grant Funds)...................................................................... -- 588
--------- ---------
1,596 5,064
Less current portion................................................................................. 1,005 1,386
--------- ---------
$ 591 $ 3,678
========= =========
</TABLE>
Other obligations include a $450,000 grant from the State of Delaware which
will be forgiven based on the satisfaction of certain employment and operational
requirements. At June 30, 1998, the Company has not met those objectives and,
accordingly, has reflected this amount as an obligation.
Aggregate principal payments applicable to long-term debt for the next five
fiscal years are as follows: 1999-$1,386,000; 2000-$341,000; 2001-$331,000;
2002-$307,000; 2003-$307,000; and 2004 and after--$2,392,000.
CREDIT ARRANGEMENTS
As of June 30, 1998, the Company had a $3,000,000 borrowing facility with a
bank that carried an interest rate of prime rate plus 25 basis points. On
October 5, 1998, the Company increased its credit facility by $2,000,000. The
facility requires an annual commitment fee of .25%. Certain of the Company's
equipment and inventories are pledged as collateral for the outstanding debt of
the Company.
NOTE 7 - OPERATING LEASES AND RELATED PARTY TRANSACTIONS
The Company is a counterparty to a non-cancelable lease of office space and
manufacturing facilities in Columbia, Maryland from a partnership in which two
stockholders of the Company have a financial interest.
F-77
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - OPERATING LEASES AND RELATED PARTY TRANSACTIONS (CONTINUED)
The lease extends through June 2007, with an annual base rent amount of $405,000
and a CPI based escalator. The Company is responsible for maintenance,
insurance, and real estate tax expense.
The Company has a land lease for its facility in Georgetown, Delaware. This
non-cancelable lease expires through December 31, 2041, with annual rental
approximating $6,000. The lessor is not a related party.
The total minimum rental commitment at June 30, 1998, under these leases is
$3,903,000 which is due as follows (amounts in thousands):
<TABLE>
<CAPTION>
SUSSEX
COLUMBIA, COUNTY,
MARYLAND DELAWARE
----------- -----------
<S> <C> <C>
Year ending June 30,
1999........................................................................................... $ 405 $ 6
2000........................................................................................... 405 6
2001........................................................................................... 405 6
2002........................................................................................... 405 6
2003........................................................................................... 405 6
2004 through 2007.............................................................................. 1,620 24
After 2007..................................................................................... -- 204
--------- ---------
$ 3,645 $ 258
========= =========
</TABLE>
NOTE 8 - COMMON STOCK AND EMPLOYEE STOCK PLAN
During 1997 and 1998, the Company's Board of Directors authorized the
purchase of 400 and 510 shares of the Company stock at $1,000 and $1,535 per
share, respectively. The purchases were acquired from certain existing and
former stockholders at prices believed to be fair value.
The Company has an Employee Stock Benefit Plan for employees to which
discretionary contributions are made from time to time. During 1997, the Board
of Directors authorized the issuance of 784 shares to this plan at a value of
$332 per share determined by an independent appraiser.
NOTE 9 - INCOME TAXES
The provision for income taxes is as follows (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Current income taxes
Federal............................................................................................ $ 398 $ 258
State.............................................................................................. 86 56
--------- ---------
484 314
Deferred income taxes (benefit)...................................................................... 298 (303)
--------- ---------
$ 782 $ 11
========= =========
</TABLE>
F-78
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - INCOME TAXES (CONTINUED)
The effective rate was 39.6% and 3.2% in 1997 and 1998, respectively. A
reconciliation of this rate to the U.S. Federal income tax rate is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
<S> <C> <C> <C>
1997 1998
% OF PRETAX % OF PRETAX
------------------------ -----------
<CAPTION>
AMOUNT INCOME AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Computed expected tax expense..................................................... $ 692 35.0% $ 116
State income taxes, net of Federal income tax benefit............................. 90 4.6 15
Reduction of valuation allowance.................................................. -- 0.0 (120)
--------- --------- ---------
$ 782 39.6% $ 11
========= ========= =========
<CAPTION>
<S> <C>
INCOME
---------
<S> <C>
Computed expected tax expense..................................................... 35.0%
State income taxes, net of Federal income tax benefit............................. 4.6
Reduction of valuation allowance.................................................. (36.4)
---------
3.2%
=========
</TABLE>
The significant components of deferred income taxes are temporary
differences arising from the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred income tax assets (liabilities)
Accrued vacation................................................................................... $ 107 $ 132
Depreciation....................................................................................... (198) 101
Research and development costs..................................................................... 798 777
Research and development credits................................................................... 900 780
--------- ---------
Total.......................................................................................... 1,607 1,790
Valuation allowance.................................................................................. (900) (780)
--------- ---------
Deferred income tax assets..................................................................... $ 707 $ 1,010
========= =========
</TABLE>
The reduction in the valuation allowance relates to the utilization of a
portion of research and development credits.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a savings and retirement plan which qualifies under
Section 401(k) of the Internal Revenue Code in which all full-time employees are
eligible to participate. In accordance with the terms of the plan, employees may
elect to contribute up to 15% of their annual compensation to the plan, subject
to certain limitations. The Board of Directors may elect to declare a
discretionary matching contribution to the Plan of 50% of all contributions made
up to 6% of each employee's salary. No matching contributions were made by the
Company for 1997 or 1998.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lawsuits and claims are filed from time to time in the ordinary course of
business. For all outstanding claims, management, in consultation with legal
counsel, is of the opinion that the outcome of such matters will not have a
material effect on the financial position of the Company.
NOTE 12 - SUBSEQUENT EVENT
In January 1999, all of Company's shares outstanding were acquired by
DeCrane Aircraft Holdings, Inc.
F-79
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
PPI Holdings, Inc.
Wichita, Kansas
We have audited the accompanying consolidated balance sheets of PPI
Holdings, Inc. and Subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
period from June 12, 1997 to December 31, 1997 and the year ended December 31,
1998. We have also audited the statements of income, stockholders' equity, and
cash flows of Precision Pattern, Inc. (the predecessor to PPI Holdings, Inc.)
for the year ended December 31, 1996 and the period from January 1, 1997 to
June 11, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PPI Holdings,
Inc. and Subsidiary as of December 31, 1997 and 1998, the results of its
operations and its cash flows for the period from June 12, 1997 to December 31,
1997 and the year ended December 31, 1998, and the results of operations and
cash flows of Precision Pattern Inc. for the year ended December 31, 1996 and
the period from January 1, 1997 to June 11, 1997 in conformity with generally
accepted accounting principles.
