-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LIOu2TKC0xzVjODhrIR+NlgKllTc4vc07jngjm8lvUmHgq3srPjrESkpZ3lOV9Ni P2eHLaMXhYSNpHUHdQ1P8A== 0001047469-99-019604.txt : 19990513 0001047469-99-019604.hdr.sgml : 19990513 ACCESSION NUMBER: 0001047469-99-019604 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECRANE AIRCRAFT HOLDINGS INC CENTRAL INDEX KEY: 0000880765 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341645569 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365 FILM NUMBER: 99617899 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVTECH CORP CENTRAL INDEX KEY: 0000714124 STANDARD INDUSTRIAL CLASSIFICATION: SWITCHGEAR & SWITCHBOARD APPARATUS [3613] IRS NUMBER: 910761549 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-03 FILM NUMBER: 99617900 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROSPACE DISPLAY SYSTEMS INC CENTRAL INDEX KEY: 0001080963 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 232859640 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-01 FILM NUMBER: 99617901 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORY COMPONENTS INC CENTRAL INDEX KEY: 0001080968 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 953938746 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-04 FILM NUMBER: 99617902 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DETTMERS INDUSTRIES INC CENTRAL INDEX KEY: 0001080969 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 954693717 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-05 FILM NUMBER: 99617903 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLIGHT REFUELING CENTRAL INDEX KEY: 0001080976 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-11 FILM NUMBER: 99617904 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATS AIRCRAFT & ENGINEERING CORP CENTRAL INDEX KEY: 0001080977 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-13 FILM NUMBER: 99617905 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 FORMER COMPANY: FORMER CONFORMED NAME: PAECO DATE OF NAME CHANGE: 19990302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRICK AIRCRAFT TANK SYSTEMS INC CENTRAL INDEX KEY: 0001080978 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-12 FILM NUMBER: 99617906 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 FORMER COMPANY: FORMER CONFORMED NAME: PATS TANKS DATE OF NAME CHANGE: 19990302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATS SUPPORT INC CENTRAL INDEX KEY: 0001080979 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-14 FILM NUMBER: 99617907 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATS INC CENTRAL INDEX KEY: 0001080980 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-10 FILM NUMBER: 99617908 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELSINORE AEROSPACE SERVICES INC CENTRAL INDEX KEY: 0001080982 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 952585262 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-06 FILM NUMBER: 99617909 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELSINORE ENGINEERING INC CENTRAL INDEX KEY: 0001080983 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 770443200 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-07 FILM NUMBER: 99617910 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLINGSHEAD INTERNATIONAL INC CENTRAL INDEX KEY: 0001080985 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 952500766 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-08 FILM NUMBER: 99617911 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRI-STAR ELECTRONIC INTERNATIONAL INC CENTRAL INDEX KEY: 0001080986 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 341687242 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-09 FILM NUMBER: 99617912 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUDIO INTERNATIONAL INC CENTRAL INDEX KEY: 0001081014 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 710640962 STATE OF INCORPORATION: AR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-02 FILM NUMBER: 99617913 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVE STREET 2: STE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION PATTERN INC CENTRAL INDEX KEY: 0001085810 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-15 FILM NUMBER: 99617914 BUSINESS ADDRESS: STREET 1: DECRANE AIR CRAFT HOLDINGS, INC. STREET 2: 2361 ROSECRANE AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3167213100 MAIL ADDRESS: STREET 1: DECRANE AIR CRAFT HOLDINGS INC STREET 2: 2361 ROSECRANE AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPI HOLDINGS INC CENTRAL INDEX KEY: 0001085811 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70365-16 FILM NUMBER: 99617915 BUSINESS ADDRESS: STREET 1: 1643 MAIZE ROAD CITY: WICHITA STATE: KS ZIP: 67209 BUSINESS PHONE: 3167213100 MAIL ADDRESS: STREET 1: DECRANE AIR CRAFT HOLDINGS INC STREET 2: 2361 ROSECRANE AVENUE SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999 REGISTRATION NO. 333-70365 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- DECRANE AIRCRAFT HOLDINGS, INC. (Exact name of registrant as specified in its charter) (AND CERTAIN SUBSIDIARIES IDENTIFIED IN FOOTNOTE (1) BELOW) DELAWARE 3728 34-1645569 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) Identification Incorporation or Organization) No.)
2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CALIFORNIA 90245 (310) 725-9123 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) R. JACK DECRANE Chief Executive Officer DECRANE AIRCRAFT HOLDINGS, INC. 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 (310) 725-9123 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: STEPHEN A. SILVERMAN, ESQ. JAMES BRYCE CLARK, ESQ. SPOLIN & SILVERMAN LLP 100 Wilshire Boulevard, Suite 940 Santa Monica, California 90401 (310) 576-1221 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE DATE. -------------------------- If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE(2) FEE(2) 12% Senior Subordinated Notes due 2008............ $100,000,000 100% $100,000,000 $27,800 Senior Subordinated Guarantees(3).................
(1) The following direct and indirect subsidiaries of DeCrane Aircraft Holdings, Inc. are co-registrants, as guarantors of the notes registered hereby, with the employer identification number indicated: Aerospace Display Systems, Inc., a Pennsylvania corporation, EIN 23-2859640; Audio International, Inc., an Arkansas corporation, EIN 71-0640962; Avtech Corporation, a Washington corporation, EIN 91-0761549; Cory Components, Inc., a California corporation, EIN 95-3938746; Dettmers Industries, Inc., a Delaware corporation, EIN 95-4693717, Elsinore Aerospace Services, Inc., a California corporation, EIN 95-2585262; Elsinore Engineering, Inc., a Delaware corporation, EIN 77-0443200; Hollingsead International, Inc., a California corporation, EIN 95-2500766; Tri-Star Electronics International, Inc., a California corporation, EIN 34-1687242; PATS, Inc., a Maryland corporation, EIN 52-1067232; Flight Refueling Inc., a Maryland corporation, EIN 52-1112836; Patrick Aircraft Tank Systems Inc., a Maryland corporation, EIN 52-1185155; PATS Aircraft and Engineering Corporation, a Maryland corporation, EIN 52-1096518; PATS Support, Inc., a Maryland corporation, EIN 52-2010611; PPI Holdings, Inc., a Kansas corporation, EIN 74-281-4579 and Precision Pattern, Inc., a Kansas corporation, EIN 48-0759147. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457; fee previously paid. (3) The 12% Series B Senior Subordinated Notes due 2008 are fully and unconditionally guaranteed on a joint and several basis by the guarantors as their unsecured, senior subordinated obligation. No separate consideration will be paid in respect of the guarantees. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This registration statement covers the registration of an aggregate principal amount of $100,000,000 of new 12% Series A Senior Subordinated Notes due 2008 of DeCrane Aircraft Holdings, Inc. that may be exchanged for equal principal amounts of our old outstanding 12% Series A Senior Subordinated Notes due 2008. This registration statement also covers the registration of the new notes for resale by Donaldson, Lufkin & Jenrette Securities Corporation in market-making transactions. The complete prospectus relating to the exchange offer follows immediately after this explanatory note. Following the prospectus are certain pages of this prospectus relating solely to such market-making transactions, including alternate front and back cover pages, a section entitled "Risk Factors--Trading Market for the New Notes" to be used in lieu of the section entitled "Risk Factors--No Prior Public Market," an alternate "Use of Proceeds" section and an alternate "Plan of Distribution" section. Also, the market-making prospectus will not include the following sections in the exchange offer prospectus: "Summary--The Exchange Offer," "The Exchange Offer" and "Federal Income Tax Consequences." All other sections of the exchange offer prospectus will be included in the market-making prospectus. PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 12, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] DeCrane Aircraft Holdings, Inc. OFFER TO EXCHANGE 12% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 FOR 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 We are offering to exchange an aggregate amount of up to $100,000,000 of our new 12% Series B Senior Subordinated Notes due 2008, which have been registered under the Securities Act of 1933, for our existing 12% Series A Senior Subordinated Notes due 2008. The new notes are being registered and offered in this exchange by us pursuant to registration rights granted in connection with the issuance in October, 1998 of the old notes, which were paired in units with warrants for the common stock of DeCrane Holdings Co. The units were originally sold together, but the warrants may trade separately from the notes on and after the effective date of the registration statement of which this prospectus is a part. The terms of the new notes are identical in all material respects to the terms of the old notes, except that the new notes have been registered under the Securities Act, and some transfer restrictions and registration rights relating to the old notes do not apply to the new notes. To exchange your old notes for new notes, you must complete and send the letter of transmittal that accompanies this prospectus to the exchange agent BY 5:00 P.M. NEW YORK TIME ON , 1999. If your old notes are held in book-entry form at The Depository Trust Company, you must instruct DTC through your signed letter of transmittal that you wish to exchange your old notes for new notes. When the exchange offer closes, your DTC account will be changed to reflect your exchange of old notes for new notes. We will publicly announce any extension or termination of this exchange offer through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. We will not receive any cash proceeds from the issuance of the new notes. We are not using a dealer-manager in connection with this exchange offer. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF RISK FACTORS THAT YOU SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES IN THE EXCHANGE OFFER. This prospectus and the letter of transmittal are first being sent to all registered holders of the old notes as of May , 1999. ------------------------ 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. The date of this prospectus is , 1999 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. 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 DLJ ACQUISITION OF DECRANE AIRCRAFT AND OUR ACQUISITIONS OF AVTECH CORPORATION, DETTMERS INDUSTRIES, INC., PATS, INC. AND PPI HOLDINGS, INC. [LOGO] THE EXCHANGE OFFER We are offering to exchange up to $100,000,000 in principal amount of the new notes for a like amount of old notes. We are making this offering in order to satisfy our obligations under the registration rights agreement relating to the old notes. 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 hereunder. Expiration Date.............. 5:00 p.m., New York time, on , 1999, unless this exchange offer is extended by us. We will publicly announce any extension or termination of this exchange offer through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. See "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Old Notes."
2 Conditions to this Exchange Offer........................ Our obligation to complete this exchange offer is subject to several conditions. We reserve the right to delay the acceptance of old notes for exchange, terminate this exchange offer, extend its expiration date and retain the old notes tendered, or amend the terms of this exchange offer in any respect. See "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Old Notes" and "--Conditions to the Exchange Offer." Withdrawal Rights............ If you tender old notes, you may withdraw them at any time on or before 5:00 p.m., New York time on the expiration date, by delivering a written notice of such withdrawal to the exchange agent in the manner described under "The Exchange Offer--Withdrawal Rights." Procedures for Tendering Old Notes........................ In order to tender old notes and accept this exchange offer, you must: - complete and sign a letter of transmittal, and comply with the instructions which it contains, - forward it and any other required documents using a method of delivery permitted by the letter of transmittal to the exchange agent appointed by us, whose address appears in the letter of transmittal, by 5:00 p.m. New York time on the expiration date, and - either deliver your old notes in the same package, or comply with the guaranteed postponed delivery method noted below. Please note that, if your old notes are held through a broker, dealer, commercial bank, trust company or other nominee, you must contact that person promptly if you wish to tender your notes. See "The Exchange Offer--Procedures for Tendering Old Notes." Questions regarding how to tender and requests for information should be directed to the exchange agent as instructed in "The Exchange Offer--Exchange Agent." Some brokers, dealers, commercial banks, trust companies and other nominees may also tender by book-entry transfer. Guaranteed Delivery Procedures................... If you wish to tender your old notes, and they are not readily available, or you cannot deliver them before the expiration date for this exchange offer, you must tender them according to the guaranteed postponed delivery procedures described in "The Exchange Offer--Guaranteed Delivery Procedures." Restrictions on Resales of New Notes.................... We believe that the new notes issued under this exchange offer in exchange for old notes may be offered for resale, resold or otherwise transferred by a holder other than a broker or dealer without further compliance with the registration and prospectus delivery requirements of the Securities Act, if: - the new notes are acquired in the ordinary course of the holder's business; - the holder is able to make the representations to us about the foregoing and related matters which are described in "The Exchange Offer-- Resale of New Notes" and in the letter of transmittal; - the holder is not participating, and has not entered into an arrangement or understanding to participate, in a "distribution" of the new notes, as understood under the Securities Act; - the holder is not our affiliate (as "affiliate" is defined in Rule 405 under the Securities Act), or a broker or dealer who purchased the old notes for resale; and - the holder is not a broker or dealer who acquired the new notes for its own account. However, the foregoing view relies on statements by the staff of the Division of Corporation Finance of the Securities and Exchange
3 Commission in interpretive letters which discuss other transactions. We have not sought our own interpretive letter, so there is no definitive legal determination of the foregoing issue. Acceptance of Old Notes and Offer, Delivery of New Notes........................ If you tender old notes to us before 5:00 p.m., New York time, on the day this exchange offer expires, you have not withdrawn them, and you comply with all of the requirements described in this prospectus, we will promptly deliver new notes to you after the expiration date. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Exchange Agent............... The exchange agent for this exchange offer is State Street Bank and Trust. Its telephone and facsimile numbers are listed in "The Exchange Offer-- Exchange Agent" and in the letter of transmittal. Use of Proceeds.............. We will not receive any cash proceeds from the issuance of the new notes. See "Use of Proceeds."
4 OUR COMPANY We manufacture electronic components and other parts and systems, and provide systems integration services, for niche markets within the commercial, regional and high-end corporate aircraft industries. We believe that we are a leading provider of components within each niche market we serve. Since DeCrane Aircraft was founded in 1989, our strategy has been to combine complementary businesses with leading market positions. We generated revenues of $244.4 million, Adjusted EBITDA of $55.9 million and a loss before extraordinary item of $1.1 million for the twelve months ended December 31, 1998 on a pro forma basis. Adjusted EBITDA is defined in "Summary Pro Forma Consolidated Financial Data" herein. We seek to maximize our sales by emphasizing the complementary nature of our products and services. We manufacture: - electrical contacts, - connectors, - wire harness assemblies, - structural supports for connectors and harnesses, - auxiliary fuel tank systems, and auxiliary power systems for ground power, - dichroic liquid crystal displays, - cockpit audio and communications, lighting, and power and control devices for commercial aircraft, and - stereo systems, video monitors, passenger switches, cabin lighting, seating and climate controls for the high-end corporate aircraft market. Our systems integration services include design and engineering of aircraft electronic and other systems, certifications on behalf of the Federal Aviation Administration, the assembly of installation kits for various aircraft systems, and installation services. Smoke detection, fire suppression and in-flight entertainment systems for aircraft are among the systems for which we supply design, certification, assembly and/or installation services. We manufacture many of the components required to complete a systems integration project. We believe that our combination of strong component manufacturing and integration capabilities gives us a critical competitive advantage, which would be difficult for competitors to duplicate. By successfully combining and growing complementary businesses, we have achieved strong revenue growth. From 1994 to 1998, our revenues increased from $47.1 million to $150.5 million on a historical basis. That increase resulted in a compound annual growth rate of 33.7%. During the same period, DeCrane Aircraft's EBITDA increased from $5.2 million to $26.9 million on a historical basis, representing a combined annual growth rate of 50.8%, and our historical income before extraordinary items increased from a $1.8 million loss to $3.1 million in income. Since 1990, we have completed thirteen acquisitions, most recently Avtech Corporation and Dettmers Industries, Inc. in June 1998, PATS, Inc. in January 1999 and PPI Holdings, Inc. in April 1999. RECENT DEVELOPMENTS Until August 1998, we were a publicly-held company. In August 1998, a holding company organized by DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities completed a successful tender offer for all shares of our common stock. See "Recent Developments--The DLJ Acquisition." In January 1999, we acquired all of the stock of PATS, Inc., a manufacturer of auxiliary fuel tank systems and other products. See "Recent Developments--PATS." In April 1999, we acquired all of the stock of PPI Holdings, Inc., a manufacturer of interior furniture components primarily for middle- and high-end corporate aircraft. See "Recent Developments--PPI." ------------------------ 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. 5 THE NOTES 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 67 and 68. 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 December 31, 1998, on a pro forma basis, DeCrane Aircraft and its subsidiary guarantors would have had approximately $175.2 million of senior indebtedness outstanding, and the non-guarantor subsidiaries would have had approximately $2.2 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 unsecured debt and equally with their future unsecured, senior 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, - make investments,
6 - 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 trade separately from the notes on and after the effective date of the registration statement of which this prospectus is a part. The warrants are subject to a separate "shelf" registration statement filed concurrently.
7 SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA The table below presents summary unaudited pro forma consolidated financial data for DeCrane Aircraft. The summary unaudited pro forma financial data were derived from historical financial data and give pro forma effect to the transactions described in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The pro forma financial data do not purport to represent what the actual results of operations or actual financial position would have been if such transactions had actually occurred on such dates or to project the future results of operations or financial position. The information in this table should be read in conjunction with "Recent Developments," "Unaudited Pro Forma Consolidated Financial Data," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the DeCrane Aircraft consolidated financial statements and related notes included elsewhere in this prospectus.
TWELVE MONTHS ENDED DECEMBER 31, 1998(1) ------------- (DOLLARS IN THOUSANDS) PRO FORMA STATEMENT OF OPERATIONS DATA: Revenues................................................................................................. $ 244,359 Gross profit (2)......................................................................................... 78,952 Operating income......................................................................................... 31,219 Provision for income taxes............................................................................... 3,128 Loss before extraordinary item........................................................................... (1,066) OTHER PRO FORMA FINANCIAL DATA: Cash flows from operating acitivities.................................................................... $ 5,486 Cash flows from investing activities..................................................................... (174,548) Cash flows from financing activities..................................................................... 170,415 EBITDA (3)............................................................................................... 52,663 EBITDA margin (4)........................................................................................ 21.6% Adjusted EBITDA (5)...................................................................................... $ 55,856 Adjusted EBITDA margin (4)............................................................................... 22.9% Depreciation and amortization (6)........................................................................ $ 16,996 Capital expenditures..................................................................................... 6,693 Cash interest expense.................................................................................... 27,120 Adjusted EBITDA to cash interest expense................................................................. 2.1x Ratio of earnings to fixed charges (7)................................................................... 1.1x OTHER OPERATING DATA: Bookings (8)............................................................................................. $ 254,220 Backlog at end of period (9)............................................................................. 130,931
AS OF DECEMBER 31, 1998 (1) ------------- (DOLLARS IN THOUSANDS) PRO FORMA BALANCE SHEET DATA: Cash and cash equivalents................................................................................ $ 7,894 Working capital.......................................................................................... 63,371 Total assets............................................................................................. 448,921 Total debt (10).......................................................................................... 275,515 Stockholder's equity..................................................................................... 110,027
See accompanying notes to Summary Pro Forma Consolidated Financial Data. 8 NOTES TO SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA (1) Reflects the following as if each had occurred as of January 1, 1998: the Avtech, Dettmers, PATS and PPI acquisitions; the DLJ acquisition; and the initial offering. (2) Net of $4.4 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. (3) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 2 above. 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. (4) EBITDA margin is computed by dividing EBITDA by revenues. Adjusted EBITDA margin is computed by dividing Adjusted EBITDA by revenues. (5) Adjusted EBITDA equals EBITDA plus the following nonrecurring charges:
TWELVE MONTHS ENDED DECEMBER 31, 1998 ------------- (DOLLARS IN THOUSANDS) EBITDA (See Note 3 above)................................................................ $ 52,663 Adjustment for nonrecurring charges: Workforce reductions................................................................... 2,430 Engineering costs...................................................................... 350 Reduction of corporate expenses........................................................ 310 Non-cash stock option compensation expense............................................. 73 Expiration of employment contract for a former shareholder of a previously acquired company.............................................................................. 30 ------------- Total adjustments.................................................................... 3,193 ------------- Adjusted EBITDA.......................................................................... $ 55,856 ------------- -------------
(6) Reflects depreciation of plant and equipment and amortization of goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts, which is classified as a component of interest expense. (7) 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. (8) Bookings represent the total invoice value of purchase orders received during the period. (9) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. (10) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 9 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The table below presents summary historical consolidated financial data for DeCrane Aircraft. The summary historical financial data for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998 were derived from audited financial statements of DeCrane Aircraft. 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 DeCrane Aircraft's consolidated financial statements and related notes included elsewhere in this prospectus.