BAIRD, KURTZ & DOBSON
Wichita, Kansas
January 28, 1999
F-80
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(SUCCESSOR)
---------------------------------
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 193 $ 1,872 $ 1,396
Accounts receivable, less allowance for doubtful accounts
of $54 and $340 as of December 31, 1997 and 1998,
respectively, and $340
as of March 31, 1999.................................... 4,847 6,230 5,879
Inventories............................................... 3,203 4,719 4,852
Deposits.................................................. 284 235 175
Prepaid expenses and other................................ 28 12 7
------- ------- -------
Total current assets.................................... 8,555 13,068 12,309
------- ------- -------
Property and equipment, net................................. 1,065 1,184 1,178
Goodwill net of accumulated amortization of $69 and $393 as
of December 31, 1997 and 1998, respectively, and $474 as
of
March 31, 1999............................................ 6,332 6,008 5,927
Other intangible assets, net of accumulated amortization of
$28 and $77 as of December 31, 1997 and 1998,
respectively, and $89 as of
March 31, 1999............................................ 219 170 158
------- ------- -------
Total assets.......................................... $16,171 $20,430 $19,572
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 1,032 $ 1,157 $ 1,342
Revolving credit agreement................................ 626 -- --
Current maturities of long-term debt...................... 1,050 1,500 1,500
Accrued warranties........................................ 300 300 300
Accrued profit sharing.................................... 348 587 274
Accrued employee compensation............................. 360 271 365
Other accrued liabilities................................. 381 445 515
------- ------- -------
Total current liabilities............................... 4,097 4,260 4,296
------- ------- -------
Long-term debt.............................................. 8,850 6,050 5,675
------- ------- -------
Stockholders' equity
Common stock, $1 stated value; authorized 10,000,000
shares; issued and outstanding 1,000,000 shares......... 1,000 1,000 1,000
Retained earnings......................................... 2,224 9,120 8,601
------- ------- -------
Total stockholders' equity.............................. 3,224 10,120 9,601
------- ------- -------
Total liabilities and stockholders' equity............ $16,171 $20,430 $19,572
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-81
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
(SUCCESSOR)
(PREDECESSOR) -------------------------------------------------
------------------------- PERIOD
PERIOD FROM FROM
JANUARY 1, JUNE 12, THREE MONTHS ENDED
YEAR ENDED 1997 TO 1997 TO YEAR ENDED MARCH 31,
DECEMBER 31, JUNE 11, DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998 1998 1999
---------- ------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $17,665 $10,400 $15,102 $37,714 $7,137 $10,226
Cost of goods sold......... 14,258 7,675 11,143 24,376 5,726 6,781
------- ------- ------- ------- ------ -------
Gross profit............... 3,407 2,725 3,959 13,338 1,412 3,445
------- ------- ------- ------- ------ -------
Operating expenses
General and
administrative......... 1,446 667 821 2,102 504 637
Engineering.............. 322 140 226 489 47 83
Bad debt provision....... 75 -- -- -- -- --
------- ------- ------- ------- ------ -------
Income from operations..... 1,564 1,918 2,912 10,747 861 2,725
------- ------- ------- ------- ------ -------
Other income (expense)
Interest income.......... 94 50 10 -- -- --
Interest expense......... -- -- (732) (1,051) (219) (158)
Other revenue............ 8 -- 39 14 -- --
Gain on sale of asset.... 42 -- 1 -- -- --
Other income (expense)... (13) 8 (6) (19) 3 67
------- ------- ------- ------- ------ -------
131 58 (688) (1,056) (216) (91)
------- ------- ------- ------- ------ -------
Net income................. $ 1,695 $ 1,976 $ 2,224 $ 9,691 $ 645 $ 2,634
======= ======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-82
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1995.................................. $ 40 $ 1 $ 7,311 $ 7,352
Net income.................................................. -- -- 1,695 1,695
Dividend on common stock
$220 per share............................................ -- -- (880) (880)
------ ---- ------- -------
Balance, December 31, 1996.................................. 40 1 8,126 8,167
Net Income.................................................. -- -- 1,976 1,976
Dividend on common stock
$862.50 per share......................................... -- -- (3,450) (3,450)
------ ---- ------- -------
Balance, June 11, 1997...................................... $ 40 $ 1 $ 6,652 $ 6,693
====== ==== ======= =======
=========================================================================================================
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
SUCCESSOR
Balance, June 12, 1997...................................... $1,000 -- $ -- $ 1,000
Net income.................................................. -- -- 2,224 2,224
------ ---- ------- -------
Balance, December 31, 1997.................................. 1,000 -- 2,224 3,224
Net income.................................................. -- -- 9,691 9,691
Dividends on common stock $2.80 per share................... -- -- (2,795) (2,795)
------ ---- ------- -------
Balance, December 31, 1998.................................. 1,000 -- 9,120 10,120
Net income (Unaudited)...................................... -- -- 2,634 2,634
Dividends on common stock $3.15 per share................... -- -- (3,153) (3,153)
------ ---- ------- -------
Balance, March 31, 1999 (Unaudited)......................... $1,000 -- $ 8,601 $ 9,601
====== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-83
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
(PREDECESSOR) (SUCCESSOR)
--------------------------- -------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, JUNE 12, THREE MONTHS ENDED
YEAR ENDED 1997 TO 1997 TO YEAR ENDED MARCH 31,
DECEMBER 31, JUNE 11, DECEMBER 31, DECEMBER 31, ---------------------------
1996 1997 1997 1998 1998 1999
----------- ------------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income................... $ 1,695 $ 1,976 $ 2,224 $ 9,691 $ 645 $ 2,634
Items not requiring
(providing) cash:
Depreciation and
amortization............. 181 79 304 633 130 158
Gain on sale of property
and equipment............ (42) -- (1) -- -- --
Changes in:
Accounts receivable........ (1,672) 1,048 (2,108) (1,383) (475) 351
Inventories................ (318) (43) (133) (1,515) (503) (134)
Prepaid expenses and
other.................... 35 51 (359) 65 32 65
Accounts payable and
accrued expenses......... 94 (158) 1,020 338 925 38
------- ------- ------- ------- ----- --------
Net cash provided by
(used in) operating
activities............. (27) 2,953 947 7,829 754 3,112
------- ------- ------- ------- ----- --------
Cash flows from investing
activities
Purchase of property and
equipment.................. (151) (251) (96) (379) (47) (59)
Proceeds from sale of
property and equipment..... 298 -- 17 -- -- --
Payments for organizational
costs...................... -- -- (247) -- -- --
Purchase of subsidiary....... -- -- (8,954) -- -- --
------- ------- ------- ------- ----- --------
Net cash provided by
(used in) investing
activities............. 147 (251) (9,280) (379) (47) (59)
------- ------- ------- ------- ----- --------
Cash flows from financing
activities
Net borrowings under
revolving credit
agreement.................. -- -- 626 (626) (626) --
Proceeds from issuance of
long-term debt............. -- -- 7,500 3,000 -- --
Principal payments on
long-term debt............. -- -- (600) (5,350) (250) (375)
Dividends paid............... (880) (3,450) -- (2,795) -- (3,154)
------- ------- ------- ------- ----- --------
Net cash provided by
(used in) financing
activities............. (880) (3,450) 7,526 (5,771) (876) (3,529)
------- ------- ------- ------- ----- --------
Increase (decrease) in cash.... (760) (748) (807) 1,679 (169) (476)
Cash, beginning of period...... 2,727 1,967 1,000 193 193 1,872
------- ------- ------- ------- ----- --------
Cash, end of period............ $ 1,967 $ 1,219 $ 193 $ 1,872 $ 24 $ 1,396
======= ======= ======= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-84
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PPI Holdings, Inc. was incorporated under Kansas law on February 14, 1997,
and serves as the holding company for Precision Pattern, Inc. The Company began
operation on June 12, 1997, with the purchase of Precision Pattern, Inc.
(Note 2)
The Company's revenues are predominately earned from sales of aircraft
interior components to aircraft manufacturers in Kansas. The Company extends
unsecured credit to customers, with credit extended to one customer exceeding
59% and 71% of accounts receivable at December 31, 1997 and 1998 respectively.
Over 97% of year end receivables are concentrated among three customers at
December 31, 1997 and 1998.
PRINCIPALS OF CONSOLIDATION
As a result of the business combination (Note 2) on June 11, 1997, the
Company has presented its financial position, results of operations, changes in
stockholders' equity and cash flows on a predecessor/ successor basis.
PPI Holdings, Inc. is a holding company, which has no material operations or
assets separate from its investment in Precision Pattern, Inc. The consolidated
financial statements as of December 31, 1997 and 1998 and for the period from
June 12, 1997 to December 31, 1997 and for the year ended December 31, 1998
include the accounts of PPI Holdings, Inc. and its subsidiary. The consolidated
financial statements of the predecessor include the accounts of Precision
Pattern, Inc. for the year ended December 31, 1996 and for the period from
January 1, 1997 to June 11, 1997. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY PRICING
Inventories are stated at lower of average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The assets are depreciated over
their estimated useful lives using straight-line and accelerated methods.
INTANGIBLE ASSETS
The Company is amortizing deferred charges consisting of loan costs, lease
costs and a noncompete agreement utilizing the straight-line method over five to
ten years. Goodwill is being amortized over twenty years also using the
straight-line method.
WARRANTY OBLIGATIONS
The Company generally provides its customers with a one to two year warranty
from the date of purchase. Estimated warranty costs are accrued at the time of
sale.
INCOME TAXES
The Company elected to have its income taxed as an S corporation under
provisions of the Internal Revenue Code; therefore, taxable income or loss is
reported to the individual stockholders for inclusion in their tax returns, and
no provision for Federal and state income tax is included in these statements.
F-85
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BUY/SELL AGREEMENT
On April 21, 1997, the Company and its shareholders entered into a buy/sell
agreement which restricts any sale or other transfer of shares of the Company.
The purpose of the agreement is to insure that all the shares of stock shall be
offered for sale to the Company and the other shareholders before disposition of
such shares to any other person or entity.
NOTE 2 -- BUSINESS COMBINATION
On June 11, 1997, PPI Holdings, Inc. acquired 100% of the outstanding stock
of Precision Pattern, Inc. which consisted of 4,000 shares for $13,172,706 in
cash. This transaction was accounted for using the purchase method by recording
the assets and liabilities of the acquiree at their estimated market values at
the acquisition date. PPI Holdings, Inc. is owned by several members of the
Company's management. As part of the purchase transaction, Precision Pattern,
Inc. borrowed funds from a bank to fund the acquisition.
NOTE 3 -- INVENTORIES
Inventories were as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Raw material................................................ $2,268 $3,205 $3,086
Work in process............................................. 1,535 2,114 2,366
------ ------ ------
3,803 5,319 5,452
Less reserve for obsolesce.................................. 600 600 600
------ ------ ------
$3,203 $4,719 $4,852
====== ====== ======
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment was as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Leasehold improvements...................................... $ 1,065 $ 563 $ 563
Machinery and equipment..................................... 1,535 612 618
Furniture and fixtures...................................... 827 343 390
Vehicles.................................................... 138 16 59
------- ------ -------
3,565 1,534 1,630
Accumulated depreciation.................................... (2,500) (350) (452)
------- ------ -------
$ 1,065 $1,184 $ 1,178
======= ====== =======
</TABLE>
NOTE 5 -- PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees.
The Company's contribution to the Plan is 6% of the compensation of all
participants under the Plan determined for the Company's taxable year for which
it makes the contribution. The Company must have current or accumulated net
profits exceeding 5% of the net sales in order to make the contributions.
Participant's interest is vested over a period of three to seven years of
service. The Company expensed contributions for the year ended December 31,
1996, the periods from January 1, 1997 to June 11, 1997, June 12, 1997 to
December 31, 1997 and the year ended December 31, 1998, in the amount of
$283,500, $141,352, $347,620 and $587,036 , respectively. Employees also have
the option to make elective deferrals to the Plan up to the limits set by the
Internal Revenue Service.
F-86
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- REVOLVING CREDIT AGREEMENT
At December 31, 1997 and 1998, the Company had $0 and $625,821 outstanding
borrowings under a $5,000,000 revolving credit agreement. The agreement is
secured by goods, equipment, accounts, inventory, instruments, documents,
chattel paper, general intangibles and other personal property of the Company.
Interest is calculated at prime rate plus various amounts up to 3/4% and is
payable monthly. Payments on principal are made daily, as cash is available,
from a lock box maintained by the lender. Final maturity is June 12, 2002.