(PREDECESSOR) ------------------------------------------------------- (SUCCESSOR) EIGHT ----------- MONTHS FOUR MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------------------------ AUGUST 31, DECEMBER 1994 1995 1996(1) 1997(2) 1998(3) 31, 1998(3) --------- --------- --------- --------- ----------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues.................... $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077 $ 60,356 Gross profit(4)............. 10,685 12,376 15,707 28,656 29,976 17,617 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 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 Investing activities...... (993) (1,462) (24,016) (27,809) (87,378) (1,813) Financing activities...... 3,028 41 21,051 22,957 89,871 (1,597) EBITDA(7)................... 5,196 5,471 7,602 16,915 13,636 13,247 EBITDA margin(8)............ 11.0% 9.8% 11.7% 15.5% 15.1% 21.9% Depreciation and amortization(9)........... $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604 Capital expenditures(10).... 1,016 1,203 5,821 3,842 1,745 1,813 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 AS OF DECEMBER 31, BALANCE SHEET DATA: 1998(14) ----------- Cash and cash equivalents............................................................ $ 3,518 Working capital...................................................................... 46,033 Total assets......................................................................... 330,927 Total debt(15)....................................................................... 186,765 Stockholders' equity................................................................. 97,921
See accompanying notes to Summary Historical Consolidated Financial Data. 10 NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (1) Includes the effect of: the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred; and the results of Aerospace Display Systems beginning September 18, 1996, and Elsinore Aerospace Services, Inc. and Elsinore Engineering, Inc. beginning December 5, 1996, the dates on which they were acquired. (2) Includes the effect of the acquisition of Audio International beginning November 14, 1997, the date on which it was acquired. (3) The results of operations of Avtech and Dettmers, which were acquired on June 26, 1998 and June 30, 1998, respectively, have been included in DeCrane Aircraft's results of operations for the periods subsequent to their acquisitions. The results of operations for the four months ended December 31, 1998 also reflect the DLJ acquisition. (4) Net of $4.4 million of non-cash charges for the four months ended December 31, 1998 to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (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 up to the date of the acquisition in February 1996 which primarily relates to Cory Components. (6) Represents: - the write-off, 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 the Company with the net proceeds from its initial public offering in April 1997; and - the write-offs, net of income tax benefit, of deferred financing costs as a result of the repayment of DeCrane Aircraft's 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 and non-cash acquisition related charges described in Note 4 above. 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 which is classified as a component of interest expense. (10) Includes $4.4 million for the year ended December 31, 1996 related to the 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 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 was a deficiency of earnings to fixed charges for the years ended December 31, 1994 and 1995 and the four months ended December 31, 1998 of $1.8 million, $2.3 million and $2.9 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 DeCrane Aircraft's receipt of orders and the speed with which those orders are filled. (14) Reflects the DLJ acquisition. (15) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 11 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION AS PART OF YOUR EVALUATION OF OUR COMPANY AND ITS BUSINESS BEFORE TENDERING YOUR OLD NOTES IN EXCHANGE FOR THE NEW NOTES. 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 the DLJ acquisition transaction. As of December 31, 1998, on a pro forma basis, we would have had total consolidated indebtedness of approximately $275.5 million, and would have available $25.9 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 for 1998 would have been $27.1 million on a pro forma basis. The principal payments on long term debt scheduled to occur during 1999 will be $2.0 million, assuming that the PPI acquisition is completed. - 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. - Restrictions in our debt agreements may cause us not to respond to changes in our markets or exploit business opportunities. The indenture for the notes and our bank credit facility each impose various contractual restrictions on our operations and businesses. Our bank credit facility contains additional restrictions, and requires that we satisfy several tests of financial condition. Our ability to do so can 12 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 the indenture 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 are general unsecured obligations of DeCrane Aircraft and of those of its subsidiaries which have provided note guarantees. The notes 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 which might reduce the payments made to you as a holder of the notes. Among other things: - As of December 31, 1998, on a pro forma basis, DeCrane Aircraft and the guarantor subsidiaries would have had outstanding about $175.2 million of senior debt. We would be required to pay all of this senior debt in full, before paying the holders of the notes, if DeCrane Aircraft or one of the guarantor subsidiaries suffers a bankruptcy filing, insolvency, liquidation or similar event; or if our senior debt is accelerated. - We are blocked from paying holders of the notes whenever there is a payment default on senior debt, and principal and premium payments may also be blocked for up to 179 days while there is a non-payment default on 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, or the notes, in full. - Holders of debt and other liabilities of our subsidiaries that are not guarantors will also have claims that are effectively senior to the notes. As of December 31, 1998, on a pro forma basis, our non-guarantor subsidiaries would have had $2.2 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 anticipate that our operating cash flow, together with borrowings under our bank credit facility, will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due for the next three years. However, if our cash flow is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets or reduce operating expenses, in order to make all required debt service payments. For example, a reduction in our operating expenses might reduce important efforts such as selling and marketing programs, management information system upgrades and new product development. On a pro forma basis, we would have had a $1.1 million loss before extraordinary item for the twelve months ended December 31, 1998. 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 13 because of the repayment of a significant part of our outstanding debt with the net proceeds of our initial public offering. Additionally, we conduct all of our operations through subsidiaries. DeCrane Aircraft's ability to meet its debt service obligations will depend upon it receiving dividends from those operations. The indenture may allow our subsidiaries to enter into future loan agreements which affect their ability to pay dividends to DeCrane Aircraft. See "Description of Notes--Principal Covenants." State law may also limit the amount of the dividends that our subsidiaries are permitted to pay to DeCrane Aircraft. AIRCRAFT INDUSTRY RISKS--OUR AIRCRAFT INDUSTRY MARKETS ARE CYCLICAL AND AFFECTED BY MANY FACTORS BEYOND OUR CONTROL, INCLUDING MILITARY SPENDING TRENDS AND REGIONAL ECONOMIC INSTABILITY IN ASIA. A downturn in any of our principal markets could adversely affect our business. - 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. If production by commercial aircraft manufacturers decreases, we may sell fewer products to them and suffer a decrease in our revenues. 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 has also recently announced production line cutbacks for 1999 and 2000. - The principal markets for corporate aircraft manufacturers are corporations and wealthy individuals. The corporate aircraft market is also 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 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. - The Asian markets are important for manufacturers of commercial aircraft and components for those aircraft. Boeing has a large backlog of aircraft sales to customers in Asia, and some deliveries have been deferred or cancelled. 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 and 777 aircraft lines, among others, during 1999. Boeing continues to reassess its production rates based on Asian demand and expects to make downward revisions based on its customer requirements. That situation could, if it continues or worsens, result in additional significant cancellations or deferrals of deliveries for new aircraft. CONCENTRATION OF KEY CUSTOMERS--WE RECEIVE A SIGNIFICANT SHARE OF OUR REVENUES FROM A SMALL GROUP OF KEY CUSTOMERS, AND 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 two largest customers for the fiscal year ended December 31, 1998 were Boeing, including McDonnell Douglas, and Matsushita Avionics Systems. Boeing accounted for approximately 29.6% of our consolidated revenues for that year, and Matsushita for approximately 5.0%, on a pro forma basis but excluding the effects of the acquisition of PPI. If we had completed our acquisition of PPI at the beginning of 1998, as is assumed by our pro forma financial statements, it would have resulted in 48.4% of our consolidated revenues concentrated among four principal customers for 1998 on a pro forma basis. Boeing would have been 25.1%, Cessna 11.4%, Raytheon 7.6%, and Matsushita 4.3% of those revenues. In addition to the percentage of revenues directly earned from Boeing, a significant part of our revenues from components are sold to Boeing indirectly, through sales to suppliers of Boeing. 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 14 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 and 777 programs in 1999 and 2000, as described in "--Aircraft Industry Risks" above. Boeing might suffer further production schedule disruptions. Boeing recently announced internal studies indicating that about one-fourth of its product lines are not likely to be profitable as currently conducted. Boeing did not disclose which lines fail to return break-even or positive returns; however, it has previously acknowledged that some of its commercial airplane programs were not meeting expectations. Boeing plans to announce specific growth and profit information for its commercial aircraft product lines later in 1999. We generally sell components and services to Matsushita pursuant to purchase orders, rather than under long-term contracts. However, we do have a supply agreement for connectors through September 1999. On a pro forma basis, again excluding PPI, during the twelve months ended December 31, 1998 as compared to the same period in 1997, our revenues from Boeing increased $25.5 million while our revenues from Matsushita declined by $1.8 million. REGULATION--MANY OF OUR OPERATIONS ARE CLOSELY REGULATED BY THE FAA. IF WE FAIL TO COMPLY WITH ITS MANY STANDARDS, OR 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. 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. 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, impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List sites under that statute or equivalent listings under state laws. We have received requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of some sites. Given the retroactive nature of federal 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. Some of our manufacturing processes create wastewater which requires chemical treatment, and one of our facilities has been cited for failure to adequately treat that water. We may incur costs in the future to address existing or future contamination. 15 YEAR 2000--SOME OF THE ADMINISTRATIVE AND MANUFACTURING SYSTEMS ON WHICH WE RELY MAY NOT OPERATE CORRECTLY DUE TO THE DATE CHANGES OCCURRING 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. We have taken steps to identify and limit the risks to our operations and products, which are described under "Management's Discussion and Analysis of Financial Conditions and Results of Operations." However, Year 2000 issues present a number of risks that are beyond our reasonable control, such as the failure of utility companies to deliver electricity, the failure of telecommunications companies to provide voice and data services, the failure of financial institutions to process transactions and transfer funds, the failure of vendors to deliver materials or perform services required by us and the collateral effects on us of the effects of Year 2000 issues on the economy in general or on our customers in particular. Although we believe that our compliance efforts are designed to appropriately identify and address those Year 2000 issues, we cannot assure you that our efforts will be fully effective, or that Year 2000 risks will not have a material adverse effect on our business, financial condition or results of operations. If the risks to our operating computer systems, machinery and vendors, or our customer base, are greater than we anticipate, the resulting losses might be difficult to resolve quickly, because a pattern of similar system failures in the business community would strain available resources for assistance or remediation. 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 all 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 94% of the common stock of DeCrane Holdings, on a fully diluted basis assuming exercise of all outstanding warrants. As a result of their stock ownership, the DLJ affiliates control DeCrane Holdings and DeCrane Aircraft, and have the power to elect all of their directors, appoint new management, approve sales of all or substantially all of the assets of the companies, issue additional capital stock, establish stock purchase programs and declare dividends. The ownership by the DLJ affiliates could have a depressive effect on the common stock and the warrants. 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. 16 The interests of those principal shareholders could conflict with your interests as a holder of the notes. Those shareholders may also 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 entering into or exchanging 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 were: - insolvent or were rendered insolvent by reason of the issuance of the notes, or - were engaged, or about to engage, in a business or transaction for which our 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. 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. We cannot assure you that, if that occurred, you would ever recover any repayment on your notes. 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. NO PRIOR PUBLIC MARKET--YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES. Prior to the registration of the new notes, there was no public market for the notes. In addition, the liquidity of the trading market in the notes, and the market price quoted for the notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, you cannot be sure that an active trading market will develop for these notes. 17 RECENT DEVELOPMENTS THE DLJ ACQUISITION In August 1998, DeCrane Holdings, one of three holding companies organized by DLJ Merchant Banking Partners II, L.P. and several affiliates, completed a successful tender offer for all shares of our common stock for $23.00 per share, resulting in a net price of approximately $182.0 million. All outstanding options to purchase shares were purchased for the same price, net of their exercise proceeds. At the completion of the tender offer, the two other holding companies merged with DeCrane Aircraft. All of our old outstanding shares and share options were cancelled, non-tendering shareholders were paid out, and as a result DeCrane Aircraft became a wholly-owned subsidiary of DeCrane Holdings. Prior to the tender offer, one of the merging holding companies entered into a $130.0 million syndicated bank credit facility, with a group of lenders led by DLJ Capital Funding, Inc. That syndicated facility is now our bank credit facility. For its principal terms, see "Description of Bank Credit Facility." The initial borrowings from that facility totalled $80.0 million of term loans and $5.4 million of revolving loans, and were used to fund the purchase of shares in the tender offer, as well as to refinance existing debt of DeCrane Aircraft. That same merging company also issued $100.0 million of senior subordinated increasing rate notes to DLJ Bridge Finance, Inc. before merging into DeCrane Aircraft, making the bridge notes our obligation. The proceeds from those bridge notes were used to fund the tender offer purchases. The bridge notes were refinanced by our initial offering of the old notes in October 1998 to the initial purchaser Donaldson, Lufkin & Jenrette Securities Corporation. DeCrane Holdings raised additional funds for the tender offer purchases, and expenses of the acquisition transactions, by selling all of the shares of its common stock for $65.0 million and all of the shares of its Senior Redeemable Exchangeable Preferred Stock due 2009 for $34.0 million. In connection with the latter, DeCrane Holdings also issued to DLJ affiliates warrants to acquire an additional 5.0% of its common stock on a fully diluted basis. The following table sets forth the cash sources and uses of funds for the DLJ acquisition, including the initial offering of the old notes completed in October 1998 and related fees and expenses (dollars in thousands): SOURCES Cash from income tax refund (1)..................................................... $ 4,368 Proceeds from the exercise of stock options......................................... 4,314 Bank credit facility: Revolving credit facility......................................................... 5,400 Term facility..................................................................... 80,000 Units sold in the initial offering.................................................. 100,000 DLJ equity investment............................................................... 99,000 Estimated additional borrowings to fund transaction fees and expenses............... 2,528 ----------- Total Sources................................................................. $ 295,610 ----------- ----------- USES Purchase price for the shares....................................................... $ 173,116 Purchase of shares from the exercise of stock options............................... 13,194 Repayment of prior senior credit facility........................................... 93,000 Estimated transaction fees and expenses............................................. 16,300 ----------- Total Uses.................................................................... $ 295,610 ----------- -----------
- ------------------------ (1) As of June 30, 1998, DeCrane Aircraft had approximately $4.4 million of income taxes refundable. Since that time, we have received all of this amount and used the cash to reduce our indebtedness. 18 PATS In January 1999, we acquired all of the stock of PATS, Inc. for a price of approximately $41.5 million, including the assumption of debt, and subject to adjustments for changes to its net working capital, and reserves for environmental and other indemnities made by the selling shareholders. PATS is a designer, manufacturer and installer of auxiliary fuel tanks which significantly extend the flight range of commercial and corporate aircraft. Among other things, PATS is the principal supplier of auxiliary fuel tank systems to the Boeing Business Jet program, as described under "Business--Products and Services--Auxiliary Fuel Systems." PATS is also a supplier of auxiliary power units which supply ground power to aircraft. PPI In April 1999, we acquired all of the stock of PPI Holdings, Inc. for a price of approximately $79.7 million in cash, which is to be adjusted upwards or downwards based on post-closing contingencies relating to financial matters. That purchase price includes $19.5 million which is to be paid over approximately two years after the closing, but is contingent upon the acquired business achieving specific financial performance criteria. PPI is a manufacturer of interior furniture components primarily for middle-and high-end corporate aircraft. 19 USE OF PROCEEDS We are conducting this exchange offer in order to satisfy our obligations under the registration rights agreement entered into at the time of the initial offering of the old notes. We will not receive any cash proceeds from the issuance of the new notes, or the exchanges made by tendering holders of notes. The old notes surrendered in the exchange will be canceled, so our issuance of the new notes will not increase our outstanding debt. 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. 20 CAPITALIZATION The following table sets forth the consolidated cash and cash equivalents and total capitalization of DeCrane Aircraft as of December 31, 1998 on a historical and pro forma basis. This table should be read in conjunction with DeCrane Aircraft's consolidated financial statements and related notes, the "Unaudited Pro Forma Consolidated Financial Statements" and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in the prospectus.
AS OF DECEMBER 31, 1998 ------------------------- ACTUAL PRO FORMA(1) ---------- ------------- (DOLLARS IN THOUSANDS) Cash and cash equivalents.................................................................... $ 3,518 $ 7,894 ---------- ------------- ---------- ------------- Total debt: Bank credit facility Term facility............................................................................ $ 79,888 $ 149,888 Revolving credit facility................................................................ 5,800 24,100 Senior Subordinated Notes due 2008......................................................... 100,000 100,000 Other debt................................................................................. 1,077 1,527 ---------- ------------- Total debt................................................................................... 186,765 275,515 Stockholder's equity......................................................................... 97,921 110,027 ---------- ------------- Total capitalization......................................................................... $ 284,686 $ 385,542 ---------- ------------- ---------- -------------
- ------------------------ (1) Pro forma reflects the additional borrowings required to fund the PATS and PPI acquisitions. 21 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA BASIS OF PRESENTATION The following unaudited pro forma consolidated financial data of DeCrane Aircraft are based on its historical financial statements adjusted to reflect transactions of two types: the "Acquisition Adjustments" and the "Offering Adjustments." The Acquisition Adjustments reflect the 1998 Avtech, Dettmers and DLJ acquisitions and the 1999 PATS and PPI acquisitions. For additional information on these acquisitions, see "Recent Developments--PATS and --PPI" and the notes to DeCrane Aircraft's consolidated financial statements included elsewhere in this prospectus. The Offering Adjustments reflect the issuance and sale of units in the initial offering and additional revolving credit facility borrowings and the use of the proceeds therefrom to repay the bridge notes, including fees and expenses, as described in the use of proceeds table in "Recent Developments--The DLJ Acquisition." For additional information on the units in the initial offering, see the discussion in the notes to DeCrane Aircraft's consolidated financial statements. An unaudited pro forma consolidated statement of operations is presented for the year ended December 31, 1998. The statement reflects the Acquisition Adjustments and the Offering Adjustments as if they had occurred as of January 1, 1998. The unaudited pro forma consolidated balance sheet reflects the 1999 Acquisition Adjustments as of December 31, 1998; all of the 1998 Acquisition and Offering Adjustment events had occurred by that date and are therefore reflected in historical amounts. 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 the historical financial statements and related notes of DeCrane Aircraft, Avtech, PATS and PPI included elsewhere in this prospectus. The pro forma financial data do not purport to represent what DeCrane Aircraft's 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 DeCrane Aircraft's results of operations or financial position for any future period or date. For a discussion of the consequences of the incurrence of indebtedness in connection with the DLJ acquisition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 22 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998
ACQUISITION ADJUSTMENTS(2) ----------------------------- DECRANE PPI AIRCRAFT HOLDINGS, HISTORICAL PATS, INC. INC. (SUCCESSOR)(1) HISTORICAL(3) HISTORICAL(3) -------------- ------------- ------------- (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents.............................................. $ 3,518 $ 2,504 $ 1,872 Accounts receivable, net............................................... 30,441 3,273 6,230 Inventories............................................................ 34,281 11,916 4,719 Deferred income taxes.................................................. 4,300 132 -- Prepaid expenses and other current assets.............................. 3,897 58 247 -------------- ------------- ------------- Total current assets................................................. 76,437 17,883 13,068 -------------- ------------- ------------- Property and equipment, net.............................................. 28,160 4,855 1,184 -------------- ------------- ------------- Other assets, principally intangibles, net............................... Goodwill and other intangibles......................................... 216,544 -- 6,017 Deferred financing costs............................................... 8,787 -- 154 Other assets........................................................... 999 1,399 7 -------------- ------------- ------------- Net other assets, principally intangibles............................ 226,330 1,399 6,178 -------------- ------------- ------------- $330,927 $24,137 $20,430 -------------- ------------- ------------- -------------- ------------- ------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings.................................................. $ 283 $-- $-- Current portion of long-term obligations............................... 1,529 6,226 1,500 Accounts payable....................................................... 6,383 2,559 1,157 Accrued expenses....................................................... 18,466 5,633 1,603 Income taxes payable................................................... 3,743 1,246 -- -------------- ------------- ------------- Total current liabilities............................................ 30,404 15,664 4,260 -------------- ------------- ------------- Long-term liabilities Revolving credit facility.............................................. 5,800 -- -- Term facility.......................................................... 79,000 -- -- Senior subordinated notes.............................................. 100,000 -- -- Other long-term obligations............................................ 153 3,501 6,050 Deferred income taxes.................................................. 16,990 -- -- Other long-term liabilities............................................ 659 -- -- -------------- ------------- ------------- Total long-term liabilities.......................................... 202,602 3,501 6,050 -------------- ------------- ------------- Stockholder's equity..................................................... 97,921 4,972 10,120 -------------- ------------- ------------- $330,927 $24,137 $20,430 -------------- ------------- ------------- -------------- ------------- ------------- ADJUSTMENTS PRO FORMA ----------- --------- ASSETS Current assets Cash and cash equivalents.............................................. $-- $ 7,894 Accounts receivable, net............................................... -- 39,944 Inventories............................................................ -- 50,916 Deferred income taxes.................................................. -- 4,432 Prepaid expenses and other current assets.............................. -- 4,202 ----------- --------- Total current assets................................................. -- 107,388 ----------- --------- Property and equipment, net.............................................. -- 34,199 ----------- --------- Other assets, principally intangibles, net............................... Goodwill and other intangibles......................................... 71,506(4) 294,067 Deferred financing costs............................................... 1,921(5) 10,862 Other assets........................................................... -- 2,405 ----------- --------- Net other assets, principally intangibles............................ 73,427 307,334 ----------- --------- $73,427 $448,921 ----------- --------- ----------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings.................................................. $-- $ 283 Current portion of long-term obligations............................... (7,226)(6) 2,029 Accounts payable....................................................... -- 10,099 Accrued expenses....................................................... 975(7) 26,677 Income taxes payable................................................... (60)(8) 4,929 ----------- --------- Total current liabilities............................................ (6,311) 44,017 ----------- --------- Long-term liabilities Revolving credit facility.............................................. 18,300(9) 24,100 Term facility.......................................................... 69,500(9) 148,500 Senior subordinated notes.............................................. -- 100,000 Other long-term obligations............................................ (9,101)(6) 603 Deferred income taxes.................................................. -- 16,990 Other long-term liabilities............................................ 4,025(7) 4,684 ----------- --------- Total long-term liabilities.......................................... 82,724 294,877 ----------- --------- Stockholder's equity..................................................... (2,986)(10) 110,027 ----------- --------- $73,427 $448,921 ----------- --------- ----------- ---------
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 23 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 1998
ACQUISITION ADJUSTMENTS ----------------------------------------------------------------- COMPANIES ACQUIRED (11) DECRANE AIRCRAFT HISTORICAL --------------------------------------------------- (1) PPI --------------------------- AVTECH DETTMERS HOLDINGS, (PREDECESSOR) (SUCCESSOR) CORPORATION INDUSTRIES PATS, INC. INC ADJUSTMENTS ------------- ----------- ----------- ---------- ---------- ----------- ----------- (DOLLARS IN THOUSANDS) Revenues.............. $90,077 $ 60,356 $20,984 $2,013 $ 33,348 $ 37,714 $ (133)(12) Cost of sales......... 60,101 42,739 13,267 1,454 24,321 24,376 (851)(13) ------------- ----------- ----------- ---------- ---------- ----------- ----------- Gross profit.......... 29,976 17,617 7,717 559 9,027 13,338 718 Selling, general and administrative expenses............ 15,719 10,274 3,695 760 4,906 2,218 (1,728)(14) Nonrecurring acquisition expenses............ 3,632 -- 1,229 -- 250 -- (5,111)(15) Nonrecurring bonuses and employment contract termination expenses............ -- -- 3,592 -- 480 -- (4,072)(16) ESOP contribution..... -- -- 300 -- 230 -- (530)(17) Amortization of intangible assets... 1,347 3,148 -- -- -- 328 7,066(18) ------------- ----------- ----------- ---------- ---------- ----------- ----------- Operating income (loss).............. 9,278 4,195 (1,099) (201) 3,161 10,792 5,093 Interest expense (income)............ 2,350 6,852 (60) 13 296 1,096 16,191(19) Other expenses (income)............ 847 335 (35) -- -- 5 (600)(20) ------------- ----------- ----------- ---------- ---------- ----------- ----------- Income (loss) before provision for income taxes and extraordinary item................ 6,081 (2,992) (1,004) (214) 2,865 9,691 (10,498) Provision for income taxes (benefit)..... 2,892 (2,668) (322) -- 1,013 -- 2,946(21) ------------- ----------- ----------- ---------- ---------- ----------- ----------- Income (loss) before extraordinary item (24)................ $ 3,189 $ (324) $ (682) $ (214) $ 1,852 $ 9,691 $(13,444) ------------- ----------- ----------- ---------- ---------- ----------- ----------- ------------- ----------- ----------- ---------- ---------- ----------- ----------- OFFERING ADJUSTMENTS PRO FORMA ----------- --------- Revenues.............. $-- $244,359 Cost of sales......... -- 165,407 ----------- --------- Gross profit.......... -- 78,952 Selling, general and administrative expenses............ -- 35,844 Nonrecurring acquisition expenses............ -- -- Nonrecurring bonuses and employment contract termination expenses............ -- -- ESOP contribution..... -- -- Amortization of intangible assets... -- 11,889 ----------- --------- Operating income (loss).............. -- 31,219 Interest expense (income)............ 1,867(22) 28,605 Other expenses (income)............ -- 552 ----------- --------- Income (loss) before provision for income taxes and extraordinary item................ (1,867) 2,062 Provision for income taxes (benefit)..... (733)(23) 3,128 ----------- --------- Income (loss) before extraordinary item (24)................ $(1,134) $ (1,066) ----------- --------- ----------- ---------
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 24 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (1) As of December 31, 1998, reflects DeCrane Aircraft's financial position subsequent to the DLJ acquisition and the initial offering. For the twelve months ended December 31, 1998, reflects DeCrane Aircraft's historical results of operations for the eight months ended August 31, 1998 (Predecessor) and the four months ended December 31, 1998 (Successor). (2) Reflects DeCrane Aircraft's purchase of all of the outstanding stock of PATS in January 1999 and the purchase of all of the outstanding stock of PPI in April 1999. Sources and uses of funds for the acquisitions, had they occurred on December 31, 1998, are as follows (dollars in thousands):