NOTE 7 -- LONG-TERM DEBT
Long-term debt was as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Note payable, bank; due June 12, 2002, payable in increasing
quarterly installments including interest at prime rate
plus various amounts up to 1% secured by goods, equipment,
accounts, inventory, instruments, documents, chattel
paper, general intangibles and other personal property of
the Company and its subsidiary............................ $6,900 $4,550 $4,275
Note payable, bank; payable in quarterly installments of
$100,000 with the balance due June 12, 2002. The note
bears interest at prime plus 1% and is secured by goods,
equipment, accounts, inventory, instruments, documents,
chattel paper, general intangibles and other personal
property of the Company and its subsidiary................ -- 3,000 2,900
Note payable, other; due September 12, 2010, payable in
quarterly installments of $150,000 beginning on September
12, 2005. Interest is accrued on the unpaid portion of the
note at 15% and is payable in bi-annual installments. None
of the Company's assets are pledged as collateral on this
note and it is subordinate to the bank note. As part of
the purchase and note agreement, dividends are restricted
to amounts necessary to cover income taxes of the
shareholders on income from the Company. This restriction
ended when the note was retired in 1998................... 3,000 -- --
------ ------ ------
9,900 7,550 7,175
Less current maturities..................................... 1,050 1,500 1,500
------ ------ ------
$8,850 $6,050 $5,675
====== ====== ======
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1998 are
(amounts in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,500
2000........................................................ 1,550
2001........................................................ 1,600
2002........................................................ 2,900
------
7,550
Less current maturities..................................... 1,500
------
Noncurrent portion.......................................... $6,050
======
</TABLE>
NOTE 8 -- SIGNIFICANT ESTIMATES AND CONCENTRATION
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts has been established based on
management's estimate of the uncollectible portion. However, actual losses may
be materially different than the estimated amount.
F-87
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SIGNIFICANT ESTIMATES AND CONCENTRATION (CONTINUED)
RESERVE FOR OBSOLETE INVENTORY
The Company owns a significant amount of raw materials which were not used
in production during the year. A reserve for obsolete inventory has been
established for the estimated amount that is obsolete; however, actual losses
may be materially different than the estimated amount.
ACCRUED WARRANTIES
Each year, the Company does a significant amount of rework related to the
satisfaction of warranties. An amount has been included in accrued expenses for
estimated warranty expense related to current year sales; however, the actual
expenses to be incurred may be materially different than the estimated amounts
which have been accrued.
MAJOR CUSTOMERS
The Company sold approximately 49% and 35% in 1996, 56% and 35% from
January 1, 1997 to June 11, 1997, 56% and 35% from June 12, 1997 to
December 31, 1997 and 66% and 30% in 1998 of its primary product to two
customers. There are a limited number of buyers of the Company's products.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company rents its business facility from a property rental company which
is owned, in part, by one of the shareholders of the Company. For the year ended
December 31, 1996, the periods from January 1, 1997 to June 11, 1997, June 12,
1997 to December 31, 1997 and the year ended December 31, 1998, the Company made
payments totaling $250,000, $139,088, $174,950, and $355,500, respectively, for
rent to the related rental company.
NOTE 10 -- ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid............................................. $ 669 $ 987
ADDITIONAL INVESTING AND FINANCING ACTIVITIES
Long-term debt incurred for purchase of subsidiary........ $ 3,000 $ --
</TABLE>
NOTE 11 -- YEAR 2000 ISSUE
Like all entities, the Company is exposed to risks associated with the Year
2000 Issue, which affects computer software and hardware; transactions with
customers, vendors and other entities; and equipment dependent on microchips.
The Company has begun but not yet completed the process of identifying and
remediating potential Year 2000 problems. It is not possible for any entity to
guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with which the Company does
business. If remediation efforts of the Company or third parties with which it
does business are not successful, the Year 2000 problem could have negative
effects on the Company's financial condition and results of operations in the
near term.
NOTE 12 -- SUBSEQUENT EVENT
In April 1999, all of the Company's shares outstanding were acquired by
DeCrane Aircraft Holdings, Inc.
F-88
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Custom Woodwork & Plastics, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Custom Woodwork & Plastics, Inc. at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
October 1, 1999
F-89
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 452 $ 776 $ 873
Trade accounts receivable................................. 209 269 642
Inventories............................................... 197 434 400
Note receivable........................................... 50 -- --
------ ------ ------
Total current assets.................................... 908 1,479 1,915
Property, plant and equipment, net.......................... 737 793 731
------ ------ ------
Total assets.......................................... $1,645 $2,272 $2,646
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable.................................... $ 15 $ 95 $ 100
Accrued expenses and other liabilities.................... 10 17 39
------ ------ ------
Total current liabilities............................... 25 112 139
------ ------ ------
Commitments and contingencies (Note 8)...................... -- -- --
------ ------ ------
Stockholders' equity
Common stock, $1 par value, 50,000 shares authorized; 500
shares issued and outstanding at December 31, 1997 and
1998 and June 30, 1999.................................... 1 1 1
Retained earnings........................................... 1,619 2,159 2,506
------ ------ ------
Total stockholders' equity.............................. 1,620 2,160 2,507
------ ------ ------
Total liabilities and stockholders' equity............ $1,645 $2,272 $2,646
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-90
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales....................................................... $3,235 $4,480 $2,034 $4,002
Cost of sales............................................... 1,877 2,358 1,104 1,843
------ ------ ------ ------
Gross profit................................................ 1,358 2,122 930 2,159
Operating expenses
Selling, general and administrative....................... 365 397 169 198
------ ------ ------ ------
Income from operations...................................... 993 1,725 761 1,961
Other income
Interest income, net...................................... 27 35 18 9
Other (expense) income, net............................... (5) 2 -- --
------ ------ ------ ------
Net income.................................................. $1,015 $1,762 $ 779 $1,970
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-91
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996.................................. 500 $ 1 $ 1,268 $ 1,269
Net income................................................ -- -- 1,015 1,015
Distributions to stockholders............................. -- -- (664) (664)
---- ----- ------- -------
Balance, December 31, 1997.................................. 500 1 1,619 1,620
Net income................................................ -- -- 1,762 1,762
Distributions to stockholders............................. -- -- (1,222) (1,222)
---- ----- ------- -------
Balance, December 31, 1998.................................. 500 1 2,159 2,160
Net income (Unaudited).................................... -- -- 1,970 1,970
Distributions to stockholders (Unaudited)................. -- -- (1,623) (1,623)
---- ----- ------- -------
Balance, June 30, 1999 (Unaudited).......................... 500 $ 1 $ 2,506 $ 2,507
==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-92
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $1,015 $ 1,762 $ 779 $ 1,970
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.......................................... 35 40 22 17
Changes in operating assets and liabilities
Trade accounts receivable............................... (209) (60) 158 (373)
Inventories............................................. 2 (237) 14 34
Trade accounts payable.................................. -- 80 33 5
Accrued expenses and other liabilities.................. -- 7 15 22
------ ------- ------ -------
Net cash provided by operating activities............. 843 1,592 1,021 1,675
------ ------- ------ -------
Cash flows from investing activities
Purchases of property, plant and equipment................ (38) (96) (64) --
(Issuance) payment of note receivable..................... (50) 50 -- --
------ ------- ------ -------
Net cash used for investing activities................ (88) (46) (64) --
------ ------- ------ -------
Cash flows from financing activities
Distributions paid to stockholders........................ (664) (1,222) (322) (1,578)
------ ------- ------ -------
Net cash used for financing activities................ (664) (1,222) (322) (1,578)
------ ------- ------ -------
Net increase in cash and cash equivalents................... 91 324 635 97
Cash and cash equivalents at beginning of period............ 361 452 452 776
------ ------- ------ -------
Cash and cash equivalents at end of period.................. $ 452 $ 776 $1,087 $ 873
====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-93
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
Custom Woodwork & Plastics, Inc. (the "Company") designs and manufactures
interior furniture components for middle- and high-end corporate aircraft. The
Company operates in the U.S. market and 100% and 74% of the Company's sales for
fiscal 1998 and 1997 were to Gulfstream Aerospace Corporation, respectively. The
Company's customers are principally concentrated in the corporate aircraft
industry.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
It is the policy of the Company to deposit its cash and cash equivalents in
federally insured financial institutions. From time to time deposits may exceed
Federal Deposit Insurance Corporation ("FDIC") limits. At December 31, 1998, the
Company had $476,000 on deposit in excess of the FDIC limits.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Major renewals and betterments are capitalized and ordinary
repairs and maintenance are charged against operations in the year incurred.