PPI HOLDINGS, PATS, INC. INC. TOTAL ----------- ------------- ---------- SOURCES: Senior credit facility borrowings: Term B facility.......................................... $ 20,000 $ -- $ 20,000 Term C facility.......................................... -- 50,000 50,000 Acquisition facility..................................... 16,500 -- 16,500 Working capital facility................................. 1,000 800 1,800 DeCrane Holdings equity investment......................... -- 12,500 12,500 Customer prepayment........................................ 5,000 -- 5,000 ----------- ------------- ---------- Total Sources.......................................... $ 42,500 $ 63,300 $ 105,800 ----------- ------------- ---------- ----------- ------------- ---------- USES: Purchase of common stock................................... $ 31,212 $ 53,250 $ 84,462 Debt repaid upon acquisition............................... 9,277 7,550 16,827 Estimated acquisition fees and expenses.................... 1,136 1,000 2,136 Estimated financing fees and expenses...................... 875 1,500 2,375 ----------- ------------- ---------- Total Uses............................................. $ 42,500 $ 63,300 $ 105,800 ----------- ------------- ---------- ----------- ------------- ----------
(3) Reflects the financial position of PATS and PPI as of December 31, 1998. (4) Reflects the excess purchase price of the acquisitions over the fair value of net assets acquired. For purposes of the Pro Forma Consolidated Financial Data, we allocated the excess purchase price to goodwill which is being amortized on a straight-line basis over 30 years. Such allocation is preliminary and may change upon the completion of the final valuations of the net assets acquired. (5) Reflects $2.1 million of credit facility amendment fees and expenses capitalized as deferred financing costs net of a $0.2 million write off of PPI deferred financing costs related to debt to be repaid upon acquisition. (6) Reflects the $16.8 million repayment of PATS and PPI debt upon acquisition offset by $0.5 million of Term C facility borrowings classified as a current obligation. (7) Reflects a customer prepayment for product to be delivered by PATS through 2001 used by DeCrane Aircraft to finance the acquisition. The prepayment will be offset semiannually against future amounts receivable and has a 7.5% effective interest rate. (8) Reflects the income tax benefit of the write off of PPI deferred financing costs. (9) Reflects the long-term portion of senior credit facility borrowings for the acquisitions. The terms of the senior credit facility are described in the DeCrane Aircraft historical consolidated financial statements and related notes included elsewhere in this prospectus. (10) Reflects the $12.5 million DeCrane Holdings equity investment net of $0.3 million of issuance costs, the elimination of the acquired companies stockholders'equity upon acquisition and the $0.1 million write off, net of income tax benefit, of PPI deferred financing costs. (11) Reflects the results of operations for the companies acquired for the periods not included in the historical columns. The results of operations for the acquired companies are for the periods from January 1, 1998 to: June 25, 1998 for Avtech; June 29, 1998 for Dettmers; and December 31, 1998 for PATS and PPI. 25 (12) Reflects the elimination of intercompany sales. (13) Reflects the net change in cost of goods sales attributable to the following (dollars in thousands): Decrease in depreciation expense (a)..................................... $ (658) Elimination of intercompany sales........................................ (133) Work force reductions attributable to merging the companies acquired..... (60) --------- Net increase (decrease) in cost of sales................................. $ (851) --------- ---------
- ------------------------ (a) 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. (14) Reflects the net decrease in selling, general and administrative expenses attributable to the following (dollars in thousands): Decrease in compensation expense (a).................................... $ (1,775) Decrease in investor relations expenses (b)............................. (221) Other, net (c).......................................................... 268 --------- Net decrease in selling, general and administrative expenses............ $ (1,728) --------- ---------
- ------------------------ (a) To reflect the resignation of some former employees and changes to employment agreements for remaining employees of the companies 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 acquired in connection with the DLJ acquisition, net of cost savings attributable to employee benefit plans implemented at the companies acquired. (15) 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 DeCrane Aircraft. (16) Reflects a reduction in expense attributable to employment contract termination expenses and nonrecurring bonuses awarded prior to, and in anticipation of, the acquisitions of Avtech and PATS by DeCrane Aircraft. (17) Reflects a reduction in expense attributable to the termination of the Employee Stock Ownership Plans in conjunction with the acquisitions of Avtech and PATS. (18) Reflects a net increase in amortization expense pertaining to the amortization of goodwill and other intangible assets related to the DLJ, PATS and PPI acquisitions on a straight-line basis as follows (dollars in thousands):
AMORTIZATION AMOUNT YEARS EXPENSE ---------- --------- ------------ Elimination of Predecessor amortization DeCrane Aircraft........................................................... $ (1,347) PPI........................................................................ (328) DLJ acquisition amortization: Goodwill................................................................... $ 166,674 30 3,704 FAA certifications......................................................... 30,391 15 1,351 Engineering drawings....................................................... 9,138 15 406 Assembled workforce........................................................ 6,588 7 627 Tradenames, trademarks and patents......................................... 3,908 5 to 12 269 Goodwill amortization attributable to 1999 acquisitions (a) PATS....................................................................... 27,376 30 913 PPI........................................................................ 44,130 30 1,471 ------------ Net increase in amortization............................................. $ 7,066 ------------ ------------
- ------------------------ (a) Amortization expense may change upon completion of the final valuations of the net assets acquired. 26 (19) Reflects the net increase in interest expense, including deferred financing cost amortization and commitment fees, as a result of the following (dollars in thousands):
INTEREST RATE OR TERM AMOUNT EXPENSE ---------------------- --------- --------- Elimination of historical net interest expense (a): Pertaining to debt refinanced (b): Interest expense.................................................. $ (3,575) Deferred financing cost amortization, commitment fees and expenses........................................................ (236) Interest income (c)................................................. 207 Successor net interest expense...................................... (6,794) Pro forma interest expense (d): Interest expense: Revolving credit facility: Working capital facility........................................ LIBOR (e) +2.75% $ 8,912 692 Acquisition facility............................................ LIBOR (e) +2.75% 16,500 1,282 Term facility: Term A.......................................................... LIBOR (e) +2.75% 35,000 2,720 Term B.......................................................... LIBOR (e) +3.00% 65,000 5,213 Term C.......................................................... LIBOR (e) +3.25% 50,000 4,135 Bridge notes...................................................... Prime + (f) 100,000 10,625 Customer prepayment interest...................................... 7.50% 5,000 375 Deferred financing cost amortization: Revolving credit facility......................................... 6 years (g) 1,277 213 Term facility: Term A.......................................................... 6 years (h) 894 200 Term B.......................................................... 7 years (h) 2,025 315 Term C.......................................................... 7 years (h) 1,200 176 Bridge notes...................................................... 7.5 years (g) 3,180 424 Commitment fees and expenses........................................ 219 --------- Net increase in interest expense.................................. $ 16,191 --------- ---------
- -------------------------- (a) Excludes interest expense pertaining capital lease obligations and other debt obligations not refinanced. (b) Includes DeCrane Aircraft Predecessor debt refinanced in conjunction with the DLJ acquisition, Dettmers debt not acquired and PATS and PPI debt refinanced in conjunction with their acquisitions by DeCrane Aircraft. See the notes to the DeCrane Aircraft, PATS and PPI consolidated financial statements included elsewhere in this prospectus for a description of the debt refinanced. (c) Interest income earned from invested surplus cash balances prior to acquisition. (d) Pro forma for the DLJ, PATS and PPI acquisitions as if they had occurred on January 1, 1998. (e) Calculations based on LIBOR at 5.02%. (f) Calculations based on Prime at 8.5%, the rate in effect during the period the bridge notes were issued and outstanding, plus 2.125%. (g) Deferred financing costs are amortized on a straight-line basis over the term of the agreement. (h) Deferred financing costs are amortized using the effective interest method. (20) Reflects adjustment for nonrecurring charges associated with a terminated debt offering in June 1998. Such offering was terminated upon initiation of the DLJ acquisition. (21) 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 PPI which was taxed as an S Corporation prior to its acquisition, and elimination of the $2.6 million one time benefit caused by reversal of DeCrane Aircraft's deferred tax valuation allowance. The effective tax rate differs from the U.S. federal statutory rate due to goodwill amortization related to acquisitions not deductible for income tax purposes. 27 (22) Reflects the net increase in interest expense, including deferred financing cost amortization and commitment fees, as a result of the initial offering as follows (dollars in thousands):
INTEREST RATE OR TERM AMOUNT EXPENSE --------------------- --------- --------- Elimination of bridge notes interest expense: Interest expense.................................................... Prime + (a) $ 100,000 $ (10,625) Deferred financing cost amortization................................ 7.5 years (b) 3,180 (424) Senior subordinated notes due 2008: Interest expense.................................................... 12.00% 100,000 12,000 Deferred financing cost amortization (c)............................ 10 years (d) 5,810 581 Revolving credit facility: Interest expense.................................................... LIBOR (e) + 2.75% 4,610 358 Commitment fees and expenses........................................ (23) --------- Net increase in interest expense.................................... $ 1,867 --------- ---------
- -------------------------- (a) Calculations based on Prime at 8.50%, the rate in effect during the period the bridge notes were issued and outstanding, plus 2.125%. (b) Deferred financing costs are amortized on a straight-line basis over the term of the agreement. (c) Includes $1.2 million for the value ascribed to the warrants issued by DeCrane Holdings in conjunction with the sale of the units in the initial offering. (d) Deferred financing costs are amortized using the effective interest method. (e) Calculations based on LIBOR at 5.02%. (23) Represents a decrease in the provision for income taxes as a result of a decrease in pro forma taxable income. (24) 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 DeCrane Aircraft's prior senior credit facility. In conjunction with the initial offering, 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. In conjunction with the PPI acquisition, deferred financing costs of $.1 million, net of income tax benefit, were written off as an extraordinary charge as a result of the repayment of PPI debt upon acquisition. These amounts have not been reflected in the unaudited pro forma consolidated statement of operations. (25) Supplemental financial data, pro forma for the Acquisition and Offering adjustments, is as follows (dollars in thousands): Cash flows from operating activities.................................. $ 5,486 Cash flows from investing activities.................................. (174,548) Cash flows from financing activities.................................. 170,415 EBITDA (a)............................................................ 52,663 Depreciation and amortization (b)..................................... 16,996 Capital expenditures.................................................. 6,693 Cash interest expense................................................. 27,120 Ratio of earnings to fixed charges (c)................................ 1.1x
- ------------------------ (a) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. 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 28 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 is classified as a component of interest expense. (c) For purposes of calculating the earnings to fixed charges ratio, 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. 29 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents historical consolidated financial data of DeCrane Aircraft 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 derived from the audited financial statements. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and DeCrane Aircraft's consolidated financial statements and related notes included elsewhere in this prospectus.
(PREDECESSOR) (SUCCESSOR) ----------------------------------------------------------- ------------- EIGHT MONTHS FOUR MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED -------------------------------------------- AUGUST 31, DECEMBER 31, 1994 1995 1996(1) 1997(2) 1998(3) 1998(4) --------- --------- ----------- --------- ------------- ------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues......................................... $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077 $ 60,356 Cost of sales(5)................................. 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(6).......................... -- -- -- -- 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)(7).......... 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(8)...... (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(9)........................................ 5,196 5,471 7,602 16,915 13,636 13,247 EBITDA margin(10)................................ 11.0% 9.8% 11.7% 15.5% 15.1% 21.9% Depreciation and amortization(11)................ $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604 Capital expenditures(12)......................... 1,016 1,203 5,821 3,842 1,745 1,813 Ratio of earnings to fixed charges(13)........... -- -- 1.0x 3.3x 3.0x -- OTHER OPERATING DATA: Bookings(14)..................................... $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 94,439 $ 54,021 Backlog at end of period(15)..................... 24,493 19,761 44,433 49,005 84,184 75,388
AS OF DECEMBER 31, ------------------------------------------------------------- (PREDECESSOR) (SUCCESSOR) ------------------------------------------------ ----------- 1994 1995 1996(1) 1997(2) 1998(16) --------- ----------- --------- ------------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................... $ 236 $ 305 $ 320 $ 206 $ 3,518 Working capital......................................... 11,459 12,583 10,486 24,772 46,033 Total assets............................................ 37,685 36,329 69,266 99,137 330,927 Total debt(17).......................................... 23,874 24,672 42,250 38,838 186,765 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
See accompanying notes to Selected Consolidated Financial Data 30 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Includes the effect of: the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred; and the results of Aerospace Display Systems beginning September 18, 1996, and Elsinore Aerospace Services, Inc. and Elsinore Engineering, Inc. beginning December 5, 1996, the dates on which they were acquired. (2) Includes the effect of the acquisition of Audio International beginning November 14, 1997, the date on which it was acquired. (3) Includes the results of operations of Avtech and Dettmers beginning June 26, 1998 and June 30, 1998, respectively, the dates on which they were acquired. (4) Reflects the results of operations subsequent to the DLJ acquisition (Successor). (5) Includes $4.4 million of non-cash charges for the four months ended December 31, 1998 to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (6) Represents non-capitalizable transaction costs associated with the DLJ acquisition. (7) 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. (8) 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 DeCrane Aircraft's existing indebtedness in connection with the DLJ acquisition and the refinancing of the bridge notes during the four months ended December 31, 1998. (9) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 5 above. 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. (10) EBITDA margin is computed by dividing EBITDA by revenues. (11) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts which are classified as a component of interest expense. (12) Includes $4.4 million for the year ended December 31, 1996 related to the acquisition of a manufacturing facility. (13) For purposes of calculating the earnings to fixed charges ratio, 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 was a deficiency of earnings to cover fixed charges for the years ended December 31, 1994 and 1995 and the four months ended December 31, 1998 of $1.8 million, $2.3 million and $2.9 million, respectively. (14) Bookings represent the total invoice value of purchase orders received during the period. (15) 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 DeCrane Aircraft's receipt of orders and the speed with which those orders are filled. (16) Reflects the financial position of Avtech and Dettmers and the DLJ acquisition. (17) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH CONSOLIDATED FINANCIAL STATEMENTS OF DECRANE AIRCRAFT AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Our results of operations have been affected by our history of acquisitions. Since our formation in 1989, we have completed thirteen acquisitions of businesses or assets, most recently PATS in January 1999 and PPI in April 1999. As a result, our historical financial statements do not reflect the results of all of our current businesses. Additionally, our capital structure was significantly altered by the tender offer for our stock successfully conducted by an affiliate of DLJ Merchant Banking Partners II, L.P. in August 1998. 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 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. The term loan facility under our bank credit facility consists of a $35.0 million amortizing Term A loan maturing in six years and a $65.0 million amortizing Term B loan maturing in seven years. The Term B loan was increased from $45.0 to $65.0 million at the time of the PATS acquisition. Scheduled aggregate amortization is $1.1 million in 1999. The bank credit facility also includes a $25.0 million working capital revolving credit facility and a $25.0 million acquisition revolving credit facility, of which $5.4 million was borrowed upon completion of the DLJ acquisition. Both revolving credit facilities will terminate after six years. Borrowings under our bank credit facility generally bear interest based on a margin over, at DeCrane Aircraft's option, either the base rate or the Euro-Dollar rate. The applicable margin for the revolving credit facilities and Term A loan is 1.50% for base rate borrowings and 2.75% for Euro-Dollar borrowings for the first six months after the January 1999 PATS acquisition amendment was adopted; the Term B loan has a margin of 1.75% for base rate borrowings and 3.00% for Euro-Dollar borrowings. 32 After the first six months, the applicable margin will vary based upon DeCrane Aircraft's ratio of total debt to EBITDA, as defined. DeCrane Aircraft's obligations under the bank credit facility are: - guaranteed by DeCrane Holdings and all existing and future wholly-owned domestic subsidiaries of DeCrane Aircraft; - secured by substantially all of the assets of DeCrane Aircraft and the subsidiary guarantors, including a pledge of the capital stock of all existing and future subsidiaries of DeCrane Aircraft, provided that no more than 65% of the voting stock of any foreign subsidiary shall be pledged; and - secured by a pledge by DeCrane Holdings of the stock of DeCrane Aircraft. The bank credit facility contains customary covenants and events of default. Both the old and new notes will mature in 2008 and are guaranteed by DeCrane Aircraft's wholly-owned domestic subsidiaries. Interest on the notes is payable semiannually in cash. The notes contain customary covenants and events of default, including covenants that limit DeCrane Aircraft's ability to incur debt, pay dividends and acquire or make equity investments in other companies. 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 to the commercial, regional, corporate and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related electronic equipment, aircraft repair and modification centers, and airlines. We believe there are favorable trends in the markets we serve that will result in continuing strong demand for our products and services. The 1998 CURRENT MARKET OUTLOOK released by the Boeing Company in early 1998 projected that: - worldwide revenue passenger kilometers will increase at a compounded annual growth rate of 5.0% over the next ten years; - the world jetliner fleet will grow from 12,300 aircraft at the end of 1997 to nearly 17,700 aircraft in 2007 and to 26,200 aircraft by 2017; and - over the next 20 years, the industry will require 17,650 new aircraft, both to support the projected world fleet expansion and to replace capacity lost as older aircraft are removed from commercial airline service. We believe these projected increases over the prolonged time frame indicated above will result in strong demand for our products and services in the commercial, regional and corporate aircraft markets that we serve. However, the shorter-term outlook includes Boeing's recent announcements concerning production line cutbacks, which will result in a projected decline in commercial aircraft deliveries in late 1999 and 2000. 33 RESULTS OF OPERATIONS The following table sets forth the items in our consolidated statements of operations as percentages of its revenues for the periods indicated. The percentages for the years ended December 31, 1996 and 1997 reflect the historical results of operations prior to the DLJ acquisition. The percentages for the year ended December 31, 1998 reflect the combined historical results of operations for the eight months ended August 31, 1998 prior to the DLJ acquisition and the four months ended December 31, 1998 subsequent to the DLJ acquisition.
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Revenues............................................................................. 100.0% 100.0% 100.0% Cost of sales........................................................................ 75.9 73.7 68.4 --------- --------- --------- Gross profit......................................................................... 24.1 26.3 31.6 Selling, general and administrative expenses......................................... 16.5 14.5 19.7 Amortization of intangible assets.................................................... 1.1 0.8 3.0 --------- --------- --------- Operating income..................................................................... 6.5 11.0 8.9 Interest expense..................................................................... 6.5 2.9 6.1 Other expense, net................................................................... 0.2 0.2 0.8 --------- --------- --------- Income (loss) before provision for income taxes, and extraordinary item............................................................. (0.2) 7.9 2.0 Provision for income taxes........................................................... (1.1) (3.1) (0.1) --------- --------- --------- Income (loss) before extraordinary item.............................................. (1.3) 4.8 1.9 Extraordinary loss from debt refinancing............................................. -- (1.9) (1.5) --------- --------- --------- Net income (loss).................................................................... (1.3)% 2.9% 0.4% --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 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. 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. 34 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 (LOSS). 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. 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. 35 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. 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 36 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. Cash increased $3.3 million during 1998. 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. Net 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. Net 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 next three years. 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. 37 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 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 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. 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. The costs we have incurred to remediate and test our systems, and evaluate and address the risks of our key customers and vendors, have been immaterial to date and we expect to incur less than $1.0 million of costs in the aggregate. All of our Year 2000 compliance costs have been or are expected to be 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. We are not aware of any material customer- or vendor-related Year 2000 issues. 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. Our Year 2000 compliance efforts are directed primarily towards ensuring that we will be able to continue to perform three critical functions: - make and sell our products, - order and receive raw material and supplies, and - pay our employees and vendors. Our assessment of year 2000 performance standards is 90% complete for our information technology systems and 100% complete for those systems deemed to be critical to our operations. Our assessment phase will be completed in the second quarter of 1999 for both the remaining, non-essential information technology systems and non-information technology systems. Our review of third-party compliance risks from our key vendors and customers is not yet complete. We intend to complete our review of data from all of those vendors and customers who respond during the second quarter of 1999. However, even assuming that all of the non-responding parties suffer interruptions to their operations due to Year 2000 systems failures, our management does not anticipate any resulting failures in our systems, products or supply chain that would disrupt our operations to a material degree. We have completed the renovation, upgrade or replacement of all of our significant information technology systems for year 2000 performance standards, except that during the third quarter of 1999 38 several of our subsidiaries will complete the installation of an accounting and manufacturing system which replaces existing systems not compliant with year 2000 performance standards. We expect to complete this phase in the third quarter of 1999. All of our significant systems which have been renovated or newly installed have been tested and are presently operating. However, the novelty and complexity of the issues presented, and our dependence on the technical skills of employees and independent contractors and on the representations and preparedness of third parties, could cause our efforts to be less than fully effective. Moreover, Year 2000 issues present a number of risks that are beyond our control, such as the failure of utility companies to deliver electricity, the failure of telecommunications companies to provide voice and data services, the failure of financial institutions to process transactions and transfer funds, the failure of vendors to deliver materials or perform services required by us and the collateral effects on us of the effects of Year 2000 issues on the economy in general or on our customers in particular. Additionally, in view of the mixed results achieved by software vendors in correcting these problems, we cannot assure you that new systems we obtain to replace noncompliant systems will themselves prove to be fully compliant. Although we believe that our compliance efforts are designed to appropriately identify and address those Year 2000 issues that are subject to our reasonable control, we cannot assure you that our efforts will be fully effective, or that Year 2000 issues will not have a material adverse effect on our business, financial condition or results of operations. In the worst case, a protracted failure of general business systems among our customers or vendors, or in our own plant, could cause production delays or cancelled orders which would significantly reduce our revenue for the duration of such a situation. We have not developed a contingency plan which assumes significant and protracted Year 2000-related failures of major vendors, customers or systems, and do not plan to do so. 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 substantial transitional costs as we redesign our software systems to reflect the adoption of the new currency. In addition, we do not know whether the adoption of the Euro will affect the enforceability of, or the denomination of payment obligations under, our commercial agreements in currencies to be replaced by the Euro. 39 BUSINESS We manufacture aviation electronic components called "avionics" and related components, and provide systems integration services, for niche markets within the commercial, regional, corporate and military aircraft industries. We believe that we are a leading provider of components within each niche market we serve. Since DeCrane Aircraft was founded in 1989, our strategy has been to combine complementary businesses with leading positions in cabin and flight deck systems. We generated revenues of $244.4 million, Adjusted EBITDA of $55.9 million and a loss before extraordinary item of $1.1 million for the twelve months ended December 31, 1998 on a pro forma basis. We seek to maximize our sales by emphasizing the complementary nature of our products and services. We manufacture: - electrical contacts; - connectors, which often include our contacts; - wire harness assemblies, which often include our connectors; - structural supports for avionic connectors and harnesses, often packaged with other products of ours and sold as "installation kits"; - auxiliary fuel tank systems and auxiliary power systems; - dichroic liquid crystal display devices, commonly called "LCDs", which are often used with flight deck avionics; - cockpit audio and communications, lighting, and power and control devices for commercial aircraft; and - stereo systems, video monitors, passenger switches, cabin lighting, seating and climate controls for the high-end corporate aircraft market. Our systems integration services include design and engineering of avionics systems, supplemental type certifications on behalf of the Federal Aviation Administration, the assembly of installation kits for various aircraft systems and installation services. Smoke detection, fire suppression and in-flight entertainment systems for jet aircraft are among the systems for which we supply design, certification, assembly and/or installation services. We manufacture many of the components required to complete a systems integration project. We believe that our combination of these component manufacturing and integration capabilities gives us a critical competitive advantage which would be difficult for competitors to duplicate. By successfully combining and growing complementary businesses, we have achieved strong revenue growth. From 1994 to 1998, our revenues increased from $47.1 million to $150.5 million on a historical basis. That increase resulted in a compound annual growth rate of 33.7%. During the same period, our EBITDA increased from $5.2 million to $26.9 million on a historical basis, representing a combined annual growth rate of 50.8%, and our historical income before extraordinary items increased from a $1.8 million loss to $3.1 million in income. We have achieved this growth primarily by: - obtaining new customers and additional business from existing customers; - selectively acquiring complementary avionics businesses, generally with high margins; - taking advantage of favorable trends in the aerospace industry; - initiating cost reduction programs and productivity improvements; and - increasing the revenues of acquired businesses, by refocusing or diversifying their strategies and products. Since 1990, we have completed thirteen acquisitions, most recently PATS, Inc. in January 1999 and PPI Holdings, Inc. in April 1999, as described in "Recent Developments." 40 INDUSTRY OVERVIEW AND TRENDS We sell to the commercial, regional, corporate and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related electronic equipment, aircraft repair and modification centers and airlines. The Boeing Company and Airbus Industrie are the primary manufacturers of commercial aircraft designed to carry 100 or more passengers. The leading manufacturers of regional and corporate aircraft, include Bombardier, Dassault and Gulfstream and will soon include the Boeing Business Jet and the Airbus A319 corporate jet. The major systems installed on new aircraft, such as flight deck avionics systems, are produced by a limited number of manufacturers, including AlliedSignal, Rockwell Collins, Honeywell and Sextant Avionique. The integration of new systems into existing aircraft, called the "retrofit" market, and the manufacture and sale of replacement products for existing aircraft, called the "aftermarket," are served by a highly fragmented group of companies, including many of the foregoing manufacturers and a number of smaller, specialized companies like our operating subsidiaries. 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--so some of our competitors ultimately may also sell some of our products. The aviation industry has been consolidating at an increasing pace in recent years, and we expect that consolidation will continue for the foreseeable future. We believe that there are many barriers to entry which 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 military specifications for some products sold to military and commercial 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. We believe the following trends are affecting the industry: INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1998 CURRENT MARKET OUTLOOK released by Boeing in early 1998 projected that the world jetliner fleet will grow from 12,300 aircraft at the end of 1997 to nearly 17,700 aircraft in 2007 and to 26,200 aircraft by 2017. The report also estimated that, over the next 20 years, the industry will require 17,650 new aircraft, both to support the projected world fleet expansion and to replace capacity lost as aircraft are removed from commercial airline service. We believe that every commercial aircraft model currently produced by Boeing and Airbus contains components manufactured by us. Boeing has, however, recently announced production cutbacks in several of its lines for 1999 and 2000. Boeing continues to re-evaluate its production schedules in response to instability in its Asian markets and to assess the profitability of its various product lines. These events are described in greater detail in "Risk Factors--Instability of Asian Market" and "Risk Factors--Dependence on Key Customers." INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. We believe that the total commercial regional aircraft fleet will grow over the next ten years. Boeing's 1998 CURRENT MARKET OUTLOOK projected that worldwide revenue passenger kilometers will increase at a compound annual growth rate of 5.0% over that period. We believe that this increase will drive demand for regional aircraft production as well, due to: - 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; 41 - 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 NEW CORPORATE AIRCRAFT. We believe that the following factors will drive increased demand for new corporate aircraft: - the introduction of new, larger and more efficient aircraft; - the growing popularity of fractional aircraft ownership; - the minimal availability of used aircraft; - the need for long range flights to expanding international markets; and - the increased demand for more expedient travel. INCREASED DEMAND FOR CABIN AND FLIGHT DECK SYSTEMS. In recent years, demand for cabin systems has increased. These systems include in-flight passenger telecommunications systems and in-flight entertainment systems, such as video, video-on-demand and other interactive systems. We believe that demand for avionics systems on the flight deck, as well as in the passenger cabin, is increasing, as a result of: - a desire by airlines for additional revenue-producing services; - longer flights combined with a demand by airline passengers for more sophisticated forms of in-flight services; and - the advent of new technologies and FAA mandates related to aircraft safety and navigation. INDUSTRY CONSOLIDATION-REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. To reduce purchasing costs and have greater control over quality, manufacturers and aircraft operators have been reducing the number of vendors and suppliers from whom they purchase. Suppliers and vendors must now possess the size and production and distribution capabilities required to provide a broader range of products and services to airlines and manufacturers. NEW SAFETY REQUIREMENTS. 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. Each of these systems presents aircraft avionics retrofit opportunities for us. DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to reduce the operating and capital costs associated with providing services. In response, airlines have increased purchases of some components from third parties and have outsourced some repair, overhaul and retrofit functions. Similarly, aircraft and electronic system manufacturers increasingly are reducing their level of vertical integration by outsourcing more manufacturing, repair and retrofit functions to third parties. We believe that these trends are creating increased demand for low-cost, high-quality component manufacturers and systems integrators. 42 ACQUISITION HISTORY DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the aircraft market through acquisitions. Since its formation, we have completed thirteen acquisitions, summarized as follows:
YEAR OF PRINCIPAL PRODUCTS AND SERVICES COMPLETION ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION - ------------- ---------------------------------------------------- ---------------------------------------------------- 1990 Hollingsead International Avionics support structures 1991 Tri-Star Electronics International Contacts and connectors 1991 Tri-Star Europe, S.A. Contact blanks 1991 Tri-Star Technologies Wire marking equipment 1991 Cory Components Connectors & harness assemblies 1996 Aerospace Display Systems Dichroic liquid crystal displays 1996 Elsinore Engineering Engineering services 1996 AMP manufacturing facility Contact blanks 1997 Audio International Cabin management & entertainment products 1998 Avtech Corporation Cockpit audio, lighting, power & control 1998 Dettmers Industries Corporate aircraft seats 1999 PATS Auxiliary fuel & power systems 1999 PPI Aircraft furniture components
COMPETITIVE STRENGTHS We believe that we are well-positioned to take advantage of the foregoing trends and expected growth, as a result of the following competitive strengths: LEADING POSITIONS IN NICHE MARKETS. We have established strong sales positions in several specialized niches within the commercial aircraft industry. We believe that we are: - the largest supplier of bulk contacts to commercial aircraft manufacturers; - the largest supplier of dichroic liquid crystal display devices for use by commercial aircraft manufacturers; - the largest provider of aircraft entertainment and cabin management products and systems for the high-end corporate aircraft market; - a major supplier of wire harness assemblies for use in in-flight entertainment systems; and - a leading supplier of cockpit audio controls. We have used our strong market positions to compete more effectively as well as to capitalize on industry consolidation trends. DIVERSIFIED REVENUE BASE. We sell to the commercial, regional, corporate and military aircraft markets. Within these markets, our customers include manufacturers of aircraft and related electronic equipment, aircraft repair and modification centers, and airlines. Each of these markets typically experience different production cycles. We believe that our involvement in multiple markets, reduces our exposure to cyclical product demand in the aircraft industry. Additionally, as a primary supplier of products and services to manufacturers of cabin and flight deck systems, we believe we have opportunities for growth that are independent of the original aircraft market. Such systems typically are installed on a retrofit basis by purchasers and operators of existing aircraft rather than by aircraft manufacturers. COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since DeCrane Aircraft was formed in 1989, we have completed twelve acquisitions of businesses and assets. We have successfully executed our strategy of acquiring complementary businesses in the cabin and flight deck markets. Our acquisitions complement each other, and create a core of avionics products and services which increases our cross-selling opportunities. For example, our acquisitions of Dettmers, a corporate aircraft seat manufacturer, and Audio, which makes custom aircraft entertainment and cabin management products, will enable us to offer a more integrated set of products and services to the high-end corporate aircraft market. 43 STRONG CUSTOMER RELATIONSHIPS. We seek to establish and maintain long-term relationships with leaders in our primary markets. For example, we have entered into requirements contracts to supply bulk contacts and specific connectors to Boeing, which is the largest commercial aircraft manufacturer. Through these and other similar agreements, we believe that we are: - the supplier of a substantial majority of the bulk contacts for all aircraft currently manufactured by Boeing; - the sole source supplier of some connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft; - a significant supplier of cockpit audio control systems to Boeing; and - the primary supplier of auxiliary fuel systems to the Boeing Business Jet program. We are also a preferred supplier of wire harness assemblies to Matsushita for its in-flight entertainment systems. LOW-COST, HIGH-QUALITY OPERATIONS. We believe that we have established low-cost operations through cost reduction programs, technological development and, where appropriate, the use of vertical integration. Our low-cost operations are demonstrated, for example, by the growth of programs under which we supply 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 Organisation specifications ISO-9001 or ISO-9002. REGULATORY CERTIFICATIONS. We employ FAA-certified airframe and power-plant mechanics who are authorized to perform specified aircraft modification functions. This level of expertise enables us to respond rapidly and effectively to our customers' technical requirements. As of February 1, 1999, our subsidiaries: - include one of only 31 currently active Designated Alteration Stations worldwide which are authorized by the FAA to provide approval and certification of the design of specific aircraft modifications on behalf of the FAA; - hold numerous Parts Manufacturer Approval authorizations from the FAA, permitting them to manufacture and sell various parts in many different types of aircraft; and - hold nine FAA domestic repair station certificates, authorizing them to perform specific aircraft modifications. GROWTH STRATEGY Our principal strategy is to establish and expand leading positions in high-margin, niche markets within the commercial, regional, corporate and military aircraft markets. We focus on the manufacture of avionics components 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 such a strategy will position us to grow by: CAPITALIZING ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN AND FLIGHT DECK SYSTEMS. Our strong market positions, and alignment with many of the leading participants in the industry, should permit us to take advantage of the projected increases in the production of aircraft discussed above. For example, in-flight entertainment systems have become more sophisticated in recent years with the inclusion of such products as video-on-demand and in-seat video tape players. Increasingly, airlines view sophisticated in-flight entertainment systems as a required service on airlines' long-haul flights, particularly in first class. Such systems are also increasingly being installed in business and coach class and on planes serving shorter routes. We believe that the trend toward jets instead of turboprops in the corporate and regional markets will further increase our dollar content per aircraft, as well as the demand for our products and services in that market. We believe that this increased demand creates a significant retrofit and aftermarket opportunity for cabin avionics systems, as well as the components and systems integration services necessary to such 44 systems. We work closely with manufacturers and modification centers to meet their delivery and scheduling requirements, and, in some cases, to provide total, turnkey solutions to adding avionics systems new aircraft. EXPANDING SYSTEMS INTEGRATION SERVICES. Our systems integration services began in the in-flight passenger telecommunications market. Beginning in 1995, we expanded our systems integration expertise and sales efforts to include navigation and satellite communication, safety, and in-flight entertainment systems. We believe that we are one of the few companies having in-house capabilities in each of the four elements of systems integration: design, certification, kitting and system installation. EMPHASIZING INTEGRATED PRODUCT SYSTEMS AND COMPLEMENTARY SERVICES. Over the past several years, we increasingly have combined our manufactured components to create higher value-added products. This activity has created additional opportunities to cross-sell and vertically integrate our products. For example, our contact business provides components to our connector business, which supplies components to our wire harness business. Our harness assemblies often are packaged with its avionics support structures to form the foundation as the installation kits which we then sell to our systems integration customers. We believe that these complementary products and services provide opportunities to increase our sales to existing customers and compete more effectively for new customers. COMPLETING ADDITIONAL STRATEGIC ACQUISITIONS. We operate in a fragmented market, which we estimated to include over 100 companies with revenues of less than $100 million in 1997. We target for acquisition aircraft component manufacturers and systems integration providers that are complementary to our existing businesses, and have a leading market share in their own niches. We seek to leverage our existing strengths, and add new expertise, through acquisitions that offer strategic value and cross-selling opportunities. We regard economies of scale, product line extensions, new customer relationships, increased manufacturing capacity and opportunities for increased cost reductions as particularly important in our analysis of a potential acquisition's strategic value. We are continually engaged in discussions with potential acquisition candidates. However, acquisitions involve many uncertainties, and our attempts to identify appropriate acquisitions, and finance and complete any particular acquisition, may not be successful. PRODUCTS AND SERVICES We believe that our products are used in each of the commercial aircraft models currently produced by Boeing and Airbus, the two largest commercial aircraft OEMs. Our seven principal classes of products and services are:
SHARE OF 1998 SALES ON A CLASS PRO FORMA BASIS --------------------------------------------------------- ----------------- - entertainment and cabin management products 26% - cockpit audio, communications, lighting and power and control devices 19% - electrical contacts 14% - auxiliary fuel systems and auxiliary power units 14% - connectors and harness assemblies 13% - integration of cabin and flight deck systems 7% - liquid crystal display devices 6%
No other product or service accounted for more than 5% of our pro forma revenues in 1998. ENTERTAINMENT AND CABIN MANAGEMENT. We are a leading supplier of aircraft entertainment and cabin management products and systems to the high-end corporate aircraft market. We supply switching and control modules, audio and video components, stereo systems, video monitors, amplifiers, chimes and paging devices, headphone systems, passenger switches, and cabin lighting and climate controls. We also offer systems integration services for cabin management electronics to corporate aircraft manufacturers and major modification centers. 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 believe we are the primary supplier of cockpit audio control systems to Boeing, and a leading supplier of 45 power conversion and fluorescent lamp ballast devices and dimmers to corporate aircraft OEMs. 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. We believe that we are the supplier of a substantial majority of the bulk contact requirements for all aircraft currently manufactured by Boeing, and the largest supplier of bulk contacts to the commercial aircraft manufacturers. AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. Through our newest subsidiary, PATS, we manufacture and install auxiliary fuel tanks for commercial and corporate aircraft. Our unique design and tank construction have made us a leader in the auxiliary fuel tank market. We have a contract with Boeing's Business Jet program to supply 120 aircraft with multiple auxiliary fuel tanks. In connection with our acquisition of PATS, Boeing agreed to make modifications to the contract and to pre-pay $5.0 million against future deliveries of the systems. We believe that the auxiliary fuel tanks will permit the Boeing Business Jet 737-700 to compete with long-range aircraft such as the Gulfstream G-V and Bombardier's Global Express. We also manufacture auxiliary power units which provide ground power to aircraft. 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 are the sole-source supplier of several specific connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft. 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. We are a primary supplier of harness assemblies to Matsushita, one of the largest manufacturers of in-flight entertainment systems. INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed, patented and produced 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. Our avionics support structures are sold under the Box-Mount-TM- name, which we believe is highly respected in the marketplace. 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 & installation, necessary to retrofit an aircraft with a new or upgraded avionics system. DICHROIC LIQUID CRYSTAL DISPLAY DEVICES. We believe we are a leading manufacturer of dichroic liquid crystal displays, also known as "LCDs", and modules used in commercial and military aircraft and the largest supplier to the commercial aircraft industry. Modules are liquid crystal displays packaged with a backlight source and some on-board electronic components. We believe we are a primary supplier of these devices to aircraft and avionics OEMs and the U.S. military. 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 which use our liquid crystal display devices. We believe that we are the only clock manufacturer which has designed a line of clocks capable of serving all types of aircraft. 46 INDUSTRY REGULATION The aviation industry is highly regulated in the U.S. 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 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 February 1, 1999, we own and/or manage slightly over 200 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 February 1, 1999. 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 eight Parts Manufacturer Approvals and multiple supplements to each of those approvals. In general, each initial Parts Manufacturer Approval is an approval of a manufacturing or modification facility's production 47 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 February 1, 1999, 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. 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 1998, we sold our products and services to about 1,300 customers. Our primary customers include manufacturers of aircraft and related electronics, airlines, aircraft component manufacturers and distributors, and aircraft repair and modification companies. Boeing accounted for approximately 29.6% and Matsushita for approximately 5.0% of our 1998 consolidated pro forma revenues BEFORE taking into account the PPI acquisition. See "Business--Customers" for the expected changes to those numbers resulting from the acquisition. In addition, a significant portion of our sales of components also are sold to Boeing indirectly through our sales to suppliers of Boeing. Historically, our systems integration operations have been affected by the timing and magnitude of program awards, at times resulting in quarterly and yearly fluctuations in revenue and earnings. We believe that we have reduced our exposure to such fluctuations by developing capabilities in multiple specialties such as safety systems, in-flight entertainment systems and navigation systems. We have secured orders for integration services in each of these targeted areas. The timing and magnitude of program awards for systems integration services may make other customers significant sources of nonrecurring income in a single year. However, we believe that we will continue to be able to significantly offset such year-to-year fluctuations with new contracts. 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 48 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 else 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. We generally sell components and services to Matsushita pursuant to purchase orders. However, we do have one supply agreement with Matsushita for connectors, through September 1999. 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 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 mil-specs 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 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. 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 compete with a number of established companies that have significantly greater financial, technological, manufacturing and marketing resources than ours. We believe that our ability to compete 49 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 for each of the products and services we provide. Due to the global nature of the aircraft industry, competition in these categories comes from both U.S. and foreign companies. However, we know of no single competitor that offers the same range of products and services as those we provide. 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.
CLASS OF PRODUCT PRINCIPAL COMPETITORS - ------------------------------------------------------ ------------------------------------------------------ - cockpit audio, - Becker Avionics, Inc. communications, lighting and power - Crane ELDEC Corp. and control devices - Diehl GmbH & Co. - Gables Engineering Inc. - Page Aerospace, Inc. - electrical contacts - Amphenol Corporation - Deutsch Engineered Connecting Devices, a division of Deutsch Co. - ITT Cannon, a division of ITT Industries, Inc. - auxiliary fuel systems and auxiliary power units - Marshall Engineering - connectors - AMP, Inc. - ITT Cannon - Radiall S.A. - entertainment and cabin management products - Aerospace Lighting Corporation - Baker Electronics - DPI Labs - Grimes Aerospace Company - Nellcor Puritan Bennett Inc. - Pacific Systems Corporation - integration of cabin and flight deck avionics - Electronic Cable Specialists systems - Engineering departments of airlines - Numerous independent airframe maintenance and modification companies - dichroic LCD devices - Cristalloid, Inc.
BACKLOG As of December 31, 1998, we had an aggregate sales order backlog of $130.9 million compared to $125.5 million as of December 31, 1997, 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, 1998, we had 1,451 employees, of whom 206 were in engineering, 68 were in sales, 1,040 were in manufacturing operations and 137 were in finance and administration. The foregoing numbers include 44 temporary employees. None of our employees are 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 have a good relationship with our employees. 50 FACILITIES We lease most of our principal facilities, as described in the following table.
APPROX. LEASE LOCATION DESCRIPTION SQ. FT. EXPIRATION - ---------------------------------------------------- ------------------------------------------- --------- ----------- Wichita, KS......................................... Manufacturing facility 107,000 2007 Georgetown, DE...................................... Manufacturing facility 85,000 2041 El Segundo, CA...................................... Manufacturing and engineering facility 81,300 2005 Columbia, MD........................................ Manufacturing facility and offices 65,923 2007 Garden Grove, CA.................................... Manufacturing and engineering facility 58,300 2004 Stuart, FL.......................................... Manufacturing facility and offices 29,700 2008 Lugano, Switzerland................................. Manufacturing facility 28,000 2003 Hatfield, PA........................................ Manufacturing and engineering facility 27,500 2002 Lugano, Switzerland................................. Manufacturing facility 21,000 2001 Irvine, CA.......................................... Manufacturing facility 16,400 1999 Seattle, WA......................................... Storage facility 10,000 2001 Wiltshire, United Kingdom........................... Manufacturing facility 5,700 2013 Hutchinson, KS...................................... Manufacturing facility 5,300 1999 El Segundo, CA...................................... Executive offices 5,000 2004 Santa Barbara, CA................................... Engineering facility 3,500 2000 Seattle, WA......................................... Engineering facility 3,200 1999 Santa Ana, CA....................................... Engineering facility 1,300 1999
We also have a leased manufacturing facility of approximately 52,000 square feet in Santa Fe Springs, CA, which expires in 2000, and that we have leased in part to several subtenants. Additionally, we own a manufacturing and engineering facility comprised of six buildings having an aggregate of 87,382 square feet in Seattle, Washington, and additional leased rental office and vacant space nearby, comprising another 34,229 square feet, and an 18,000 square foot manufacturing and engineering facility in North Little Rock, Arkansas. We believe that our properties are in good condition and are adequate to support our operations for the foreseeable future. ENVIRONMENTAL MATTERS Our facilities and operations are subject to various federal, state, local, and foreign environmental requirements, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, some environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended, similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may be separately asserted federal environmental as "joint and several" liability against 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 that statute or equivalent listings under state laws. We have received 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. 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 retroactive nature of federal environmental liability, that we will from time to time 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 has been cited for failure to adequately treat that water. The costs associated with remedying that failure have been immaterial. See "--Legal Proceedings." We have been and are in substantial compliance with environmental requirements. We believe that we have no liabilities under environmental requirements, except for liabilities which would we do not expect would likely have a material adverse effect on our business, results of operations or 51 financial condition. 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 requirements as described in "Risk Factors--Environmental Risks and Regulation." LEGAL PROCEEDINGS One of our manufacturing facilities has received several notices of violation related to its wastewater discharge permit, most recently in June 1998. We have taken various corrective measures. However, we continue to experience difficulty in meeting the wastewater flow limitations contained in its discharge permit and we are evaluating additional measures, including seeking modification to our permit. We have installed new treatment equipment. The cost for such installation, plus the anticipated cost of any additional installations and/or outsourcing of the plating processes that create the discharge, is not expected to be material. We do not believe that the notices will result in any material sanctions. 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 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. Attorneys for families of persons who died aboard the flight requested that we put our insurance carrier on notice of a potential claim by those families, and we did so. The Transportation Safety Board has advised us that it has no evidence that the system we installed malfunctioned or failed during the flight. We are fully cooperating with the investigation. On July 21, 1998, plaintiffs seeking to represent a purported class of our stockholders filed in Delaware Chancery Court an action entitled TAAM Associates, Inc. v. DeCrane, et al. against DeCrane Aircraft, our directors, DLJ, Inc. and one of its affiliates. The complaint alleged, among other things, that our directors had breached their fiduciary duties by entering into the merger with the DLJ affiliate described in "Recent Developments--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 our stockholders. On July 24, 1998, the plaintiffs amended the complaint to add allegations that the Schedule 14D-9 we filed with the SEC as part of the tender offer and merger transaction contained various material misstatements or omissions; that the termination fees to the affiliate of DLJ were unreasonable; and that the directors who approved the DLJ acquisition had conflicts of interest. The complaint sought among other things an injunction barring the transaction, or damages plus attorneys' fees and litigation expenses. Without admitting any wrongdoing in the action, in order to avoid the burden and expense of further litigation, the defendants reached an agreement in principle with the plaintiffs which contemplates settlement of the action. The foregoing defendants and the plaintiffs entered into a memorandum of understanding under which the parties, subject to selected facts being confirmed through discovery which has not been completed, would enter into a settlement agreement subject to approval by the Court of Chancery. That memorandum of understanding required that we make several additional disclosures by filing an amendment to our Schedule 14D-9, which we did, and provided for a complete release and settlement of all claims arising out of the facts set forth in the complaint. The memorandum also contemplates that 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 agreed not to oppose. In August 1998, DeCrane Aircraft and R. Jack DeCrane, its chief executive officer, were served in an action filed in state court in California by Robert A. Rankin, 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 as a result of his allegations of improprieties in connection with the DLJ acquisition transactions. The action seeks not less than $1.5 million plus punitive damages and costs. Discovery has not been completed. We intend to vigorously defend against the claim. Mr. Rankin's employment with DeCrane Aircraft was terminated. 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. 52 WHERE YOU CAN GET MORE INFORMATION Each registered purchaser of the old notes from the initial purchaser will receive a copy of this prospectus and any related amendments or supplements. 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 a part 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. We are required to attach copies of most important contracts and documents as exhibits to the registration statement. We intend to become 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 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 companies 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. 53 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.
NAME AGE POSITION - ------------------------------------------ --- --------------------------------------------------------------------- R. Jack DeCrane........................... 52 Director and Chief Executive Officer Charles H. Becker......................... 52 President and Chief Operating Officer Richard J. Kaplan......................... 56 Senior Vice President, Chief Financial Officer, Secretary and Treasurer Thompson Dean............................. 40 Chairman of the Board of Directors John F. Fort, III......................... 57 Director Dr. Robert J. Hermann..................... 65 Director Dr. Paul G. Kaminski...................... 56 Director Susan C. Schnabel......................... 37 Director Timothy J. White.......................... 37 Director
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 the board of directors since its inception. CHARLES H. BECKER has been President and Chief Operating Officer of DeCrane Aircraft since April 1998. Mr. Becker previously served as Group Vice President of Components of the Company 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 for DeCrane Aircraft since April 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. 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 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. 54 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 high growth 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. 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, 1998, 1997 and 1996.
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------------------------------- ------------------------------------------------ OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING ALL OTHER COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION YEAR SALARY BONUS (1) AWARDS SAR(2) PAYOUT (3) --------- --------- --------- ----------- ----------- ----------- --------- ----------- R. Jack DeCrane.......... 1998 $ 281,761 $1,044,000 $ 30,151 50,000 -- Chief Executive Officer 1997 244,744 220,000 -- 50,000 $ 29,411 and Director(4) 1996 206,600 146,000 7,813 34,028 -- Charles H. Becker........ 1998 $ 206,948 $ 160,000 $ 14,678 -- -- President and Chief 1997 174,492 102,000 6,168 15,000 $ 18,000 Operating Officer(5) 1996 148,750 65,000 9,103 19,850 30,586 R.G. MacDonald(6)........ 1998 $ 212,744 $ 107,000 $ 20,260 -- -- 1997 184,859 102,000 10,536 4,000 -- 1996 177,437 82,000 13,200 -- -- John R. Hinson(7) ....... 1998 $ 136,155 $ 126,000 $ 3,872 -- -- 1997 108,400 33,500 2,112 -- -- 1996 88,273 28,500 2,083 -- -- Robert A. Rankin(8)...... 1998 $ 131,115 $ -- $ 9,856 -- -- 1997 149,309 103,000 7,158 15,000 -- 1996 139,375 65,000 12,838 19,850 --
- ------------------------ (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. (2) Number of shares of common stock issuable upon exercise of options granted 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. (6) Mr. MacDonald served as President through December 1996 and Vice Chairman of the Board of Directors through August 1998. (7) Mr. Hinson served as Chief Financial Officer, Secretary and Treasurer until March 1998. (8) Mr. Rankin served as Chief Financial Officer, Secretary and Treasurer until August 1998. 55 STOCK OPTION/SARS GRANTS IN LAST FISCAL YEAR The following table sets forth individual grants of stock options granted to the executive officers named below during the fiscal year ended December 31, 1998, pursuant to the share incentive plan then in place. See "Employment Agreements and Compensation Arrangements--Former Share Incentive Plan."
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF STOCK SECURITIES PRICE UNDERLYING % OF EXERCISE OR APPRECIATION OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION ---------- NAME SAR GRANTED GRANTED PER SHARE DATE 5% - ------------------------------------------------- ------------ --------------- ----------- ------------- ---------- R. Jack DeCrane.................................. 50,000 100% $ 16.875 2007 $ (1) Charles H. Becker................................ -- -- -- -- -- R.G. MacDonald................................... -- -- -- -- -- John R. Hinson................................... -- -- -- -- -- Robert A. Rankin................................. -- -- -- -- -- NAME 10% - ------------------------------------------------- ------------ R. Jack DeCrane.................................. $ (1) Charles H. Becker................................ -- R.G. MacDonald................................... -- John R. Hinson................................... -- Robert A. Rankin................................. --
- ------------------------ (1) DeCrane Aircraft cancelled all options for common stock, and all holders thereof were paid $23.00 per share, shortly after the grant of these options. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information about the stock options exercised by the executive officers named below during the fiscal year ended December 31, 1998.
NUMBER OF VALUE OF SECURITIES UNEXERCISED SHARES UNDERLYING IN-THE-MONEY ACQUIRED VALUE UNEXERCISED OPTIONS/SAR NAME ON EXERCISE REALIZED OPTIONS/SAR AT FY-END(1) - ----------------------------------------- --------------- --------- ------------- ----------------- EXERCISABLE/ EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE ------------- ----------------- R. Jack DeCrane.......................... -- $3,347,850 $ 0/0 $ 0/0 Charles H. Becker........................ -- $ 811,419 0/0 0/0 R.G. MacDonald........................... -- $1,299,422 0/0 0/0 John R. Hinson........................... -- $ 107,092 0/0 0/0 Robert A. Rankin......................... -- $ 811,419 0/0 0/0
- ------------------------ (1) Based on the common stock share price of $23.00 per share as of August 28, 1998, the measuring date. In August 1998, on the effective date of the mergers conducted as a part of the DLJ acquisition, all outstanding options for the common stock of DeCrane Aircraft were canceled. See "Recent Developments-- The DLJ Acquisition". The holders of all vested and unvested options received a cash payment determined, for each option, as follows: ($23.00 per share--exercise X maximum number of shares holder could price of option) have purchased, if all options were fully vested, by exercising option just before the effective date.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS On July 17, 1998, the Compensation Committee of our Board of Directors approved an 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 ranging from 0% to 100% of Mr. DeCrane's annual base salary depending on the degree to which we achieve performance goals; 56 - 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 immediately exercisable options were cancelled in August 1998 and he received a cash payout in lieu of the options, calculated according to the formula noted above under "Aggregated Option/ SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values." The employment agreement also provides that if 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. 401(K) RETIREMENT PLAN Effective April 1992, we adopted the Lincoln National Life Insurance Company Non-Standardized 401(k) Salary Reduction Plan and Trust Prototype Plan. The 401(k) allows employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, plus interest, as a retirement fund. 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. Effective January 1, 1999, we plan 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 board of directors has approved a stock option incentive plan providing for the issuance of options for the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries, to persons and in amounts determined by the compensation committee of the Board from time to time, and has reserved an aggregate amount of the common stock of DeCrane Holdings equal to 10% of all such stock outstanding, on a fully diluted basis, for stock issued under those options. Under the plan, the Board's compensation committee will make a single award during 1999 to each designated participant, which will progressively vest as the participant's operating unit achieves EBITDA targets set for that unit during the four year period following the award. No awards have been made under the plan. Our board of directors has approved a stock purchase plan providing for the purchase of shares of common stock of DeCrane Holdings as incentive compensation to 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, available to persons and in amounts determined by the compensation committee of the Board from time to time. No awards have been made under the plan. Our board of directors has approved a cash incentive bonus plan providing 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, as the exclusive sources of elective merit raises during the next four years. The bonus pool for participants will be adjusted upwards or downwards each year based on EBITDA and cash flow generated by the relevant participant's operating unit. ARRANGEMENTS PRIOR TO DLJ ACQUISITION We adopted a Share Incentive Plan in 1993 which permitted us to grant to our eligible employees options to purchase shares of our common stock, shares of common stock with conditional vesting based upon performance criteria, and options to receive payments based on the appreciation of common stock, commonly known as Share Appreciation Rights called "SARs." That plan permitted such grants to be made to key employees of DeCrane Aircraft designated by a compensation committee of the Board of Directors. As described above, all options to purchase common stock outstanding in August 1998 were terminated when 57 the DLJ acquisition transactions were completed, and the holders received cash payments in exchange for those options. In 1996 we introduced an incentive plan for our management personnel tied to DeCrane Aircraft's and each operating unit's annual budget as approved each year by the Compensation Committee of the Board of Directors. The 1996 incentive plan matrix provided for an annual bonus of up to 70% of participating employees' base salary if the relevant operating unit achieves 110% of budget. Fifty percent of the bonus was payable solely based on performance of the relevant operating unit and the remainder was payable upon the achievement by the employee of his or her individual objectives in the discretion of our Chief Executive Officer or the president of the relevant operating unit. DIRECTORS' COMPENSATION The directors of DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of DeCrane Aircraft of the Board of Directors 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. 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. 58 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 3,389,663 shares of common stock issued and outstanding, owned by 18 shareholders. The following table sets forth the beneficial ownership of DeCrane Holdings' voting securities as of April 1, 1999 by its principal owners and other persons who we are required to mention, such as executive officers and directors.
COMMON STOCK 14% SENIOR REDEEMABLE ----------------------------- EXCHANGEABLE PREFERRED STOCK NUMBER OF DUE 2008 SHARES, ---------------------------- PARTIALLY NUMBER OF NAME OF BENEFICIAL OWNER (1) DILUTED(2) PERCENTAGE(2) SHARES PERCENTAGE - --------------------------------------------------------------- ---------- ----------------- ----------- --------------- DLJMB Merchant Banking Partners II, L.P., and affiliates(3).... 3,519,565 99% 340,000 99% Thompson Dean(4)............................................... -- -- -- DLJMB Inc. 277 Park Avenue New York, New York 10172 Susan C. Schnabel(4)........................................... -- -- -- -- DLJMB Inc. 277 Park Avenue New York, New York 10172 Timothy J. White(4)............................................ -- -- -- -- DLJMB 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)....................................... 5,938 -- 714 -- c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. Dr. Paul G. Kaminski(5)........................................ 5,938 -- 714 -- c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. John F. Fort, III.............................................. -- -- -- -- R. Jack DeCrane................................................ -- -- -- -- Charles H. Becker.............................................. -- -- -- -- Richard J. Kaplan.............................................. -- -- -- -- All directors and named executive officers as a group (9 persons).................................................. 11,876 -- 1,428 --
- ------------------------ (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 show number of shares owned and total percentage of ownership in the manner required by SEC rules. The entry for each holder of warrants assumes that the particular holder, and no-one else, fully exercises all rights under those warrants to purchase shares of common stock. (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 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 59 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 20,098 shares of DeCrane Holdings common stock, and 2,417 shares of DeCrane Holdings 14% Senior Redeemable Exchangeable Preferred Stock due 2008, in a transaction 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. 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 3,389,663 are outstanding, excluding 305,000 reserved for issuance for outstanding warrants. 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." 60 RELATED PARTY TRANSACTIONS The merger 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. 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 the bank credit facility and as a lender thereunder. DLJ Bridge Finance, Inc., also an affiliate of DLJ Merchant Banking, received customary fees in connection with its commitment to purchase and its purchase of the bridge notes. Donaldson, Lufkin & Jenrette Securities Corporation, which is also an affiliate of DLJ Merchant Banking, acted as financial advisor and dealer manager in connection with the tender offer, as arranger of the bank credit facility and received customary fees for those services; DLJ Securities Corporation also acted as the initial purchaser of the old notes. The aggregate amount of all fees payable to the DLJ entities in connection with the DLJ acquisition is approximately $12.0 million. DeCrane Aircraft is also obligated to reimburse DLJ Securities Corporation for reasonable out-of-pocket expenses incurred in connection with the tender offer, including the fees and disbursements of outside counsel, and to indemnify DLJ Securities Corporation against liabilities, including liabilities under the federal securities laws. In addition, DeCrane Aircraft is obligated to pay DLJ Securities Corporation an annual advisory fee of $300,000 beginning on the consummation of the tender offer for a period of five years. 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 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. - 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, 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 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. 61 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. In connection with the DLJ acquisition, Global Technology Partners, LLC will have options to purchase up to 1.25% of DeCrane Holdings common stock. The options will 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 the foregoing DLJ affiliates. In addition, in December 1998 six members of Global Technology Partners, including Messrs. Hermann and Kaminski, purchased approximately $704,000 of shares of newly issued common and preferred stock of DeCrane Holdings. DeCrane Aircraft loaned half of the purchase price for such shares to those members at an interest rate equal to the interest rate on the longest maturity senior bank debt of DeCrane Aircraft in effect from time to time, plus 1.0%. 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. 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. This additional investment is included as part of the acquisition financing in the unaudited pro forma financial data in this prospectus. 62 DESCRIPTION OF BANK CREDIT FACILITY The bank credit facility is provided by a syndicate of lenders led by DLJSC, as arranger, and DLJ Capital Funding, as syndication agent. The bank credit facility initially included an $80.0 million term loan facility and a $50.0 million revolving credit facility which provides for loans and 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 original amount of $35.0 million which matures on August 28, 2004 and a Term B facility in the original amount of $45.0 million which matures on August 28, 2005. The revolving credit facility is comprised of an acquisition facility of $25.0 million and a working capital facility of $25.0 million. A portion of the working capital facility was used to finance the conversion of shares into cash in connection with the DLJ acquisition and the remainder can be used for general corporate and working capital purposes, each of which matures on August 28, 2004. The working capital facility is subject to a potential, but uncommitted, increase of up to $20.0 million at the our request at any time prior to such maturity date. Such increase will be available only if one or more financial institutions agrees, at the time of our request, to provide it. The Term B facility was increased to $65.0 million in January 1999 by a first amendment to the facility, in connection with our acquisition of PATS. In connection with our acquisition of PPI in April 1999 and the potential for future acquisition transactions, we obtained an additional increase in the term loan amounts available for acquisitions, by adding a new Term C facility in an amount of up to $70 million, in an amended and restated loan agreement dated April 23, 1999. 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. For the first six months after the January 1999 amendment, the margin for Term A loans and the revolving credit facility is 1.50% for base rate borrowings and 2.75% for Euro-Dollar borrowings. Thereafter, the margin will vary based upon DeCrane Aircraft's ratio of total debt to EBITDA as defined in the bank 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 applicable commitment fees are also 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. Those fees are payable quarterly in arrears and upon the maturity or termination of the revolving credit facility. We pay a letter of credit fee on the undrawn amounts of letters of credit issued and outstanding under the bank credit facility, at a rate per annum equal to the then-applicable margin for Euro-Dollar loans under the Term A facility, which is shared by all lenders participating in such letter of credit, and an additional amount to be mutually agreed upon to the issuer of each letter of credit. The term loans are subject to the following amortization schedule, which was amended as to the Term B loans by the January 1999 amendment:
TERM A LOAN TERM B LOAN YEAR AMORTIZATION AMORTIZATION - ------------------------------------------------------------------------ ------------- ------------- 1....................................................................... 0.0% 0.9% 2....................................................................... 5.0% 1.0% 3....................................................................... 10.0% 1.0% 4....................................................................... 20.0% 1.0% 5....................................................................... 25.0% 1.0% 6....................................................................... 40.0% 1.0% 7....................................................................... -- 94.1% ----- ----- 100.0% 100.0% ----- ----- ----- -----
The bank credit facility will be subject to mandatory prepayment: - with 50% of the net cash proceeds received from the issuance of equity securities to the extent that the foregoing leverage ratio exceeds 3.5 to 1, subject to exceptions, 63 - with 100% of the net cash proceeds received from the issuance of debt, subject to exceptions, - with 100% of the net cash proceeds received from permitted asset sales, subject to exceptions and - with 50% of excess cash flow, as specified 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 subsidiaries other than Audio International Sales, Inc., a U.S. Virgin Islands corporation, are guarantors of the bank credit facility. Our obligations under the bank credit facility are also 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, or in the case of foreign subsidiaries, 65% of their voting stock. - 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, - a pledge by DeCrane Holdings of the stock of DeCrane Aircraft, and - a negative pledge on all assets of DeCrane Aircraft and its subsidiaries, subject to some exceptions. The bank credit facility contains customary covenants and restrictions on our ability to engage in some 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 discussed in "Risk Factors--Substantial Leverage." 64 DESCRIPTION OF NOTES GENERAL The notes have been issued pursuant to an indenture between DeCrane Aircraft and State Street Bank and Trust Company, as Trustee. 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, and the registration rights agreement described below, 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 December 31, 1998, DeCrane Aircraft and the Guarantors would have had outstanding approximately $175.2 million of Senior Indebtedness and DeCrane Aircraft's non-Guarantor subsidiaries would have had approximately $2.2 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. 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, 65 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, 66 - 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:
PERCENTAGE OF PRINCIPAL YEAR AMOUNT - ------------------------------------------------------------------------------------ ------------------ 2003................................................................................ 106.000% 2004................................................................................ 104.000% 2005................................................................................ 102.000% 2006 and thereafter................................................................. 100.000%
67 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 68 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 69 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, 70 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 71 (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 72 (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, 73 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. 74 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; 75 (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." 76 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, 77 (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 78 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 79 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; 80 (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. 81 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 82 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, 83 (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. REGISTRATION RIGHTS; LIQUIDATED DAMAGES We are conducting this exchange offer, and filing the registration statement of which this Prospectus is part, in order to comply with our obligations under the registration rights agreement which we entered into with the initial purchaser at the time of the DLJ acquisition. If we are not permitted to complete this exchange offer, because it is not permitted by applicable law or SEC policy, or any holder of the old notes, or new notes bearing transfer restrictions, notifies us of restrictions on its participation in the exchange offer within 20 business days of the completion of this exchange offer, we will file with the SEC a shelf 84 registration statement to cover resales of the notes by holders who satisfy conditions relating to the provision of information. The registration rights agreement requires that we file the registration statement of which this Prospectus is part, within 120 days after October 5, 1998; use our reasonable best efforts to have it declared effective by the SEC within 180 days after October 5, 1998; unless not permitted by applicable law or SEC policy, commence the exchange offer described herein and use our reasonable best efforts to issue the new notes, within 30 business days after the effective date of the foregoing registration statement; and, if obligated to file a shelf registration statement because some parties cannot register their notes in connection with the exchange offer, file it within 120 days after such obligation arises, and use our reasonable best efforts to cause it to be declared effective within 180 days after that date. If - we fail to file any of the registration statements required by the registration rights agreement when required, - any of those registration statements is not declared effective by the SEC by the deadlines specified above, - we fail to complete this exchange offer within 40 business days of the deadline for filing the related registration statement, or - any required registration statement declared effective but thereafter ceases to be effective or usable as contemplated by the registration rights agreement, we are in default of the registration rights agreement. We are required under the terms of the old notes and the registration rights agreement to pay "liquidated damages" to each holder of notes, with respect to the first 90-day period immediately following the occurrence of the first default of that type in an amount equal to $0.05 per week per $1,000 principal amount of notes held by such holder. The amount of the liquidated damages will increase by an additional $0.05 per week per $1,000 principal amount of notes with respect to each subsequent 90-day period until all defaults of that type have been cured, up to a maximum amount of liquidated damages for all defaults of that type of $0.25 per week per $1,000 principal amount of notes. All accrued liquidated damages will be paid by us on each Damages Payment Date to the Global Note holder by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all defaults of that type, the accrual of liquidated damages will cease. Holders of notes will be required to make representations to DeCrane Aircraft and the Guarantors, which are described in the registration rights agreement, in order to participate in the exchange offer and will be required to deliver information to be used in connection with the shelf registration statement and to provide comments on the shelf registration statement within the time periods set forth in the registration rights agreement in order to have their notes included in the shelf registration statement and benefit from the provisions regarding liquidated damages set forth above with respect to the shelf registration statement. 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. "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 85 (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. "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 86 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 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 87 (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; 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. 88 "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. "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. 89 "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 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. 90 "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." "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. 91 "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. "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 92 - 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 - 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; 93 - 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. "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 94 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; - 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 95 - 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. 96 THE INITIAL OFFERING In August 1998, in connection with the DLJ acquisition, DeCrane Aircraft assumed responsibility by merger for $100.0 million of Senior Subordinated Increasing Rate Notes to DLJ Bridge Finance, Inc. We used the proceeds from these bridge notes to fund the tender offer purchases made as part of the DLJ acquisition, and related expenses. The bridge notes were refinanced by our issuance in October of the old notes to the initial purchaser Donaldson, Lufkin & Jenrette Securities Corporation. These transactions are described in more detail in "Recent Developments--The DLJ Acquisition." The old notes were not registered under the Securities Act, and accordingly subject to various transfer restrictions. We concurrently entered into the registration rights agreement, which requires us to take specified steps to issue the new notes, offer them in exchange for the old notes under this exchange offer, and register them, all as described in "Description of Notes--Registration Rights Agreement." The terms of the old notes and the new notes are identical in most respects, except as described in "Description of Notes." THE EXCHANGE OFFER We are conducting this exchange offer, and filing the registration statement of which this prospectus is part, in order to comply with our obligations under the registration rights agreement which we entered into with the Initial Purchaser at the time of the DLJ acquisition. If we are not permitted to complete this exchange offer, because it is not permitted by applicable law or SEC policy, or any holder of the old notes or new notes bearing transfer restrictions notifies us of restrictions on its participation in the exchange offer within 20 business days of the completion of this exchange offer, we will file with the SEC a shelf registration statement to cover resales of the notes by holders who satisfy conditions relating to the provision of information. This exchange offer is not extended to, and we will not accept tenders from, holders of old notes in any jurisdiction in which this exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES The terms and conditions for this exchange offer are set forth in this prospectus and in the accompanying letter of transmittal. Subject to those terms and conditions, we will accept for exchange old notes which are properly tendered on or prior to the expiration date described below and not withdrawn as permitted below. For each $1,000 principal amount at maturity of old notes surrendered pursuant to this exchange offer, the holder will receive an exchange note with the same principal amount at maturity. We will keep this exchange offer open for not less than 20 business days, or longer if required by applicable law, after the date that this prospectus is first sent to the holders of the old notes. We are mailing it, on or about the date on the cover page, to all registered holders of old notes at the addresses set forth in the register maintained by the Trustee. This exchange offer is subject to the conditions set forth under "--Conditions to this Exchange Offer" below. We expressly reserve the right, at any time or from time to time, to extend the period of time during which this exchange offer is open, and thereby delay acceptance of any old notes, by giving oral or written notice of such extension to the exchange agent and notice of such extension to each holder as described below. During any such extension, all old notes previously tendered will remain subject to this exchange offer and we may accept them for exchange. We will return any old notes not accepted for exchange for any reason, without expense to the tendering holders, as promptly as is practicable after the expiration or termination of this exchange offer. We expressly reserve the right to amend or terminate this exchange offer, and to cease accepting any tenders of old notes, if any of the conditions of this exchange offer specified below under "Conditions to this Exchange Offer" occur. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. If the exchange offer is extended, we will give that notice by means of a press release or other public announcement no later than 9:00 a.m., New York time, on the next business day after the previously scheduled expiration date. We have no obligation to 97 publish, advertise or otherwise communicate any such public announcement other than by issuing a release to the Dow Jones News Service or as may otherwise be required by applicable law. Holders of old notes do not have any appraisal or dissenters' rights in connection with this exchange offer. Old notes which are not tendered for exchange or are tendered but not accepted in connection with this exchange offer will remain outstanding and be entitled to the benefits of the indenture, but will not be entitled to any further registration rights under the registration rights agreement. We intend to conduct this exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC. PROCEDURES FOR TENDERING OLD NOTES If you tender old notes as set forth below and we accept them, we will have a binding agreement on the terms and conditions set forth in this prospectus and in the letter of transmittal. Except as set forth below, in order to tender old notes and accept this exchange offer, you must: - complete and sign a letter of transmittal, and comply with the instructions which it contains, - forward it and any other required documents using a method of delivery permitted by the letter of transmittal to the exchange agent appointed by us, whose address appears below and in the letter of transmittal, by 5:00 p.m. New York time on the expiration date, and - either deliver your old notes in the same package, or comply with the book entry delivery method noted below, or comply with the guaranteed postponed delivery method noted below. Please note that, if your old notes are held through a broker, dealer, commercial bank, trust company or other nominee, you must contact that person promptly if you wish to tender your notes. YOU MAY ELECT WHICH METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS YOU USE, BUT YOU DO SO AT YOUR OWN RISK. IF YOU CHOOSE TO DELIVER DOCUMENTS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ANY CASE, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO DECRANE AIRCRAFT. SIGNATURE GUARANTEES. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed, unless the old notes surrendered for exchange pursuant thereto are tendered either (1) by a registered holder of the old notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal or (2) for the account of an institution which itself is eligible to issue the guarantees described below. The only kind of signature guarantees which will be acceptable are those made by a firm which is a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. If old notes are registered in the name of a person other than the person signing the letter of transmittal, the old notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by us in our sole discretion, duly executed by the registered holder with a signature guarantee of the kind described above. We will determine all questions as to the validity, form, eligibility, time of receipt and acceptance of old notes tendered for exchange in our sole discretion. We reserve the absolute right to reject any and all tenders of any particular old notes not properly tendered, or to not accept any particular old notes which acceptance, in our judgment or that of our counsel, might be unlawful. We also reserve the absolute right to waive any defects or irregularities or conditions of this exchange offer as to any particular old notes, either before or after the expiration of this offer date, including the ineligibility of any holder to tender old notes. Our interpretation of the terms and conditions of this exchange offer as to any particular old notes shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with the tender of old notes for exchange must be cured within such reasonable period of time as we determine. Neither DeCrane Aircraft, the exchange agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of old notes for exchange, nor incur any liability for failure to give such notification. 98 If the letter of transmittal is signed by a person or persons other than the registered holder or holders of old notes, those old notes must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name or names of the registered holder or holders that appear on the old notes. If the letter of transmittal or any old notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers or corporations or others acting in a fiduciary or representative capacity, the person signed must indicate their capacity and, unless waived by us, submit along with the documents proper evidence satisfactory to us of its authority to so act. By executing, or otherwise becoming bound by, the letter of transmittal, each holder of the old notes, with a few specified exceptions, will represent that - it is not an affiliate of DeCrane Aircraft, - any new notes to be received by it were acquired in the ordinary course of its business, and - it has no arrangement with any person to participate in the distribution, within the meaning of the Securities Act, of the new notes. If the tendering holder is a broker-dealer that will receive new notes for its owns account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See "--Resale of the New Notes." ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to this exchange offer, we will accept, promptly after the expiration date, all old notes properly tendered and will issue the new notes promptly after acceptance of the old notes. See "--Conditions to this Exchange Offer" below. For purposes of this exchange offer, we shall be deemed to have accepted properly tendered old notes for exchange when, as and if we have given oral or written notice thereof to the exchange agent. In all cases, issuance of new notes for old notes that are accepted for exchange pursuant to this exchange offer will be made only after timely receipt by the exchange agent of certificates for such old notes or a timely book-entry confirmation of such old notes into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described below, a properly completed and duly executed letter of transmittal and all other required documents. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of this exchange offer or if certificates representing old notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged old notes will be returned without expense to the tendering holder thereof, or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described below, such non-exchanged old notes will be credited to an account maintained with DTC, as promptly as practicable after the expiration or termination of this exchange offer. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the old notes at DTC for purposes of this exchange offer promptly after the date of this prospectus. Any financial institution that is a participant in DTC's systems may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent's account in accordance with DTC's Automated Tender Offer Program procedures for transfer. However, we will only make exchanges for old notes tendered in this manner after: - timely confirmation that the book-entry transfer of old notes has been made into the exchange agent's account, and - timely receipt by the exchange agent of all other documents required by the letter of transmittal, and a confirmation message, transmitted by DTC, confirming the book-entry transfer of the old notes, and stating that DTC has received an express acknowledgment from the holder that it has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce such agreement against it. Please note that, even if you deliver old notes by this book-entry transfer method, you must still deliver the letter of transmittal, properly completed and duly executed, with any required signature guarantees and 99 any other required documents, to the exchange agent at its address set forth under "--Exchange Agent", on or before the expiration date for this exchange offer. Please note also that delivery of documents to DTC in accordance with its procedures does not constitute delivery to the exchange agent. GUARANTEED DELIVERY PROCEDURES If a registered holder of the old notes desires to tender them, and they are not immediately available, or time will not permit the notes or other required documents to reach the exchange agent before the expiration date for the exchange offer, or the procedure for book-entry transfer cannot be completed on a timely basis, the holder still may validly accomplish a tender of the notes if: - the tender is made through a firm which is a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States, - prior to that expiration date, the exchange agent receives from one of those institutions a properly completed and duly executed letter of transmittal or a facsimile thereof along with a Notice of Guaranteed Delivery, substantially in the form we have provided, by telegram, telex, facsimile transmission, mail or hand delivery, and - the certificates for all physically tendered old notes, in proper form for transfer, or a confirmation of book-entry transfer as described above, and all other documents required by the Letter of Transmittal, are received by the exchange agent within five New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery. The notice of guaranteed delivery must state the name and address of the holder of old notes, state the amount of old notes tendered, state that tender is being made thereby, and guarantee that within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a confirmation of book-entry transfer as described above, and all other documents required by the letter of transmittal, will be deposited by the institution with the exchange agent. WITHDRAWAL RIGHTS Tenders of old notes may be withdrawn at any time prior to the expiration date for this exchange offer. For a withdrawal to be effective, a written notice of withdrawal must be received by the exchange agent at one of the addresses set forth below under "--Exchange Agent." Any notice of withdrawal must specify the name of the person having tendered the old notes to be withdrawn, identify the old notes to be withdrawn and their principal amount at maturity, and where certificates for old notes have been transmitted specify the name in which such old notes are registered, if different from that of the withdrawing holder. If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any note of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of such facility. Our determination of all questions as to the validity, form, eligibility and time of receipt of such notices will be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of this exchange offer. We will return any old notes tendered for exchange but which are not exchanged for any reason, without cost to such holder or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described above, we will cause such old notes to be credited to an account maintained with DTC for the old notes, as soon as practicable after withdrawal, rejection of tender or termination of this exchange offer. Properly withdrawn old notes may be re-entered by following one of the procedures described under "--Procedures for Tendering Old Notes" above at any time on or prior to the expiration date for this exchange offer. 100 CONDITIONS TO THIS EXCHANGE OFFER Notwithstanding any other provisions of this exchange offer, we are not required to accept for exchange, or to issue new notes in exchange for, any old notes and may terminate or amend this exchange offer, if at any time before the acceptance of such old notes for exchange or this exchange of the new notes for such old notes, such acceptance or issuance would violate applicable law or any interpretation of the staff of the SEC. The foregoing condition is for our sole benefit and may be asserted by us regardless of the circumstances giving rise to such condition. Our failure at any time to exercise the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, we will not accept for exchange any old notes tendered, nor issue any new notes and no new notes will be issued in exchange for any such old notes, if at such time any stop order shall be threatened or in effect with respect to either the registration statement of which this prospectus constitutes a part, or the qualification of the indenture under the Trust Indenture Act. EXCHANGE AGENT We have appointed State Street Bank and Trust Co. as the exchange agent for this exchange offer. All executed letters of transmittal should be directed to the exchange agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery should be directed to the exchange agent, addressed as follows: Deliver To: BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER: State Street Bank and Trust Company, State Street Bank and Trust Company, Exchange Agent Exchange Agent P.O. Box 778 Two International Place Boston, Massachusetts 02102 Boston, Massachusetts 02110 ATTENTION: Corporate Trust Department ATTENTION: Corporate Trust Department Kellie Mullen Kellie Mullen Reference: DeCrane Aircraft Reference: DeCrane Aircraft BY HAND IN NEW YORK TO 4:30 P.M. BY HAND IN BOSTON TO 4:30 P.M.: (as drop agent): State Street Bank and Trust Company, State Street Bank and Trust Company, Exchange Agent Exchange Agent Two International Place 61 Broadway Fourth Floor 15th Floor Boston, Massachusetts 02110 Corporate Trust Window ATTENTION: Corporate Trust New York, NY 10006 Department Reference: DeCrane Aircraft Kellie Mullen Reference: DeCrane Aircraft