Depreciation is computed using the straight-line method for buildings and
building improvements and the double-declining balance method for machinery and
equipment, vehicles and furniture and fixtures. Estimated useful lives are 40
years for buildings and building improvements and 5 to 7 years for machinery and
equipment, vehicles and furniture and fixtures.
REVENUE RECOGNITION
Revenue is recognized when products are shipped.
INCOME TAXES
The Company elected to have its income taxed as an S corporation under
provisions of the Internal Revenue Code; therefore, taxable income or loss is
reported to the individual stockholders for inclusion in their tax returns, and
no provision for Federal and state income tax is included in these statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, receivables,
accounts payable and accrued expenses and other liabilities do not significantly
differ from fair values as of December 31, 1997 and 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-94
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM RESULTS
The financial information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited. In the opinion of the Company, the
unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim periods. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
NOTE 3 -- INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw material................................................ $ 14 $ 24 $ 47
Work-in-process............................................. 183 410 353
---- ---- ----
Total inventories......................................... $197 $434 $400
==== ==== ====
</TABLE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Land........................................................ $ 75 $ 75
Buildings and building improvements......................... 644 644
Machinery and equipment..................................... 113 113
Vehicles.................................................... 90 163
Furniture and fixtures...................................... 16 16
----- ------
Total cost................................................ 938 1,011
Accumulated depreciation and amortization................. (201) (218)
----- ------
Net property and equipment................................ $ 737 $ 793
===== ======
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1998 was
$35,000 and $40,000, respectively.
NOTE 5 -- LINE OF CREDIT
The Company had a $200,000 revolving line of credit with a bank,
collaterialized by all of the assets of the Company. Loans under the line of
credit bear interest at the rate of 8.75% per annum. All borrowings under the
line of credit were used for working capital purposes. The line of credit
matured in February 1999 and was not renewed. As of December 31, 1997 and 1998,
the Company had no borrowings outstanding under the line of credit.
NOTE 6 -- RELATED PARTY TRANSACTIONS
At December 31, 1997, the Company had a $50,000 note receivable from a
related party. The note was repaid in full in 1998.
F-95
<PAGE>
CUSTOM WOODWORK & PLASTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- EMPLOYEE BENEFIT PLANS
The Company has a savings and retirement plan which qualifies under Section
401(k) of the Internal Revenue Code in which all full-time employees are
eligible to participate. In accordance with the terms of the plan, employees may
elect to contribute up to 15% of their annual compensation to the plan, subject
to certain limitations. The Board of Directors may elect to declare a
discretionary matching contribution to the Plan of 50% of all contributions made
up to 6% of each employee's salary. The Company did not make any matching
contributions for 1997 or 1998.
NOTE 8 -- COMMITMENT AND CONTINGENCIES
The Company is involved in routine legal and administrative proceedings
incidental to the normal conduct of business. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 9 -- SUBSEQUENT EVENT
In August 1999, substantially all of the Company's net assets were acquired
by DeCrane Aircraft Holdings, Inc.
F-96
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
PCI NewCo, Inc.
We have audited the accompanying balance sheets of PCI NewCo, Inc. as of
December 31, 1997 and 1998, and the related 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of PCI NewCo, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BAIRD, KURTZ & DOBSON
November 1, 1999
Wichita, Kansas
F-97
<PAGE>
PCI NEWCO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 188 $ 350 $ 410
Accounts receivable....................................... 763 751 1,116
Inventories............................................... 563 885 764
Prepaid expenses and other................................ 34 39 56
------ ------ ------
Total current assets.................................... 1,548 2,025 2,346
Property and equipment, net................................. 208 328 304
------ ------ ------
Total assets.......................................... $1,756 $2,353 $2,650
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving credit agreement................................ $ 200 $ 200 $ --
Note payable to stockholder............................... 290 115
Accounts payable.......................................... 217 243 94
Accrued expenses.......................................... 108 97 224
------ ------ ------
Total current liabilities............................... 815 655 318
------ ------ ------
Commitments and contingencies (Note 10)
Stockholders' equity
Common stock--Class A, no par value, 100,000 shares
authorized; 10,000 shares issued and outstanding as of
December 31, 1997 and 1998 and 10,526 shares issued and
outstanding as of September 30, 1999.................... 1 1 1
Common stock--Class B, no par value, 100,000 shares
authorized; none issued and outstanding................. -- -- --
Additional paid-in capital................................ 224 224 247
Retained earnings......................................... 716 1,473 2,084
------ ------ ------
Total stockholders' equity.............................. 941 1,698 2,332
------ ------ ------
Total liabilities and stockholders' equity............ $1,756 $2,353 $2,650
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-98
<PAGE>
PCI NEWCO, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................................... $4,899 $7,933 $5,756 $6,692
Cost of goods sold.......................................... 3,821 5,807 4,272 4,747
------ ------ ------ ------
Gross profit................................................ 1,078 2,126 1,484 1,945
Operating expenses
Selling, general and administrative....................... 362 536 389 520
------ ------ ------ ------
Income from operations...................................... 716 1,590 1,095 1,425
Other expense (income)
Interest expense (income), net............................ 39 35 25 (2)
Miscellaneous income...................................... (1) (7) (4) (3)
------ ------ ------ ------
Net income.................................................. $ 678 $1,562 $1,074 $1,430
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-99
<PAGE>
PCI NEWCO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK--
CLASS A
---------------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............................ 10,000 $ 1 $224 $ 118 $ 343
Net income.......................................... -- -- -- 678 678
Common stock dividends.............................. -- -- -- (80) (80)
------ ---------- ---- ------ ------
Balance, December 31, 1997............................ 10,000 1 224 716 941
Net income.......................................... -- -- -- 1,562 1,562
Common stock dividends.............................. -- -- -- (805) (805)
------ ---------- ---- ------ ------
Balance, December 31, 1998............................ 10,000 1 224 1,473 1,698
Net income (Unaudited).............................. -- -- -- 1,430 1,430
Sale of common stock (Unaudited).................... 526 -- 23 -- 23
Common stock dividends (Unaudited).................. -- -- -- (819) (819)
------ ---------- ---- ------ ------
Balance, September 30, 1999 (Unaudited)............... 10,526 $ 1 $247 $2,084 $2,332
====== ========== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-100
<PAGE>
PCI NEWCO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 678 $1,562 $1,074 $ 1,430
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................... 65 92 42 53
Loss on sale of property and equipment.................. 3 -- -- --
Changes in operating assets and liabilities
Accounts receivable....................................... (484) 12 (77) (365)
Inventories............................................... (83) (322) (336) 121
Prepaid expenses and other................................ (26) (5) 22 (17)
Accounts payable and accrued expenses..................... 170 15 88 (22)
----- ------ ------ -------
Net cash provided by operating activities............... 323 1,354 813 1,200
----- ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (166) (212) (192) (29)
----- ------ ------ -------
Net cash used for investing activities.................. (166) (212) (192) (29)
----- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable.................... 20 -- -- --
Proceeds from sale of common stock........................ -- -- -- 23
Common stock dividends.................................... (80) (805) (475) (819)
Revolving line of credit repayments....................... -- -- -- (200)
Principal payments on note payable........................ -- (175) (36) (115)
----- ------ ------ -------
Net cash used for financing activities................ (60) (980) (511) (1,111)
----- ------ ------ -------
NET INCREASE IN CASH........................................ 97 162 110 60
CASH AT BEGINNING OF PERIOD................................. 91 188 188 350
----- ------ ------ -------
CASH AT END OF PERIOD....................................... $ 188 $ 350 $ 298 $ 410
===== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-101
<PAGE>
PCI NEWCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PCI NewCo, Inc (the "Company") manufacturers aircraft components for several
aircraft manufacturers located in the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY PRICING
Inventories are stated at lower of weighted-average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The assets are depreciated over
their estimated useful lives using the straight-line and accelerated methods.
INCOME TAXES
The Company elected to have its income taxed as an "S" corporation under
provisions of the Internal Revenue Code; taxable income or loss is reported to
the individual stockholders for inclusion in their tax returns. Therefore, no
provision for Federal and state income tax is included in these statements.
UNAUDITED INTERIM RESULTS
The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of the Company,
the unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim periods. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
NOTE 2 -- ACCOUNTS RECEIVABLE AND MAJOR CUSTOMERS
The Company sells most of its primary product to two customers. There are a
limited number of buyers of the Company's products. The Company extends
unsecured credit to its customers, with credit extended to two customers
exceeding 88% and 67% of accounts receivable at December 31, 1997 and 1998,
respectively.
NOTE 3 -- INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................... $350 $396 $494
Work-in-process............................................. 213 489 270
---- ---- ----
Total inventories......................................... $563 $885 $764
==== ==== ====
</TABLE>
F-102
<PAGE>
PCI NEWCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements...................................... $ 15 $ 76 $ 76
Machinery and equipment..................................... 226 343 361
Furniture and fixtures...................................... 7 11 13
Computer equipment.......................................... 28 38 47
Vehicles.................................................... 28 46 46
---- ----- -----
Total cost................................................ 304 514 543
Accumulated depreciation and amortization................. (96) (186) (239)
---- ----- -----
Net property and equipment................................ $208 $ 328 $ 304
==== ===== =====
</TABLE>
NOTE 5 -- REVOLVING CREDIT AGREEMENT
At December 31, 1997 and 1998, the Company had outstanding borrowings in the
amount of $200,000 under a bank revolving credit agreement. The agreement is
unsecured and is personally guaranteed by the principal stockholder. Interest is
at 1/2% under the prime rate (7.25% at December 31, 1998) and is payable
monthly. The agreement provides for maximum borrowings of $500,000 and matures
on November 27, 1999.
NOTE 6 -- NOTE PAYABLE TO PRINCIPAL STOCKHOLDER
The Company has an unsecured note payable to the principal stockholder in
the amount of $290,000 and $115,000 at December 31, 1997 and 1998, respectively.
Interest is paid annually at a rate of 7%. Subsequent to December 31, 1998, the
balance was paid in full.
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll..................................................... $ 67 $ 36 $ 161
Profit sharing.............................................. 33 57 61
Other....................................................... 8 4 2
---- ----- -----
Total accrued expenses.................................... $108 $ 97 $ 224
==== ===== =====
</TABLE>
F-103
<PAGE>
PCI NEWCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. The Company's contribution to the plan is 6% of the compensation of
all participants under the plan determined for the Company's taxable year for
which it makes the contribution. The Company expensed contributions for the
years ended December 31, 1997 and 1998 in the amounts of $33,000 and $57,000,
respectively.
NOTE 9 -- STOCK OPTIONS
During 1998, the Company granted options to one of its employees for up to
526 shares of Class A common stock. The options immediately vested and all were
exercised in 1999.
A summary of the status of the options outstanding at December 31, 1998, and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
-------- ---------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- --
Options granted during the year............................. 526 $ 118.82
---
Options outstanding at December 31, 1998.................... 526 $ 118.82
===
Options exercisable at December 31, 1998.................... 526 $ 118.82
===
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock options issued to employees, and no
compensation cost has been recognized. No fair value disclosures with respect to
stock options are presented because in the opinion of management, such
disclosures would not materially effect the financial statements.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company rents its business facility from a property rental company,
which is partially owned by the Company's principal stockholder. The lease was
month-to-month through September 1999 when a 10-year lease was entered into.
Annual lease payments were $88,000 and $96,000 for 1997 and 1998, respectively.
NOTE 11 -- ADDITIONAL CASH FLOW INFORMATION
Interest paid in cash during the twelve months ended December 31, 1997 and
1998 was $39,000 and $35,000, respectively.
NOTE 12 -- YEAR 2000 ISSUE
Like all entities, the Company is exposed to risks associated with the Year
2000 Issue, which affects computer software and hardware; transactions with
customers, vendors and other entities; and equipment dependent on microchips.
The Company has begun but not yet completed the process of identifying and
remediating potential Year 2000 problems. It is not possible for any entity to
guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with which the Company does
business. If remediation efforts of the Company or third parties with which it
does business are not successful, the Year 2000 problem could have negative
effects on the Company's financial condition and results of operations in the
near term.