FOR INFORMATION CALL: Kellie Mullen 617-664-5587 Delivery to any other address or transmission in any other manner will not be a valid delivery. FEES AND EXPENSES Our solicitation for this exchange offer is being made primarily by mail. However, we may made additional solicitation by telegraph, telephone, electronic mail or in person by our officers and regular employees. No additional compensation will be paid to any such officers and employees who engage in soliciting tenders. We will not make any payment to brokers, dealers, or others soliciting acceptances of this exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. Our cash expenses to be incurred in connection with this exchange offer will be paid by us, and we estimate that they will total about $ . ACCOUNTING TREATMENT The new notes will be recorded at the same carrying value as the old notes, which is face value, as reflected in our accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The expenses of the exchange offer will be expensed over the term of the new notes. 101 TRANSFER TAXES Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes in connection therewith, EXCEPT that holders who: - instruct us to register new notes in the name of a person other than the registered tendering holder, or - request that old notes not tendered or not accepted in this exchange offer to be returned to a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. RESALE OF THE NEW NOTES Under existing interpretations of the staff of the SEC contained in several no-action letters to third parties, the new notes generally should be freely transferable after this exchange offer by a holder other than a broker or dealer without further compliance with the registration and prospectus delivery requirements of the Securities Act, if: - the new notes are acquired in the ordinary course of the holder's business; - the holder is not participating, and has not entered into an arrangement or understanding to participate, in a distribution of the new notes, as "distribution" is understood under the Securities Act; - the holder is not our affiliate, as "affiliate" is defined in Rule 405 under the Securities Act, or a broker or dealer who purchased the old notes for resale; and - the holder is not a broker or dealer who acquired the old notes for its own account. However, the foregoing view relies on statements by the staff of the Division of Corporation Finance of the SEC, in interpretive letters which discuss other transactions: EXXON CAPITAL HOLDINGS CORPORATION (May 13, 1988), MORGAN STANLEY AND COMPANY INCORPORATED (June 5, 1991), WARNACO INCORPORATED (October 11, 1991), EPIC PROPERTIES, INCORPORATED (October 21, 1991), K-III COMMUNICATIONS CORPORATION (May 14, 1993) and BROWN & WOOD LLP (February 7, 1997). We have not sought our own interpretive letter, so there is no definitive legal determination of the foregoing issue. Each holder of old notes who signs, or otherwise becomes bound by, the Letter of Transmittal, other than a few specified holders, will represent that it qualifies for each of the criteria listed above. Any holders who do not meet the foregoing criteria will not be able to tender their old notes in this exchange offer, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the notes, unless such sale or transfer is made pursuant to an exemption from such requirements. In any resales of new notes, any participating broker-dealer who acquired the notes for its own account as a result of market-making or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the new notes, other than a resale of an unsold allotment from the original sale of the old notes, with this prospectus, as it may be amended or supplemented. Under the registration rights agreement, we are required to allow participating broker-dealers and any other persons subject to similar prospectus delivery requirements to use this prospectus as it may be amended or supplemented from time to time, in connection with the resale of such exchange notes. 102 FEDERAL INCOME TAX CONSEQUENCES This section is a summary of federal income tax considerations relevant to this exchange offer. It is not a complete analysis of all potential tax effects. We have not considered other taxes, including foreign or state taxes, gift taxes or gift taxes, among other things, and your individual tax liabilities and consequences also depend on your own circumstances. We based this summary on U.S. federal tax law, regulations, pronouncements and judicial decisions now in effect. All of the laws and rules may change, and changes can be made retroactively as well. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO YOU OF PARTICIPATING IN THIS EXCHANGE OFFER. Your exchange of old notes for new notes pursuant to this exchange offer should have no federal income tax consequences to you as a holder of the notes. When you exchange an old note for a new note under this exchange offer, you should have the same adjusted basis and holding period in the new note as you had in the old note immediately before the exchange occurred. PLAN OF DISTRIBUTION Each broker-dealer who acquired old notes for its own account, as a result of market-making activities or other trading and who participates in this exchange offer activities, which we call "participating broker-dealers" in this prospectus, must acknowledge that it will deliver a prospectus in connection with any resale of new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of the new notes received in exchange for old notes, IF it acquired the old notes as a result of market-making activities or other trading activities. We have agreed that we will make this prospectus, as amended or supplemented, available to any participating broker-dealer for use in any such resale, and those broker-dealers will be authorized to deliver it for no more than 90 days after the expiration date of the exchange offer. We will not receive any proceeds from any sales of the new notes by participating broker-dealers. New notes received by such brokers-dealers for their own account in this exchange offer may be sold from time to time, in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the notes, or a combination of such methods of resale, and may be sold at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from the participating broker-dealer that resells the new notes that were received by it for its own account under this exchange offer. Any broker or dealer that participates in a distribution of that kind may be deemed to be an "underwriter" within the meaning of the Securities Act. Any profit on resulting resales of new notes, and any omissions or concessions received by any such persons, may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. We will promptly send additional copies of this prospectus, and any amendment or supplement to this prospectus, to any participating broker-dealer that requests such documents in the letter of transmittal. See "The Exchange Offer." LEGAL MATTERS The validity of the new notes offered hereby will be passed upon for DeCrane Aircraft by Spolin & Silverman LLP, Santa Monica, California and Davis, Polk & Wardwell, New York, New York. 103 EXPERTS 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, and 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. 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 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., 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. 104 INDEX TO FINANCIAL STATEMENTS
PAGE --------- DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Report of Independent Accountants........................................................................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998............................................. F-3 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-4 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-5 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-7 Notes to Consolidated Financial Statements............................................................... F-8 AVTECH CORPORATION Report of Independent Accountants........................................................................ F-43 Balance Sheets as of September 30, 1996 and 1997 and June 25, 1998 (unaudited)........................... F-44 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-45 Statements of Stockholders' Equity for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 25, 1998 (unaudited)................................................................. F-46 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-47 Notes to Financial Statements............................................................................ F-48 PATS, INC. AND SUBSIDIARIES Report of Independent Accountants........................................................................ F-55 Consolidated Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited)............... F-56 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-57 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and the six months ended December 31, 1998 (unaudited)............................................................. F-58 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-59 Notes to Consolidated Financial Statements............................................................... F-60 PPI HOLDINGS, INC. AND SUBSIDIARY Report of Independent Accountants........................................................................ F-66 Consolidated Balance Sheets as of December 31, 1997 and 1998............................................. F-67 Consolidated Statements of Income for the year ended December 31, 1996 and the period from January 1, 1997 to June 11, 1997 and the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998...................................................................................... F-68 Consolidated Statements of Stockholders' Equity for the year ended December 31, 1996 and the period from January 1, 1997 to June 11, 1997 and the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998................................................................................ F-69 Consolidated Statements of Cash Flows for the year ended December 31, 1996 and the period from January 1, 1997 to June 11, 1997 and the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998...................................................................................... F-70 Note to Consolidated Financial Statements................................................................ F-71
F-1 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-2 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ------------ 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 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of the consolidated financial statements. F-3 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
EIGHT YEAR ENDED DECEMBER MONTHS FOUR MONTHS 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 1998 31, 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- ----------- ----------- 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) --------- --------- ----------- ----------- --------- --------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. F-4 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
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 - ------------------------------ ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- 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)
The accompanying notes are an integral part of the consolidated financial statements. F-5 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
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 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- 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 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- ----------- ------- ------ --------- ------ ---------- -------- ----------- -------
The accompanying notes are an integral part of the consolidated financial statements. F-6 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, EIGHT MONTHS -------------------- ENDED AUGUST 31, 1998 1996 1997 (PREDECESSOR) (PREDECESSOR) --------- --------- --------------- Cash flows from operating activities Net income (loss)................................................................. $ (817) $ 3,176 $ 3,189 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization................................................. 4,343 5,372 4,454 Extraordinary loss from debt refinancing...................................... -- 2,078 -- Deferred income taxes......................................................... 88 (1,281) (2,339) Other, net.................................................................... 188 654 (360) Changes in assets and liabilities Accounts receivable....................................................... (3,069) (3,159) (3,621) Inventories............................................................... (2,665) (4,956) (2,017) Prepaid expenses and other assets......................................... (3) (136) (58) Accounts payable.......................................................... 1,891 (361) (1,127) Accrued expenses.......................................................... 2,477 (1,041) 3,519 Income taxes payable...................................................... 525 4,295 1,374 --------- --------- ------- Net cash provided by operating activities............................. 2,958 4,641 3,014 --------- --------- ------- 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) Other, net........................................................................ 5 (370) 175 --------- --------- ------- Net cash used for investing activities................................ (24,016) (27,809) (87,378) --------- --------- ------- Cash flows from financing activities Acquisition of Predecessor Proceeds from senior credit facility and bridge notes........................... -- -- -- Proceeds from sale of common stock.............................................. -- -- -- Proceeds from stock options exercised........................................... -- -- -- Purchase of shares outstanding.................................................. -- -- -- Repayment of existing senior credit facility.................................... -- -- -- Transaction fees and expenses................................................... -- -- -- 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 Principal payments on capitalized lease and other long-term obligations........... (2,001) (1,675) (1,317) Other, net........................................................................ (1,343) 139 (73) --------- --------- ------- Net cash provided by (used for) financing activities.................. 21,051 22,957 89,871 --------- --------- ------- Effect of foreign currency translation on cash...................................... 22 97 26 --------- --------- ------- Net increase (decrease) in cash and cash equivalents................................ 15 (114) 5,533 Cash and cash equivalents at beginning of period.................................... 305 320 206 --------- --------- ------- Cash and cash equivalents at end of period.......................................... $ 320 $ 206 $ 5,739 --------- --------- ------- --------- --------- ------- FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR) -------------- Cash flows from operating activities Net income (loss)................................................................. $ (2,553) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization................................................. 4,983 Extraordinary loss from debt refinancing...................................... 2,229 Deferred income taxes......................................................... (5,072) Other, net.................................................................... (97) Changes in assets and liabilities Accounts receivable....................................................... (2,929) Inventories............................................................... 4,313 Prepaid expenses and other assets......................................... (562) Accounts payable.......................................................... (1,754) Accrued expenses.......................................................... 2,342 Income taxes payable...................................................... 108 -------------- Net cash provided by operating activities............................. 1,008 -------------- Cash flows from investing activities Cash paid for acquisitions, net of cash acquired.................................. -- Capital expenditures.............................................................. (1,813) Other, net........................................................................ -- -------------- Net cash used for investing activities................................ (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.......................................... -- Borrowings under credit facility................................................ -- Repayment of debt............................................................... -- Financing of acquisitions Revolving line of credit borrowings............................................. -- Proceeds from issuance of cumulative convertible preferred stock and mandatorily redeemable common stock warrants, net.......................................... -- Senior term loan borrowings..................................................... -- Convertible subordinated note borrowings from related parties................... -- Promissory note principal payments.............................................. -- Net borrowings under revolving line of credit agreements.......................... (1,103) Principal payments on capitalized lease and other long-term obligations........... (458) Other, net........................................................................ (36) -------------- Net cash provided by (used for) financing activities.................. (1,597) -------------- Effect of foreign currency translation on cash...................................... 181 -------------- Net increase (decrease) in cash and cash equivalents................................ (2,221) Cash and cash equivalents at beginning of period.................................... 5,739 -------------- Cash and cash equivalents at end of period.......................................... $ 3,518 -------------- --------------
The accompanying notes are an integral part of the consolidated financial statements. F-7 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 F-8 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. F-9 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 F-10 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 F-11 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - THE DLJ ACQUISITION (CONTINUED) 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. 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 F-12 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) 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 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. F-13 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) ELSINORE On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc. and the Elsinore Engineering Services Division of Elsinore, L.P., collectively 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. 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.
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1997 1998 ---------- ---------- Revenues............................................................................... $ 160,054 $ 173,297 Loss before extraordinary item......................................................... (10,000) (3,548)
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. F-14 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS (CONTINUED) SIGNIFICANT CUSTOMERS Two customers each accounted for more than 10% of the Company's consolidated revenues, as follows:
YEAR ENDED DECEMBER FOUR MONTHS 31, EIGHT MONTHS ENDED -------------------- ENDED AUGUST DECEMBER 31, 31, 1998 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- ------------- ------------- Customer A.......................................... 15.8% 19.0% 17.3% 20.1% Customer B.......................................... 7.2% 11.2% 7.6% 5.6%
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. NOTE 6 - INVENTORIES Inventories are comprised of the following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ----------- 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 ----------- ----------- ----------- -----------
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):
1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ----------- 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 ----------- ----------- ----------- -----------
F-15 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - PROPERTY AND EQUIPMENT (CONTINUED) Property and equipment under capital leases included above consists of the following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998 (PREDECESSOR) (SUCCESSOR) ------------- ------------- 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 ------ ----- ------ -----
Depreciation of machinery and equipment under capital leases is included in cost of sales in the consolidated financial statements. 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):
1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ----------- 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 ----------- ----------- ----------- -----------
NOTE 9 - ACCRUED EXPENSES Accrued expenses are comprised of the following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998 (PREDECESSOR) (SUCCESSOR) ------------- ----------- 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 ------ ----------- ------ -----------
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% F-16 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - BORROWINGS (CONTINUED) 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):
1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ----------- 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 ----------- ----------- ----------- -----------
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). F-17 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - BORROWINGS (CONTINUED) 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. AGGREGATE MATURITIES The aggregate maturities of long-term obligations are as follows as of December 31, 1998 (amounts in thousands):
YEAR ENDING DECEMBER 31, 1999................................................................................................ 1,529 2000................................................................................................ 2,722 2001................................................................................................ 4,866 2002................................................................................................ 7,905 2003................................................................................................ 10,522 Thereafter.......................................................................................... 158,938 ---------- Total long-term obligations..................................................................... $ 186,482 ---------- ----------
NOTE 11 - INCOME TAXES Income (loss) before income taxes and extraordinary item was taxed under the following jurisdictions (amounts in thousands):
YEAR ENDED DECEMBER EIGHT MONTHS FOUR MONTHS 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1998 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- ------------- --------------- Domestic........................................ $ (855) $ 7,509 $ 5,637 $ (3,345) Foreign......................................... 750 1,089 444 353 --------- --------- ------ ------- Total......................................... $ (105) $ 8,598 $ 6,081 $ (2,992) --------- --------- ------ ------- --------- --------- ------ -------
F-18 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - INCOME TAXES (CONTINUED) The provisions for income taxes (benefit) are as follows (amounts in thousands):
YEAR ENDED DECEMBER EIGHT MONTHS FOUR MONTHS 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1998 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- ------------- --------------- 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) --------- --------- ------------- ------- --------- --------- ------------- -------
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):
YEAR ENDED DECEMBER 31, EIGHT MONTHS FOUR MONTHS -------------------- ENDED AUGUST ENDED DECEMBER 31, 1998 31, 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- ------------- --------------- 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) --------- --------- ------ ------- --------- --------- ------ -------
F-19 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - INCOME TAXES (CONTINUED) Deferred tax liabilities (assets) are comprised of the following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998 (PREDECESSOR) (SUCCESSOR) ----------- ----------- 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 ----------- ----------- ----------- -----------
The balance sheet classification of the net deferred tax liabilities as of December 31, 1997 and 1998 are as follows (amounts in thousands):
1997 1998 (PREDECESSOR) (SUCCESSOR) ------------- ----------- Noncurrent deferred tax liability.................................... $ 1,758 $ 16,990 Current deferred tax asset........................................... -- (4,300) ------ ----------- Net deferred tax liability......................................... $ 1,758 $ 12,690 ------ ----------- ------ -----------
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. F-20 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - INCOME TAXES (CONTINUED) 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 $146,000 for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. At December 31, 1998, the Company had no open forward exchange contracts. The Company believes exposure to derivative credit losses is minimal in the event of nonperformance by the senior lender because any amounts due, but not paid, to the Company by the senior lender could be offset against the Company's principal and interest payments to the lender. NOTE 13 - SUCCESSOR CAPITAL STRUCTURE In connection with the DLJ Acquisition, all of the Company's old outstanding shares which were tendered were cancelled and non-tendering shareholders were paid out. The Company was authorized to issue 100 new common shares ($.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. F-21 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) 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. 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 F-22 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) $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).
REDEEMABLE WARRANTS ---------------------- NUMBER OF COMMON AMOUNT SHARES --------- ----------- 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................................................................. $ -- -- --------- ----------- --------- -----------
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 recapitalization also provided for the cashless exercise and conversion of all preferred stock warrants F-23 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) 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 F-24 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) 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:
1996 1997 1998 ---------------------- ---------------------- ----------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ----------- --------- ----------- ---------- ----------- 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 -- -- --------- --------- ---------- ----------- --------- --------- ---------- -----------
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 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):
YEAR ENDED DECEMBER 31, EIGHT MONTHS ------------------------ ENDED AUGUST 1996 1997 31, 1998 (PREDECESSOR) (PREDECESSOR) ------------------------ ------------- 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
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%; F-25 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) 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 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 F-26 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, 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 F-27 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) and operating lease commitments under non-cancelable leases are as follows as of December 31, 1998 (amounts in thousands):
CAPITAL OPERATING LEASES LEASES ----------- ----------- 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 ----- -----
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. F-28 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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):
FOUR MONTHS YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED ---------------------------- ENDED AUGUST DECEMBER 1996 1997 31, 1998 31, 1998 (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) ---------------------------- ------------- ----------- Interest.................................... $ 2,983 $ 2,842 $ 2,227 $ 3,706 Income taxes................................ 132 300 4,825 1,328
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES Certain noncash investing and financing transactions occurred as follows (amounts in thousands):
EIGHT YEAR ENDED DECEMBER MONTHS FOUR MONTHS 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 1996 1997 1998 31, 1998 (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) -------------------- ----------- ----------- Refinancing of Bridge Notes with proceeds from Units offering................................... $ -- $ -- $ -- $ 100,000 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 -- --------- --------- ----------- ----------- --------- --------- ----------- -----------
F-29 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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):
EIGHT YEAR ENDED DECEMBER MONTHS FOUR MONTHS 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 1996 1997 1998 31, 1998 --------- --------- ----------- ----------- (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) 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 --------- --------- ----------- ----------- --------- --------- ----------- -----------
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 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 F-30 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18 - EMPLOYEE BENEFIT PLANS (CONTINUED) 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-31 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):
YEAR ENDED FOUR MONTHS DECEMBER 31, EIGHT MONTHS ENDED -------------------- ENDED AUGUST DECEMBER 1996 1997 31, 1998 31, 1998 --------- --------- ------------- ----------- (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) 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 -- --
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 F-32 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED) 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. 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-33 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)
DECEMBER 31, 1997 (PREDECESSOR) ----------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------ 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 ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------
F-34 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 (SUCCESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- --------------- ------------ 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 -------- ------------ ------------- --------------- ------------ -------- ------------ ------------- --------------- ------------
F-35 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)
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR) ----------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------ 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) ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- 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 ------- ------------ ------------- -------------- ------------- ------- ------------ ------------- -------------- -------------
F-36 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)
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- 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 ------- ------------ ------------- ------- ------------- ------- ------------ ------------- ------- -------------
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- 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) ------- ------------ ------------- ------- ------------- ------- ------------ ------------- ------- -------------
F-37 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)
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR) ------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED 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 ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- -----------
F-38 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)
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR) ------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED 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 ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- -----------
F-39 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)
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) --------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED 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 ------------- ----------- ----- ----------- ----------- ------------- ----------- ----- ----------- -----------
F-40 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR) --------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED 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 ------------- ----------- ----- ----------- ----------- ------------- ----------- ----- ----------- -----------
F-41 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)
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998 -------------------------------------------- ------------------------------------------------------------- (SUCCESSOR) (PREDECESSOR) (TWO MONTHS (ONE MONTH ENDED ENDED AUGUST 31, SEPTEMBER 30, 1998) 1998) 1ST 2ND 3RD 4TH 1ST 2ND 3RD 3RD 4TH --------- --------- --------- ----------- --------- --------- ----------- ------------- ----------- Revenues........... $ 26,118 $ 28,130 $ 26,639 $ 28,016 $ 29,128 $ 29,854 $ 31,095 $ 16,012 $ 44,344 Gross profit....... 6,011 7,214 6,998 8,433 8,987 9,720 11,269 4,932 12,685 Income (loss) before extraordinary item.............. 629 1,454 1,481 1,690 1,688 1,672 (171) (480) 156 Extraordinary loss from debt refinancing....... -- (2,078) -- -- -- -- -- (296) (1,933) Net income (loss)............ 629 (624) 1,481 1,690 1,688 1,672 (171) (776) (1,777)
F-42 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-43 AVTECH CORPORATION BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ---------------- 1996 1997 JUNE 25, 1998 ------- ------- ------------- (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 ------- ------- ------------- ------- ------- -------------
The accompanying notes are an integral part of these financial statements. F-44 AVTECH CORPORATION STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, -------------------- ------------------------------- JUNE 30, JUNE 25, 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) 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 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-45 AVTECH CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
STATED NUMBER OF VALUE OF SHARES COMMON RETAINED OUTSTANDING STOCK EARNINGS ----------- --------- --------- 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 ----------- --------- --------- ----------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-46 AVTECH CORPORATION STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, -------------------- ------------------------------- JUNE 30, JUNE 25, 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) 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 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-47 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. F-48 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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:
YEARS --------- Buildings............................................................................. 20-39 Building improvements................................................................. 10-39 Machinery and equipment............................................................... 5 Furniture, computer and other equipment............................................... 5-7
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". F-49 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. NOTE 2 - INVENTORIES Inventories at September 30, 1996 and 1997 and June 25, 1998 (unaudited) consist of the following (amounts in thousands):
SEPTEMBER 30, -------------------- JUNE 25, 1996 1997 1998 --------- --------- ----------- (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 --------- --------- ----------- --------- --------- -----------
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 F-50 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED) March 31, 1998, the building was fully occupied. Minimum future rentals to be received on noncancelable leases are as follows (amounts in thousands):
YEAR ENDING SEPTEMBER 30, - ------------------------------------------------------------------ 1998.............................................................. $ 128 1999.............................................................. $ 20
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):
SEPTEMBER 30, -------------------- 1996 1997 --------- --------- 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 --------- --------- --------- ---------
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. 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):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1996 1997 --------- --------- --------- Current................................................................................ $ 439 $ 987 $ 2,783 Deferred............................................................................... 54 947 (1,265) --------- --------- --------- $ 493 $ 1,934 $ 1,518 --------- --------- --------- --------- --------- ---------
F-51 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FEDERAL INCOME TAXES (CONTINUED) 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):
SEPTEMBER 30, -------------------- 1996 1997 --------- --------- 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 --------- --------- --------- ---------
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-52 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):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1996 1997 --------- --------- --------- Rent expense.............................................................................. $ 60 $ 60 $ 60 Less: Sublease rentals.................................................................... (7) (11) (10) --- --- --- $ 53 $ 49 $ 50 --- --- --- --- --- ---
The following is a schedule by years of the future minimum rentals under this lease (amounts in thousands):
YEAR ENDING SEPTEMBER 30, LESSEE SUBLEASE NET - ------------------------------------------------------------------- ----------- ----------- --------- 1998........................................................... $ 60 $ 10 $ 50 1999........................................................... 60 11 49 2000........................................................... 60 11 49 2001........................................................... 60 11 49 ----- --- --------- $ 240 $ 43 $ 197 ----- --- --------- ----- --- ---------
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 F-53 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - STOCK OPTION PLANS (CONTINUED) 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. 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):
YEAR ENDED SEPTEMBER 30, ------------------------------ 1995 1996 1997 ------ ------ ------ Cash paid during the period for: Capital leases.................................. $ 36 $ 36 $ 40 ------ ------ ------ ------ ------ ------ Interest........................................ $ 10 $ 7 $ 5 ------ ------ ------ ------ ------ ------ Income taxes.................................... $-- $1,449 $2,900 ------ ------ ------ ------ ------ ------
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-54 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-55 PATS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, -------------------- 1997 1998 --------- --------- DECEMBER 31, ------------ 1998 ------------ (UNAUDITED) 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 --------- --------- ------------ --------- --------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-56 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, --------------------------- -------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1997 1998 --------- --------- ------------- ------------ (UNAUDITED) 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 --------- --------- ------ ------------ --------- --------- ------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-57 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL NUMBER OF COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL ----------- ------------- ----------- ----------- --------- 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 ----------- --- ----- ----------- --------- ----------- --- ----- ----------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-58 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- -------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1997 1998 --------- --------- ------------ ------------ (UNAUDITED) 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
The accompanying notes are an integral part of these consolidated financial statements. F-59 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. F-60 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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):
JUNE 30, -------------------- 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 --------- --------- --------- ---------
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):
JUNE 30, -------------------- 1997 1998 --------- --------- Raw materials.................................................................................. $ 3,609 $ 4,055 Work-in-process................................................................................ 2,977 2,527 --------- --------- $ 6,586 $ 6,582 --------- --------- --------- ---------
F-61 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - INVENTORIES (CONTINUED) 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. 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).