NOTE 13 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. For the revolving credit agreement and note payable to
the principal stockholder, the fair value is estimated based on the borrowing
rates currently available to the Company for bank loans with similar terms and
maturities.
F-104
<PAGE>
PCI NEWCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of certain of these instruments were calculated by discounting
expected cash flows, which method involves significant judgments by management
and uncertainties. Fair value is the estimated amount at which financial assets
or liabilities could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Because no market exists
for certain of these financial instruments, and because management does not
intend to sell these financial instruments, the Company does not know whether
the fair values shown below represent values at which the respective financial
instruments could be sold individually or in the aggregate.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets
Cash...................................................... $188 $188 $350 $350
Financial liabilities
Revolving credit agreement................................ $200 $200 $200 $200
Note payable to principal stockholder..................... $290 $290 $115 $115
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS
DIVIDENDS PAID
Dividends of $624,000 were declared on January 1, 1999, and were paid on
April 15, 1999.
SALE OF COMPANY
On October 6, 1999, substantially all of the Company's assets were sold to
an unrelated entity.
F-105
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder of
DeCrane Aircraft Holdings, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' equity and of cash flows present fairly, in all material
respects, the financial position of The Infinity Partners, Ltd. as of December
31, 1998 and September 30, 1999 and the results of its operations and its cash
flows for the year ended December 31, 1998 and the nine months ended September
30, 1999, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
January 18, 2000
F-106
<PAGE>
THE INFINITY PARTNERS, LTD.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 150 $ 604
Trade accounts receivable................................. 874 2,024
Inventories............................................... 507 1,092
Prepaid expenses.......................................... 24 40
Note receivable from related party........................ -- 716
------ ------
Total current assets.................................... 1,555 4,476
Plant and equipment, net.................................... 375 1,047
------ ------
Total assets.......................................... $1,930 $5,523
====== ======
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Current portion of long-term debt......................... $ 54 $ 432
Trade accounts payable.................................... 392 606
Customer advances......................................... 374 581
Accrued expenses.......................................... 265 559
------ ------
Total current liabilities............................... 1,085 2,178
Long-term debt, less current maturities..................... 216 772
Commitments and contingencies (Note 9)
Partners' equity............................................ 629 2,573
------ ------
Total liabilities and partners' equity................ $1,930 $5,523
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-107
<PAGE>
THE INFINITY PARTNERS, LTD.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Sales............................................... $10,136 $6,261 $16,166
Cost of sales....................................... 7,998 5,144 12,050
------- ------ -------
Gross profit........................................ 2,138 1,117 4,116
Operating expenses
Selling, general and administrative............... 716 396 1,252
------- ------ -------
Income from operations.............................. 1,422 721 2,864
Other expenses (income)
Interest expense.................................. 19 14 44
Interest income................................... (8) (5) (8)
------- ------ -------
Net income.......................................... $ 1,411 $ 712 $ 2,828
======= ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-108
<PAGE>
THE INFINITY PARTNERS, LTD.
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'
EQUITY
---------
<S> <C>
Balance, December 31, 1997.................................. $ 211
Net income................................................ 1,411
Distributions to partners................................. (993)
------
Balance, December 31, 1998.................................. 629
Net income................................................ 2,828
Distributions to partners................................. (884)
------
Balance, September 30, 1999................................. $2,573
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-109
<PAGE>
THE INFINITY PARTNERS, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 1,411 $ 712 $ 2,828
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization......................... 46 31 82
Changes in operating assets and liabilities
Trade accounts receivable............................... (643) (460) (1,150)
Inventories............................................. (219) 49 (585)
Prepaid expenses........................................ 5 21 (32)
Trade accounts payable.................................. 174 (149) 214
Customer advances....................................... 1 (372) 207
Accrued expenses........................................ 258 635 294
------- ------ -------
Net cash provided by operating activities............. 1,033 467 1,858
------- ------ -------
Cash flows from investing activities
Purchases of plant and equipment.......................... (187) (76) (599)
Loan to related party..................................... -- -- (700)
------- ------ -------
Net cash used for investing activities................ (187) (76) (1,299)
------- ------ -------
Cash flows from financing activities
Term debt borrowings...................................... 240 240 822
Release of restricted cash securing bank term loan........ 50 50 --
Distributions to partners................................. (993) (204) (884)
Debt principal payments................................... (76) (67) (43)
------- ------ -------
Net cash provided by (used for) financing
activities.......................................... (779) 19 (105)
------- ------ -------
Net increase in cash and cash equivalents................... 67 410 454
Cash and cash equivalents at beginning of period............ 83 83 150
------- ------ -------
Cash and cash equivalents at end of period.................. $ 150 $ 493 $ 604
======= ====== =======
Supplemental disclosures
Cash paid for interest.................................... $ 19 $ 14 $ 28
Equipment acquired with capital lease and term debt
obligations............................................. 60 60 154
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-110
<PAGE>
THE INFINITY PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
The Infinity Partners, Ltd. (the "Company") designs and manufactures
interior components for middle-and high-end corporate aircraft. On November 19,
1999, the Company converted to a Texas limited partnership; prior to that date,
the Company was organized as a limited liability company. The Company operates
in the U.S. market and all of the Company's sales and resulting accounts
receivable for the year ended December 31, 1998 and nine months ended September
30, 1999 were to one customer. The Company's customer is in the corporate
aircraft industry.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
It is the policy of the Company to deposit its cash and cash equivalents in
federally insured financial institutions. From time to time deposits may exceed
Federal Deposit Insurance Corporation limits. At December 31, 1998 and September
30, 1999, the Company had $902,000 and $776,000 on deposit in excess of those
limits.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost less accumulated depreciation. Major
renewals and betterments are capitalized and ordinary repairs and maintenance
are charged against operations in the year incurred. Leasehold improvements are
amortized over the shorter of the related asset's useful life or the lease term.
Depreciation is computed using the straight-line method over the following
estimated useful lives: leasehold improvements -- 5 to 10 years; machinery and
equipment -- 7 years; vehicles -- 5 years; and furniture, fixtures and office
equipment -- 3 to 7 years.
REVENUE RECOGNITION
Revenues on long-term contracts are recognized using the percentage of
completion method based on costs incurred to date compared to the total
estimated cost at completion. Amounts received from customers in excess of
revenues recognized are classified in current liabilities as customer advances.
The Company anticipates that substantially all incurred costs associated with
contract work-in-process at September 30, 1999 will be billed and collected in
2000. Unbilled accounts receivable are $32,000 at September 30, 1999; there were
none at December 31, 1998. Unbilled accounts receivable are expected to be
billed and collected during the succeeding twelve-month period.