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ------------------ Costs and estimated earnings.................................................................. $ 11,513 Less--progress billings....................................................................... 10,740 ------- $ 773 ------- -------
NOTE 6 - DEBT AND LINES OF CREDIT Long-term debt consisted of the following (amounts in thousands):
JUNE 30, -------------------- 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 --------- --------- --------- ---------
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. F-62 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - DEBT AND LINES OF CREDIT (CONTINUED) 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. 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):
SUSSEX COLUMBIA, COUNTY, MARYLAND DELAWARE ----------- ----------- 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 ----------- ----- ----------- -----
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. F-63 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - INCOME TAXES The provision for income taxes is as follows (amounts in thousands):
JUNE 30, -------------------- 1997 1998 --------- --------- Current income taxes Federal...................................................................................... $ 398 $ 258 State........................................................................................ 86 56 --------- --------- 484 314 Deferred income taxes (benefit)................................................................ 298 (303) --------- --------- $ 782 $ 11 --------- --------- --------- ---------
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):
JUNE 30, -------------------------------------------------- 1997 1998 % OF PRETAX % OF PRETAX ------------------------ ------------------------ AMOUNT INCOME AMOUNT INCOME ----------- ----------- ----------- ----------- Computed expected tax expense............................................... $ 692 35.0% $ 116 35.0% State income taxes, net of Federal income tax benefit....................... 90 4.6 15 4.6 Reduction of valuation allowance............................................ -- 0.0 (120) (36.4) ----- --- ----- ----- $ 782 39.6% $ 11 3.2% ----- --- ----- ----- ----- --- ----- -----
The significant components of deferred income taxes are temporary differences arising from the following (amounts in thousands):
JUNE 30, -------------------- 1997 1998 --------- --------- 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 --------- --------- --------- ---------
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 F-64 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - EMPLOYEE BENEFIT PLANS (CONTINUED) 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, 100% of Company's shares were acquired by DeCrane Aircraft Holdings, 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 certain environmental and other indemnities made by the Company's shareholders. F-65 INDEPENDENT ACCOUNTANTS' REPORT 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-66 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1997 1998 --------- --------- (SUCCESSOR) ASSETS Current assets Cash............................................................................................ $ 193 $ 1,872 Accounts receivable, less allowance for doubtful accounts of $54 and $340 for 1997 and 1998, respectively.................................................................................. 4,847 6,230 Inventories..................................................................................... 3,203 4,719 Deposits........................................................................................ 284 235 Prepaid expenses and other...................................................................... 28 12 --------- --------- Total current assets.......................................................................... 8,555 13,068 --------- --------- Property and equipment, net....................................................................... 1,065 1,184 Goodwill net of accumulated amortization of $69 and $393 for 1997 and 1998, respectively.......... 6,332 6,008 Other intangible assets, net of accumulated amortization of $28 and $77 for 1997 and 1998, respectively.................................................................................... 219 170 --------- --------- Total assets................................................................................ $ 16,171 $ 20,430 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................................................................................ $ 1,032 $ 1,157 Revolving credit agreement...................................................................... 626 -- Current maturities of long-term debt............................................................ 1,050 1,500 Accrued warranties.............................................................................. 300 300 Accrued profit sharing.......................................................................... 348 587 Accrued employee compensation................................................................... 360 271 Other accrued liabilities....................................................................... 381 445 --------- --------- Total current liabilities..................................................................... 4,097 4,260 --------- --------- Long-term debt.................................................................................... 8,850 6,050 --------- --------- Stockholders' equity Common stock, $1 stated value; authorized 10,000,000 shares; issued and outstanding 1,000,000 shares........................................................................................ 1,000 1,000 Retained earnings............................................................................... 2,224 9,120 --------- --------- Total stockholders' equity.................................................................... 3,224 10,120 --------- --------- Total liabilities and stockholders' equity.................................................. $ 16,171 $ 20,430 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements F-67 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER JANUARY 1, JUNE 12, DECEMBER 31, 1996 1997 TO JUNE 1997 TO 31, 1998 ----------- 11, 1997 DECEMBER ----------- ------------- 31, 1997 (PREDECESSOR) ----------- (SUCCESSOR) (PREDECESSOR) (SUCCESSOR) Net sales...................................... $ 17,665 $ 10,400 $ 15,102 $ 37,714 Cost of goods sold Direct material.............................. 4,942 2,837 3,541 7,353 Direct labor................................. 4,125 2,403 3,283 7,534 Manufacturing expenses....................... 4,645 2,059 3,407 7,742 Outside processing........................... 546 376 912 1,747 ----------- ------------- ----------- ----------- 14,258 7,675 11,143 24,376 ----------- ------------- ----------- ----------- Gross profit................................... 3,407 2,725 3,959 13,338 ----------- ------------- ----------- ----------- Operating expenses General and administrative................... 1,446 667 821 2,102 Engineering.................................. 322 140 226 489 Bad debt provision........................... 75 -- -- -- ----------- ------------- ----------- ----------- Income from operations......................... 1,564 1,918 2,912 10,747 ----------- ------------- ----------- ----------- Other income (expense) Interest income.............................. 94 50 10 -- Interest expense............................. -- -- (732) (1,051) Other revenue................................ 8 -- 39 14 Gain on sale of asset........................ 42 -- 1 -- Other income (expense)....................... (13) 8 (6) (19) ----------- ------------- ----------- ----------- 131 58 (688) (1,056) ----------- ------------- ----------- ----------- Net income..................................... $ 1,695 $ 1,976 $ 2,224 $ 9,691 ----------- ------------- ----------- ----------- ----------- ------------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. F-68 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ----------- ------------- ----------- --------- 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 ----------- ----- ----------- --------- ----------- ----- ----------- --------- - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ----------- ------------- ----------- --------- 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 ----------- ----- ----------- --------- ----------- ----- ----------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-69 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, JUNE 12, 1997 DECEMBER 31, 1996 1997 TO TO 1998 --------------- JUNE 11, 1997 DECEMBER 31, --------------- ------------- 1997 (PREDECESSOR) --------------- (SUCCESSOR) (PREDECESSOR) (SUCCESSOR) Cash flows from operating activities Net income........................ $ 1,695 $ 1,976 $ 2,224 $ 9,691 Items not requiring (providing) cash: Depreciation and amortization... 181 79 304 633 Gain on sale of property and equipment..................... (42) -- (1) -- Changes in: Accounts receivable............. (1,672) 1,048 (2,108) (1,383) Inventories..................... (318) (43) (133) (1,515) Prepaid expenses and other...... 35 51 (359) 65 Accounts payable and accrued expenses...................... 94 (158) 1,020 338 ------- ------------- ------- ------- Net cash provided by (used in) operating activities........ (27) 2,953 947 7,829 ------- ------------- ------- ------- Cash flows from investing activities Purchase of property and equipment....................... (151) (251) (96) (379) 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) ------- ------------- ------- ------- Cash flows from financing activities Net borrowings under revolving credit agreement................ -- -- 626 (626) Proceeds from issuance of long-term debt.................. -- -- 7,500 3,000 Principal payments on long-term debt............................ -- -- (600) (5,350) Dividends paid.................... (880) (3,450) -- (2,795) ------- ------------- ------- ------- Net cash provided by (used in) financing activities........ (880) (3,450) 7,526 (5,771) ------- ------------- ------- ------- Increase (decrease) in cash......... (760) (748) (807) 1,679 Cash, beginning of period........... 2,727 1,967 1,000 193 ------- ------------- ------- ------- Cash, end of period................. $ 1,967 $ 1,219 $ 193 $ 1,872 ------- ------------- ------- ------- ------- ------------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements. F-70 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-71 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 at December 31, 1997 and 1998, were as follows (amounts in thousands):
1997 1998 ------------ ------------ Raw material............................................................ $ 2,268 $ 3,205 Work in process......................................................... 1,535 2,114 ------------ ------------ 3,803 5,319 Less reserve for obsolesce.............................................. 600 600 ------------ ------------ $ 3,203 $ 4,719 ------------ ------------ ------------ ------------
NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1998, were as follows (amounts in thousands):
1997 1998 --------- --------- Leasehold improvements........................................................... $ 1,065 $ 563 Machinery and equipment.......................................................... 1,535 612 Furniture and fixtures........................................................... 827 343 Vehicles......................................................................... 138 16 --------- --------- 3,565 1,534 Less accumulated depreciation.................................................... 2,500 350 --------- --------- $ 1,065 $ 1,184 --------- --------- --------- ---------
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. 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, F-72 PPI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - REVOLVING CREDIT AGREEMENT (CONTINUED) 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
1997 1998 --------- --------- (IN THOUSANDS) 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 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 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 Less current maturities.......................................................... 1,050 1,500 --------- --------- $ 8,850 $ 6,050 --------- --------- --------- ---------
Aggregate annual maturities of long-term debt at December 31, 1998 are (amounts in thousands): 1999..................................................................... $ 1,500 2000..................................................................... 1,550 2001..................................................................... 1,600 2002..................................................................... 2,900 --------- 7,550 Less current maturities.................................................. 1,500 --------- Noncurrent portion....................................................... $ 6,050 --------- ---------
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-73 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
1997 1998 ---------- ------------ (IN THOUSANDS) ADDITIONAL CASH PAYMENT INFORMATION Interest paid........................................................... $ 669 $ 987 ADDITIONAL INVESTING AND FINANCING ACTIVITIES Long-term debt incurred for purchase of subsidiary...................... $ 3,000 $ --
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 March 1999, the shareholders of the Company signed a definitive agreement to sell all of the outstanding stock of the Company. The shareholders expect to complete the sale during the second quarter of 1999. F-74 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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
PAGE ---- Summary................................................................... 2 Summary Pro Forma Consolidated Financial Data............................. 8 Summary Historical Consolidated Financial Data............................ 10 Risk Factors.............................................................. 12 Recent Developments....................................................... 18 Use of Proceeds........................................................... 20 Capitalization............................................................ 21 Unaudited Pro Forma Consolidated Financial Data........................... 22 Selected Consolidated Financial Data...................................... 30 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 32 Business.................................................................. 40 Management................................................................ 54 Security Ownership of Significant Beneficial Owners and Management........ 59 Related Party Transactions................................................ 61 Description of Bank Credit Facility....................................... 63 Description of Notes...................................................... 65 The Initial Offering...................................................... 97 The Exchange Offer........................................................ 97 Federal Income Tax Consequences........................................... 103 Plan of Distribution...................................................... 103 Legal Matters............................................................. 103 Experts................................................................... 104 Index to Financial Statements............................................. F-1
DeCrane Aircraft Holdings, Inc. OFFER TO EXCHANGE 12% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 FOR 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 --------------------- PROSPECTUS --------------------- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all estimated expenses we have incurred or expect to incur in connection with the exchange offer for and registration of the notes, and the concurrent registration of the warrants issued as part of the units in the initial offering.
ITEM AMOUNT - ------------------------------------------------------------------------------------------------------------- --------- SEC Registration Fee......................................................................................... $ 27,800 Blue Sky Filing Fees and Expenses............................................................................ Printing and Engraving Costs................................................................................. Transfer Agent Fees.......................................................................................... Legal Fees and Expenses...................................................................................... Accounting Fees and Expenses................................................................................. Miscellaneous................................................................................................ Total......................................................................................................
All amounts are estimated except for the SEC registration fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The certificates of incorporation of DeCrane Aircraft and DeCrane Holdings each contains a provision eliminating or limiting director liability to the company and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director. Those provisions may not, however, eliminate or limit the personal liability of a director: - for any breach of such director's duty of loyalty to the company or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - under the Delaware statutory provision making directors personally liable, under a negligence standard, for unlawful dividends or unlawful stock purchases or redemptions; or - for any transaction from which the director derived an improper personal benefit. As a result of this provision, the ability of either company, or a stockholder thereof, to successfully prosecute an action against a director for breach of his duty of care is limited. However, the provision does not affect the availability of equitable remedies such as an injunction or recision based upon a director's breach of his duty of care. The SEC has taken the position that the provision will have no effect on claims arising under the federal securities laws. In addition, the certificate of incorporation and bylaws for DeCrane Aircraft and DeCrane Holdings each provide for mandatory indemnification rights, subject to limited exceptions, to any director or executive officer of the company who (by reason of the fact that he or she is a director or officer) is involved in a legal proceeding of any nature. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable corporate law. DeCrane Aircraft also maintains directors' and officers' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (1) Pursuant to a Securities Purchase Agreement dated February 9, 1996 among DeCrane Aircraft, R.G. MacDonald, Charles Becker, Robert Rankin and John R. Hinson, DeCrane Aircraft sold 75,000 shares of Series C preferred stock for a purchase price of $1.50 per share. The sale of these securities was exempt from registration pursuant to Section 4(2) of the Securities Act. (2) Pursuant to a Securities Purchase Agreement dated as of February 20, 1996 between the Company and Nassau, DeCrane Aircraft issued for an aggregate purchase price of $6.5 million: 2,000,000 shares of II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (CONTINUED) Series D Preferred Stock, and warrants to purchase 194,618 shares of common stock. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Securities Act. (3) Pursuant to a Securities Purchase Agreement dated September 18, 1996 among DeCrane Aircraft, Nassau and Electra, DeCrane Aircraft sold $2.0 million aggregate principal amount of 15% convertible notes and 49,079 warrants to purchase common stock, for a purchase price of $3.0 million, and 750,000 shares of Series E Preferred Stock and 49,079 warrants to purchase common stock, for a purchase price of $3.0 million. The issuance of such securities was exempt from registration under Section 4(2) of the Securities Act. (4) Pursuant to an Amended and Restated Credit Agreement dated as of September 18, 1996 among DeCrane Aircraft, ING (U.S.) Capital Corporation and Provident Bank, DeCrane Aircraft issued to 70,892 warrants to purchase Common Stock as additional consideration for amendments to our then-existing senior credit facility. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Securities Act. (5) The recapitalization DeCrane Aircraft conducted as of April 16, 1997 provided for, among other things: the conversion of all 6,847,705 shares of issued and outstanding cumulative convertible preferred stock into 1,941,804 shares of common stock; the cashless exercise and conversion of all 52,784 convertible preferred stock warrants and 9,355 common stock warrants into a total of 16,585 shares of common stock; and the cashless exercise of 508,497 mandatorily redeemable common stock warrants into a total of 507,708 shares of common stock. In December 1997, DeCrane Aircraft issued an additional 16,918 shares of common stock to Electra and 33,825 shares to Nassau to correct a disputed calculation regarding the number of shares that should have been issued as part of the foregoing recapitalization in the conversions described above. The issuance and conversion of such securities was exempt from registration pursuant to Section 3(a)(9) of the Securities Act. (6) As part of the DLJ acquisition financing, DeCrane Finance Co. issued $100.0 million of senior subordinated increasing rate notes to DLJ Bridge Finance, Inc. on August 27, 1998, before merging into DeCrane Aircraft, making the bridge notes our obligation. The proceeds from those bridge notes were used to fund the tender offer purchases. See "Recent Developments--The DLJ Acquisition" in the prospectus. The issuance of such securities was exempt from registration under Section 4(2) of the Securities Act. (7) DeCrane Aircraft issued $100.0 million in aggregate principal amount of 12% senior subordinated notes due 2008 to the initial purchaser, Donaldson, Lufkin & Jenrette Securities Corporation, paired in units with warrants for an aggregate of 155,000 shares of common stock of DeCrane Holdings Co., for an aggregate purchase price of $100.0 million. See "The Initial Offering" in the prospectus. The issuance of such securities was exempt from registration under Section 4(2) of the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------ 3.2.1 Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight Acquisition Co. and DAHX, Inc.)* 3.2.2 Bylaws of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight Acquisition Co. and DAHX, Inc.)* 3.3.1 Certificate of Incorporation of Aerospace Display Systems, Inc. (formerly ADS Acquisition Inc.)* 3.3.2 Bylaws of Aerospace Display Systems, Inc.* 3.4.1 Articles of Incorporation of Audio International, Inc.* 3.4.2 Amended & Restated Bylaws of Audio International, Inc.* 3.5.1 Articles of Incorporation of Avtech Corporation* 3.5.2 Bylaws of Avtech Corporation* 3.6.1 Articles of Incorporation of Cory Components, Inc.* 3.6.2 Bylaws of Cory Components, Inc.* 3.7.1 Certificate of Incorporation of Dettmers Industries, Inc. (formerly DAHX Acquisition, Inc.)* 3.7.2 Bylaws of Dettmers Industries, Inc.* 3.8.1 Restated Articles of Incorporation of Elsinore Aerospace Services, Inc.* 3.8.2 Bylaws of Elsinore Aerospace Services Inc.* 3.9.1 Certificate of Incorporation of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)* 3.9.2 Bylaws of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)* 3.10.1 Articles of Incorporation of Hollingsead International, Inc.* 3.10.2 Bylaws of Hollingsead International Inc.* 3.11.1 Articles of Incorporation of Tri-Star Electronics International, Inc.* 3.11.2 Bylaws of Tri-Star Electronics International, Inc.* 3.12.1 Articles of Incorporation of PATS, Inc.* 3.12.2 Bylaws of PATS, Inc.* 3.12.3 Amendment to Articles of PATS, Inc.* 3.12.4 Amendment to Bylaws of PATS, Inc.* 3.13.1 Articles of Incorporation of Flight Refueling, Inc.* 3.13.2 Bylaws of Flight Refueling, Inc.* 3.14.1 Articles of Incorporation of Patrick Aircraft Tank Systems, Inc.* 3.14.2 Bylaws of Patrick Aircraft Tank Systems, Inc.* 3.15.1 Articles of Incorporation of PATS Aircraft and Engineering Corporation* 3.15.2 Bylaws of PATS Aircraft and Engineering Corporation* 3.16.1 Articles of Incorporation of PATS Support, Inc.* 3.16.2 Bylaws of PATS Support, Inc.* 3.17.1 Articles of Incorporation of PPI Holdings, Inc.* 3.17.2 By Laws of PPI Holdings, Inc.* 3.18.1 Articles of Incorporation of Precision Pattern, Inc.* 3.18.2 By Laws of Precision Pattern, Inc.* 4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company* 4.1.1 Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company*
II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------ 4.1.2 Supplemental Indenture to be dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company* 4.2 A/B Exchange Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the subsidiary guarantors, and DLJ Securities Corporation* 4.5 Form of DeCrane 12% Senior Subordinated Notes due 2008* 5.1 Opinion of Spolin & Silverman LLP 5.2 Opinion of Davis Polk & Wardwell 10.2 Amended and Restated Investors' Agreement dated as of October 2, 1998* 10.5 Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries* 10.6 Employment Agreement dated July 17, 1998 between the Company and R. Jack DeCrane* 10.7 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company* 10.8 Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC* 10.10 Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.* 10.10.1 First Amendment to Credit Agreement dated January 22, 1999* 10.10.2 Draft Amended and Restated Credit Agreement to be dated April 23, 1999 10.11 Lease between Botzler-Emery Associates Guilford Ten Limited Partnership and PATS, Inc.* 10.12 Lease among Continental Development Corporation, Tri-Star Electronics International, Inc., and Cory Components, Inc. for real property in El Segundo, CA* 10.13 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation and Hollingsead International for real property in Garden Grove, California* 10.14 Lease between Sussex County, MD and PATS, Inc.* 10.15 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number 6-5752-0002* 10.15.1 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components, Number 6-5752-0004* 10.15.2 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January 1, 1995 through December 31, 1999* 10.16 Purchase Agreement dated as of October 1, 1998 between Matsushita Electronic Industrial Co., Ltd. and Cory Components Inc.* 10.17 1998 General Terms Agreement between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number BCA-6-5632-0032* 10.17.1 Special business provisions between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number STD-6-5632-0097* 10.18 General Terms Agreement between Boeing Company and PATS, Inc. dated February 17, 1998* 10.18.1 Special business provisions between the Boeing Company and PATS, Inc. dated February 17, 1998* 10.18.2 Letter Agreement dated January 15, 1999 between The Boeing Company and DeCrane Aircraft Holdings, Inc.* 10.19 Stock Option Incentive Plan 10.20 Stock Purchase Plan 10.21 Cash Incentive Bonus Plan 12.1 DeCrane Aircraft Holdings, Inc. Earnings to Fixed Charges Ratio* 21.1 List of Subsidiaries of Registrant*
II-4 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------ 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Baird, Kurtz & Dobson 23.3 Consent of Spolin & Silverman LLP (included in Exhibit 5.1) 23.4 Consent of Davis Polk & Wardwell (included in Exhibit 5.2) 24 Power of Attorney 25 Statement of Eligibility and Qualification of State Street Bank & Trust Company, as trustee, under the Indenture listed as Exhibit 4.1, on Form T-1* 27 Financial Data Schedule* 99.1 Form of Letter of Transmittal to Exchange Agent* 99.2 Form of Notice of Guaranteed Delivery*
- ------------------------ * Previously filed. (B) FINANCIAL STATEMENT SCHEDULE: Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrants hereby undertake: - To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: - To include any prospectus required by section 10(a)(3) of the Securities Act; - To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; - To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; - For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. - That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-5 ITEM 17. UNDERTAKINGS (CONTINUED) - To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. - To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. - Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of each registrant pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities is asserted by such director, officer or controlling person in connection with the securities being registered (other than the payment by a registrant of expenses incurred or paid by a director, officer or controlling person of a registrant in the successful defense of any action, suit or proceeding), that registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES This registration statement, pursuant to the requirements of the Securities Act of 1933 has been signed on its behalf by the undersigned, thereunto duly authorized, in the State of California, on this 12th day of May 1999. DECRANE AIRCRAFT HOLDINGS, INC. By: /s/ R. JACK DECRANE ------------------------------------------ R. Jack DeCrane CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Chairman of the Board of Thompson Dean Directors R. JACK DECRANE - ------------------------------ Chief Executive Officer May 12, 1999 R. Jack DeCrane and Director * - ------------------------------ Director John F. Fort, III * - ------------------------------ Director Dr. Robert J. Hermann * - ------------------------------ Director Dr. Paul Kaminski * - ------------------------------ Director Susan Schnabel * - ------------------------------ Director Timothy J. White Senior Vice President, /s/ RICHARD J. KAPLAN Chief Financial Officer, - ------------------------------ Secretary and Treasurer May 12, 1999 Richard J. Kaplan (principal accounting officer)
/s/ R. JACK DECRANE -------------------------------------- R. Jack DeCrane May 12, 1999 *By: ATTORNEY-IN-FACT
II-7 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COST AND CHARGED TO END OF CLASSIFICATION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------------- ------------ ----------- -------------- ----------- ----------- PREDECESSOR YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts............ $ 259 $ 68 $ 71(A) $ 19 $ 379 Reserve for excess, slow moving and potentially obsolete material............ $ 1,154 $ 1,055 -- $ 116 $ 2,093 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts............ $ 379 $ 111 $ 174(B) $ 177 $ 487 Reserve for excess, slow moving and potentially obsolete material............ $ 2,093 $ 1,374 $ 59(B) $ 162 $ 3,364 EIGHT MONTHS ENDED AUGUST 31, 1998 Allowance for doubtful accounts............ $ 487 $ 384 $ 32(B) $ 376 $ 527 Reserve for excess, slow moving and potentially obsolete material............ $ 3,364 $ 760 $ 2,056(B) $ 311 $ 5,869 SUCCESSOR FOUR MONTHS ENDED DECEMBER 31, 1998 Allowance for doubtful accounts............ $ 527(B) $ 243 -- $ 189 $ 581 Reserve for excess, slow moving and potentially obsolete material............ $ 5,869(B) $ 285 -- $ 452 $ 5,702
- -------------------------- (A) Comprised of the following: Effect of foreign currency translation $ (4) Recovery of amounts previously written off 20 Attributable to companies acquired 55 --------- $ 71 --------- --------- (B) Attributable to companies acquired. Reflects historical amounts used to determine the fair values of net assets acquired.