INCOME TAXES
The Company is organized as a partnership, therefore taxable income or loss
is reported to the individual partners for inclusion in their tax returns. No
provision for federal and state income tax is included in these statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, receivables,
accounts payable and accrued expenses and other liabilities do not significantly
differ from fair values as of December 31, 1998 and September 30, 1999.
F-111
<PAGE>
THE INFINITY PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The financial information for the nine months ended September 30, 1998 is
unaudited. In the opinion of the Company, the unaudited financial information is
presented on a basis consistent with the audited financial statements and
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for such interim periods. The
results of operations for the interim periods are not necessarily indicative of
results of operations for the full year.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Raw material............................................ $507 $ 871
Work-in-process......................................... -- 221
---- ------
Total inventories..................................... $507 $1,092
==== ======
</TABLE>
Included in work-in-process are costs relating to long-term contracts
recognized on the percentage of completion method of accounting.
NOTE 4 -- PLANT AND EQUIPMENT
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements.................................. $186 $ 532
Machinery and equipment................................. 95 307
Vehicles................................................ 35 55
Furniture, fixtures and office equipment................ 126 315
---- ------
Total cost............................................ 442 1,209
Accumulated depreciation and amortization............. (67) (162)
---- ------
Net plant and equipment............................... $375 $1,047
==== ======
</TABLE>
F-112
<PAGE>
THE INFINITY PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- PLANT AND EQUIPMENT (CONTINUED)
Plant and equipment under capital leases included above consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................................. $ 8 $ 80
Furniture, fixtures and office equipment................ -- 53
--- ----
Total cost............................................ 8 133
Accumulated depreciation and amortization............. (2) (16)
--- ----
Net plant and equipment under capital leases.......... $ 6 $117
=== ====
</TABLE>
Depreciation of equipment under capital leases is included in cost of sales
and selling, general and administrative expense.
NOTE 5 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Salaries, wages, bonuses, compensated absences and
related taxes......................................... $ 44 $493
Uninvoiced accounts payable............................. 220 44
Other................................................... 1 22
---- ----
Total accrued expenses................................ $265 $559
==== ====
</TABLE>
F-113
<PAGE>
THE INFINITY PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Note payable, due in monthly principal and interest
installments of $4,141, interest at prime plus 2.75%,
collaterialized by substantially all of the Company's
assets, repaid in July 1999............................... $224 $ --
Term loan, due in quarterly installments of $87,500 plus
interest at 10%, personally guaranteed by one of the
partners, repaid in December 1999 (Note 7)................ -- 700
Note payable, due in monthly installments of $3,535 plus
interest at 10%, personally guaranteed by one of the
partners, repaid in December 1999......................... -- 205
Note payable, due in monthly principal and interest
installments of $2,573, interest at 9.5%, collaterialized
by certain equipment, repaid in December 1999............. -- 114
Capital lease obligations, interest at 6.0% to 8.3%,
collaterialized by leased equipment....................... 3 127
Note payable, due in monthly principal and interest
installments of $419, interest at 8.99%, collaterialized
by a vehicle, repaid in December 1999..................... -- 19
Note payable, due in monthly principal and interest
installments of $581, interest at 10.02%, collaterialized
by a vehicle, repaid in October 1999...................... 16 12
Non-interest bearing note payable, due in monthly
installments of $487, collaterialized by leasehold
improvements, repaid in December 1999..................... 27 27
---- ------
Total debt.............................................. 270 1,204
Less current portion.................................... (54) (432)
---- ------
Long-term debt, less current portion.................... $216 $ 772
==== ======
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Three months ending December 31, 1999....................... $ 114
Twelve months ending December 31,
2000...................................................... 457
2001...................................................... 368
2002...................................................... 105
2003...................................................... 105
2004...................................................... 55
------
Total long-term debt.................................... $1,204
======
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
In 1999, the Company obtained a $700,000 bank term loan (Note 6) and loaned
the proceeds to one of its partners. In connection with the sale of the Company
in December 1999 (Note 10), the partner repaid the note in full and the Company
repaid the bank term loan.
F-114
<PAGE>
THE INFINITY PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The Company has a savings and retirement plan which qualifies under Section
401(k) of the Internal Revenue Code in which all full-time employees who are
over the age of twenty-one and have at least one year of service with the
Company are eligible to participate. In accordance with the terms of the plan,
employees may elect to contribute up to 15% of their annual compensation to the
plan, subject to certain limitations. The Company may elect to declare a
discretionary matching contribution to the Plan up to 6% of each employee's
salary. Company contributions were $35,000 and $26,000 for the year ended
December 31, 1998 and nine months ended September 30, 1999, respectively.
NOTE 9 -- COMMITMENT AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space, vehicles and certain machinery and
equipment under various capital and operating leases. Future minimum capital and
operating lease commitments under non-cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Three months ending December 31, 1999....................... $ 7 $ 100
Year ending December 31,....................................
2000...................................................... 29 400
2001...................................................... 29 396
2002...................................................... 29 382
2003...................................................... 28 379
2004...................................................... 21 87
2005 and thereafter....................................... -- 386
---- ------
Total minimum payments required........................... 143 $2,130
======
Less amount representing future interest cost............. (16)
----
Recorded obligation under capital leases................ $127
====
</TABLE>
Total rental expense charged to operations the year ended December 31, 1998
and nine months ended September 30, 1999 was $91,000 and $189,000, respectively.
LITIGATION
The Company is involved in routine legal and administrative proceedings
incidental to the normal conduct of business. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 10 -- SUBSEQUENT EVENT
In December 1999, substantially all of the Company's net assets were
acquired by DeCrane Aircraft Holdings, Inc.
F-115
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
Summary Unaudited Pro Forma Consolidated Financial Data................... 8
Summary Historical Consolidated Financial Data............................ 10
Risk Factors.............................................................. 12
Recent Developments....................................................... 20
Use of Proceeds........................................................... 21
Capitalization............................................................ 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 34
Management................................................................ 49
Security Ownership of Significant Beneficial Owners and Management........ 54
Related Party Transactions................................................ 56
Description of Bank Credit Facility....................................... 58
Description of Notes...................................................... 60
Plan of Distribution...................................................... 91
Legal Matters............................................................. 91
Experts................................................................... 92
Index to Unaudited Pro Forma Consolidated Financial Data.................. P-1
Index to Financial Statements............................................. F-1
</TABLE>
DeCrane Aircraft Holdings, Inc.
12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
---------------------
PROSPECTUS
---------------------
FEBRUARY 10, 2000
<PAGE>
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