S-1 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------------------------------------- --------- 3.2.1 Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight Acquisition Co. and DAHX, Inc.)* 3.2.2 Bylaws of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight Acquisition Co. and DAHX, Inc.)* 3.3.1 Certificate of Incorporation of Aerospace Display Systems, Inc. (formerly ADS Acquisition Inc.)* 3.3.2 Bylaws of Aerospace Display Systems, Inc.* 3.4.1 Articles of Incorporation of Audio International, Inc.* 3.4.2 Amended & Restated Bylaws of Audio International, Inc.* 3.5.1 Articles of Incorporation of Avtech Corporation* 3.5.2 Bylaws of Avtech Corporation* 3.6.1 Articles of Incorporation of Cory Components, Inc.* 3.6.2 Bylaws of Cory Components, Inc.* 3.7.1 Certificate of Incorporation of Dettmers Industries, Inc. (formerly DAHX Acquisition, Inc.)* 3.7.2 Bylaws of Dettmers Industries, Inc.* 3.8.1 Restated Articles of Incorporation of Elsinore Aerospace Services, Inc.* 3.8.2 Bylaws of Elsinore Aerospace Services Inc.* 3.9.1 Certificate of Incorporation of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)* 3.9.2 Bylaws of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)* 3.10.1 Articles of Incorporation of Hollingsead International, Inc.* 3.10.2 Bylaws of Hollingsead International Inc.* 3.11.1 Articles of Incorporation of Tri-Star Electronics International, Inc.* 3.11.2 Bylaws of Tri-Star Electronics International, Inc.* 3.12.1 Articles of Incorporation of PATS, Inc.* 3.12.2 Bylaws of PATS, Inc.* 3.12.3 Amendment to Articles of PATS, Inc.* 3.12.4 Amendment to Bylaws of PATS, Inc.* 3.13.1 Articles of Incorporation of Flight Refueling, Inc.* 3.13.2 Bylaws of Flight Refueling, Inc.* 3.14.1 Articles of Incorporation of Patrick Aircraft Tank Systems, Inc.* 3.14.2 Bylaws of Patrick Aircraft Tank Systems, Inc.* 3.15.1 Articles of Incorporation of PATS Aircraft and Engineering Corporation* 3.15.2 Bylaws of PATS Aircraft and Engineering Corporation* 3.16.1 Articles of Incorporation of PATS Support, Inc.* 3.16.2 Bylaws of PATS Support, Inc.* 3.17.1 Articles of Incorporation of PPI Holdings, Inc.* 3.17.2 By Laws of PPI Holdings, Inc.* 3.18.1 Articles of Incorporation of Precision Pattern, Inc.* 3.18.2 By Laws of Precision Pattern, Inc.* 4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company* 4.1.1 Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company* 4.1.2 Supplemental Indenture to be dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company*
EXHIBIT NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------------------------------------- --------- 4.2 A/B Exchange Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the subsidiary guarantors, and DLJ Securities Corporation* 4.5 Form of DeCrane 12% Senior Subordinated Notes due 2008* 5.1 Opinion of Spolin & Silverman LLP 5.2 Opinion of Davis Polk & Wardwell 10.2 Amended and Restated Investors' Agreement dated as of October 2, 1998* 10.5 Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries* 10.6 Employment Agreement dated July 17, 1998 between the Company and R. Jack DeCrane* 10.7 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company* 10.8 Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC* 10.10 Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.* 10.10.1 First Amendment to Credit Agreement dated January 22, 1999* 10.10.2 Draft Amended and Restated Credit Agreement to be dated April 23, 1999 10.11 Lease between Botzler-Emery Associates Guilford Ten Limited Partnership and PATS, Inc.* 10.12 Lease among Continental Development Corporation, Tri-Star Electronics International, Inc., and Cory Components, Inc. for real property in El Segundo, CA* 10.13 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation and Hollingsead International for real property in Garden Grove, California* 10.14 Lease between Sussex County, MD and PATS, Inc.* 10.15 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number 6-5752-0002* 10.15.1 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components, Number 6-5752-0004* 10.15.2 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January 1, 1995 through December 31, 1999* 10.16 Purchase Agreement dated as of October 1, 1998 between Matsushita Electronic Industrial Co., Ltd. and Cory Components Inc.* 10.17 1998 General Terms Agreement between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number BCA-6-5632-0032* 10.17.1 Special business provisions between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number STD-6-5632-0097* 10.18 General Terms Agreement between Boeing Company and PATS, Inc. dated February 17, 1998* 10.18.1 Special business provisions between the Boeing Company and PATS, Inc. dated February 17, 1998* 10.18.2 Letter Agreement dated January 15, 1999 between The Boeing Company and DeCrane Aircraft Holdings, Inc.* 10.19 Stock Option Incentive Plan 10.20 Stock Purchase Plan 10.21 Cash Incentive Bonus Plan 12.1 DeCrane Aircraft Holdings, Inc. Earnings to Fixed Charges Ratio* 21.1 List of Subsidiaries of Registrant* 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Baird, Kurtz & Dobson 23.3 Consent of Spolin & Silverman LLP (included in Exhibit 5.1) 23.4 Consent of Davis Polk & Wardwell (included in Exhibit 5.2) 24 Power of Attorney
EXHIBIT NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------------------------------------- --------- 25 Statement of Eligibility and Qualification of State Street Bank & Trust Company, as trustee, under the Indenture listed as Exhibit 4.1, on Form T-1* 27 Financial Data Schedule* 99.1 Form of Letter of Transmittal to Exchange Agent* 99.2 Form of Notice of Guaranteed Delivery*
- ------------------------ * Previously filed. [ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS] PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 12, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] DECRANE AIRCRAFT HOLDINGS, INC. ----------- 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 [ ], 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 prices set forth on page [ ]. 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 grantors' senior and unsecured debt and equally with their future unsecured, senior debt. The notes will effectively rank junior to all liabilities of our subsidiaries that are not guarantors. As of December 31, 1998, on a pro forma basis, DeCrane Aircraft and its guarantor subsidiaries would have outstanding approximately $ million of senior indebtedness, and the non-guarantor subsidiaries would have had approximately $ million of outstanding liabilities, including trade payables. INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE [ ]. 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. ------------------------ 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 , 1999 [ALTERNATE RISK FACTOR FOR MARKET-MAKING PROSPECTUS] TRADING MARKET FOR THE NOTES--WE CANNOT ASSURE YOU THAT A MARKET FOR THE NOTES WILL DEVELOP. There is no existing trading market for the notes. We cannot assure you that any market for the notes will develop, or about your ability to sell the notes or the price at which you may be able to sell them. If such a market were to develop, the notes could trade at prices that may be higher or lower than their initial offering price. That trading price could depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. We have also been advised by DLJ Securities Corporation that, subject to applicable laws and regulations, DLJ Securities Corporation currently intends to make a market in the new notes following completion of the exchange offer. 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. DLJ Securities Corporation may be deemed to be our "affiliate" (as defined in the Securities Act) and, as such, may be required to deliver a prospectus in connection with its market-making activities in the notes. Pursuant to the registration rights agreement we signed with DLJ Securities Corporation in connection with the initial offering of the old notes, we have agreed to use our best efforts to file and maintain a registration statement that would allow DLJ Securities Corporation to engage in market-making transactions in the notes for up to 90 days from the date on which we consummate the offer to exchange the notes for the old notes. We have agreed to bear substantially all the costs and expenses related to that registration. [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] USE OF PROCEEDS This Prospectus is delivered in connection with the sale of the notes by DLJ Securities Corporation in market-making transactions. We will not receive any of the proceeds from such transactions. [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] 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 94% of the common stock of DeCrane Holdings. 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 the 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 in the DLJ acquisition, as arranger in connection with the bank credit facility, and as the initial purchaser of the old notes, and is the financial advisor to DeCrane Holdings and DeCrane Aircraft. See "Recent Developments--The DLJ Acquisition." DLJ Merchant Banking, DLJ Capital Funding, Inc. and DLJ Bridge Finance, Inc. are affiliates of DLJ Securities Corporation. DLJ Securities Corporation has informed us that it does not intend to confirm sales of the new notes to any accounts over which it exercises discretionary authority without the prior specific written approval of such transactions by the customer. We have also been advised by DLJ Securities Corporation that, subject to applicable laws and regulations, DLJ Securities Corporation currently intends to make a market in the new notes following completion of the exchange offer. 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 also will be 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 develop, or about your ability to sell their new 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 "Certain Relationships and Related 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. EX-5.1 2 EXHIBIT 5.1 EXHIBIT 5.1 [SPOLIN & SILVERMAN LLP] [Date of Issuance], 1999 DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 Ladies and Gentlemen: We have acted as counsel to DeCrane Aircraft Holdings, Inc., a Delaware corporation (the "Company"), in connection with the Company's offer to exchange its 12% Series B Senior Subordinated Notes due 2008 for any and all of its outstanding 12% Series A Senior Subordinated Notes due 2008, and the preparation and filing by the Company of a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, for the registration of the Series B notes, which are guaranteed by certain of the Company's subsidiaries. We have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and officers of the Company and such other instruments as we have deemed necessary or appropriate as a basis for the opinions expressed below, including the Registration Statement, the Certificate of Incorporation of the Company and the By-laws of the Company. Based on the foregoing and assuming the due execution and delivery of the Series B notes and guarantees, we are of the opinion that, when the Series B notes and guarantees are executed, authenticated and delivered in exchange for the Series A notes in accordance with the above exchange offer, the Series B notes will be valid and binding obligations of the Company enforceable in accordance with their terms, and the guarantees of the subsidiary guarantors contained therein will be valid and binding obligations of such guarantors enforceable in accordance with their terms, in each case except (1) as such enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, (2) as such enforcement may be limited by general principles of equity, regardless of whether enforcement is sought in a proceeding at law or in equity and (3) to the extent that a waiver of rights under any usury or stay law may be unenforceable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to us in the prospectus contained in such Registration Statement. We are members of the bar of the State of California. The foregoing opinion is rendered as of the date hereof, and we assume no obligation to update such opinion to reflect any facts or circumstances which may hereafter come to my attention or any changes in the law which may hereafter occur. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent, except that the holders of the notes, and State Street Bank and Trust Co., as trustee for the notes and exchange agent, may rely on this opinion as if addressed to them directly. Very truly yours, /s/ SPOLIN & SILVERMAN LLP ------------------------------------------ Spolin & Silverman LLP
EX-5.2 3 EXHIBIT 5.2 [DAVIS, POLK & WARDWELL] [Date of Issuance], 1999 DeCrane Holdings Co. c/o DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 Ladies and Gentlemen: The undersigned has acted as New York counsel to DeCrane Holdings Co., a Delaware corporation (the "Company"), in connection with its issuance of 100,000 warrants (the "Warrants") to purchase shares of Common Stock, par value $.01 per share of the Company. We understand that the Company has filed a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act") in order to register under the Act the resale of the Warrants by certain holders named in the Prospectus contained in the Registration Statement or to be named in an accompanying supplement thereto ("Warrantholders"). The Warrants were issued pursuant to a Warrant Agreement (the "Warrant Agreement") dated as of October 5, 1998 between DeCrane Holdings Co. and State Street Bank and Trust Company, as Warrant Agent (the "Warrant Agent"). We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary for the purposes of rendering this opinion. Based on the foregoing, we are of the opinion that the Warrants when issued were duly authorized, executed and delivered by the Company and are valid and binding obligations of the Company, enforceable according to its terms, except as (x) such enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, and (y) such enforcement may be limited by general principles of equity, regardless of whether enforcement is sought in a proceeding at law or in equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the general corporation law of the State of Delaware. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement relating to the Exchange Offer. We also consent to the reference to us under the heading "Legal Matters" in the prospectus contained in such Registration Statement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent, except that the holders of the Warrants may rely upon this opinion as if it were addressed directly to them. The foregoing opinion is rendered as of the date hereof, and we assume no obligation to update such opinion to reflect any facts or circumstances which may hereafter come to my attention or any changes in the law which may hereafter occur. Very truly yours, DAVIS, POLK & WARDWELL EX-10.19 4 EXHIBIT 10.19 EXHIBIT 10.19 DeCRANE HOLDINGS CO. and DeCRANE AIRCRAFT HOLDINGS, INC. STOCK OPTION INCENTIVE PLAN SECTION 1. PURPOSE. The purposes of the DeCrane Holdings Co. Stock Incentive Plan are to promote the interests of DeCrane Holdings Co. (the "COMPANY") and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Subsidiaries, as defined below; (ii) motivating such employees by means of performance-related incentives to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of the Company. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, the terms "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), when used with respect to any Person, means the possession, directly or indirectly of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "AWARD" means any Option. "AWARD AGREEMENT" means an agreement in substantially the Form attached hereto as Exhibit A, or any other written agreement, contract, or other instrument or document, designated by the Committee, evidencing any Award which may, but need not, be executed or acknowledged by a Participant. "BOARD" means the Board of Directors of the Company. "CAUSE" means (i) dishonesty by a Participant that results in substantial personal enrichment at the expense of the Company; (ii) willful violations of a Participant's obligations to the Company (including under any employment agreement between the Participant and the Company) which result in material injury to the Company; (iii) a Participant's conviction of any felony involving the personal dishonesty of the Participant; or (iv) a Participant's chronic alcoholism or abuse of controlled substances. "CHANGE OF CONTROL" means: (a) any "person" (as such term is used in Section 3(a)(9) and 13(d)(3) of the Exchange Act) other than (A) the DLJ Entities and/or their respective Permitted Transferees (as defined in the Investors' Agreement) or (B) any "group" (within the meaning of such Section 13(d)(3)) of which the DLJ Entities constitute a majority (on the basis of ownership interest), acquires, directly or indirectly, by virtue of the consummation of any purchase, merger or other combination, securities of the Company representing more than 51% of the combined voting power of the Company's then outstanding voting securities with respect to matters submitted to a vote of the stockholders generally; or (b) a sale or transfer by the Company or any of its Subsidiaries of substantially all of the consolidated assets of the Company and its Subsidiaries to an entity which is not an Affiliate of the Company prior to such sale or transfer. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITTEE" means a committee of the Board designated by the Board to administer the Plan. Until otherwise determined by the Board, the full Board shall be the Committee under the Plan. "DISABILITY" shall mean a Participant's inability to perform the duties of his or her employment due to mental or physical incapacity for a period of six consecutive months. "EMPLOYEE" means an employee of the Company or any Subsidiary. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means with respect to the Shares, as of any given date or dates, the average reported closing price of a share of such class of common stock on such exchange or market as is the principal trading market for such class of common stock for the three trading days immediately preceding such date or dates. If such class of common stock is not traded on an exchange or principal trading market on such date, the fair market value of a Share shall be determined by the Committee in good faith taking into account as appropriate recent sales of the Shares, recent valuations of the Shares and such other factors as the Committee shall in its discretion deem relevant or appropriate. 2 "INVESTORS' AGREEMENT" means the Amended and Restated Investors' Agreement dated as of October 2, 1998 among (i) the Company, (ii) DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking 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, DLJ EAB Partners, DLJ First ESC, L.P. and DLJ ESC II, L.P. (collectively, the "DLJ ENTITIES") and (iii) certain other Persons listed on the signature pages thereof. "OPTION" means a right to purchase Shares from the Company granted under Section 6 of the Plan. "PARTICIPANT" means any Employee selected by the Committee to receive an Award under the Plan (and to the extent applicable, any heirs or legal representatives thereof). "PERMITTED TRANSFEREE" shall have the meaning assigned to it in the Investors' Agreement. "PERSON" means any individual, corporation, limited liability company, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "PLAN" means this DeCrane Holdings Co. Management Incentive Plan. "SEC" means the Securities and Exchange Commission or any successor thereto. "SHARES" means shares of common stock, $0.01 par value, of the Company or such other securities as may be designated by the Committee from time to time. "SUBSIDIARY" shall mean, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by such Person. "SUBSTITUTE AWARDS" means Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. 3 SECTION 3. ADMINISTRATION. (a) AUTHORITY OF COMMITTEE. The Plan shall be administered by the Committee. Subject to the terms of the Plan, applicable law and contractual restrictions affecting the Company, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award and Award Agreement; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in case, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) COMMITTEE DISCRETION BINDING. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any Subsidiary, any Participant, any holder or beneficiary of any Award, any shareholder and any Employee. SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b) and 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be approved by resolution of the Board upon the adoption of this Plan. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan or to which such an Award relates are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards 4 may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall, in the calendar year in which such settlement, forfeiture, termination or cancellation occurs, again become Shares with respect to which Awards may be granted unless any dividends have been paid thereon prior to such settlement, forfeiture, termination or cancellation. In addition, Shares tendered in satisfaction or partial satisfaction of the exercise price of any Award or any tax withholding obligations will again become Shares with respect to which Awards may be granted. Notwithstanding the foregoing and subject to adjustment as provided in Section 4(b), no Employee of the Company may receive Options in any calendar year that relate to more than a number of Shares, if any, fixed by resolution of the Board from time to time. (b) ADJUSTMENTS. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, reclassification, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares of the Company (or number and kind of other securities or property) with respect to which Awards may thereafter be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award. (c) SUBSTITUTE AWARDS. Any Shares underlying Substitute Awards shall not be counted against the Shares available for Awards under the Plan. (d) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. SECTION 5. ELIGIBILITY. Any Employee, including any officer or employee-director of the Company or any Subsidiary, shall be eligible to be designated a Participant. 5 SECTION 6. STOCK OPTIONS. (a) GRANT. Subject to the provisions of the Plan and contractual restrictions affecting the Company, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the exercise price therefor and the conditions and limitations applicable to the exercise of the Option. (b) EXERCISE PRICE. The Committee in its sole discretion shall establish the exercise price at the time each Option is granted; PROVIDED, that in no event shall the exercise price per Share be less than the Fair Market Value of a Share on the date of grant. (c) EXERCISE. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable. (d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price, or adequate provision therefor, is received by the Company. Such payment may be made: (i) in cash; (ii) in Shares owned by the Participant for at least six months (the value of such Shares shall be their Fair Market Value on the date of exercise); (iii) by a combination of cash and Shares; or (iv) in such other manner as permitted by the Committee at the time of grant or thereafter. SECTION 7. VESTING; TERMINATION OF EMPLOYMENT. Each Award Agreement shall contain such terms as the Committee may in its sole discretion determine concerning vesting, forfeiture, the Company's rights of repurchase of Shares acquired upon exercise of an Option, and/or the effects of termination or suspension of a Participant's employment upon the exercisability of any Option granted thereunder. SECTION 8. CHANGE OF CONTROL. The Committee, in its sole discretion, may provide in an Award Agreement for the accelerated vesting of an Award in the event of a Change of Control. SECTION 9. AMENDMENT AND TERMINATION. (a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that 6 no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) AMENDMENTS TO AWARDS. Subject to the terms of the Plan and applicable law, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. (c) CANCELLATION. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, in the event of a Change of Control or an offer to Participants generally relating to the acquisition of Shares, including through purchase, merger or otherwise, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. SECTION 10. GENERAL PROVISIONS. (a) DIVIDEND EQUIVALENTS. In the sole and complete discretion of the Committee, an Award may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) NONTRANSFERABILITY. Except to the extent otherwise provided in an Award Agreement, no Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution. (c) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of 7 Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) SHARE CERTIFICATES. Certificates issued in respect of Shares shall, unless the Committee otherwise determines, be registered in the name of the Participant or its Permitted Transferees and shall be deposited by such Participant or Permitted Transferee, together with a stock power endorsed in blank, with the Company. When the Participant ceases to be bound by any transfer restrictions set forth herein or in the Investors' Agreement, the Company shall deliver such certificates to the Participant upon request. Such stock certificate shall carry such appropriate legends, and such written instructions shall be given to the Company's transfer agent, as any be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933, any state securities laws or any other applicable laws and the Investor's Agreement. Subject to the provisions of the Investors' Agreement, all certificates for Shares or other securities of the Company or any Subsidiary delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission or any stock exchange upon which such Shares or other securities are then listed and any applicable laws or rules or regulations, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) WITHHOLDING. A Participant may be required to pay to the Company or any Subsidiary, and the Company or any Subsidiary shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from any such grant, lapse, vesting, or exercise of any Award. (f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto. (g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting or continuing in effect other compensation arrangements, which may, but need not, 8 provide for the grant of options, restricted stock, Shares and other types of Awards provided for hereunder (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ or service of the Company or any Subsidiary. Further, the Company or an Subsidiary may at any time dismiss a Participant from employment or service, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (i) RIGHTS AS A STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be issued under the Plan until he or she has become the holder of such Shares. (j) GOVERNING LAW. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Delaware. (k) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant in connection therewith shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. 9 (m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary. (n) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash or other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (o) TRANSFER RESTRICTIONS. Shares acquired hereunder may not be sold, assigned, transferred, pledged or otherwise disposed of, except as provided in the Plan, the applicable Award Agreement and the Investors' Agreement. (p) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 11. TERM OF THE PLAN. (a) EFFECTIVE DATE. The Plan shall be effective as of April 22, 1999, subject to approval by the shareholders of the Company. Awards may be granted hereunder prior to such shareholder approval subject in all cases, however, to such approval. (b) EXPIRATION DATE. The Board and the Committee's authority to grant Awards under the Plan shall terminate on the tenth anniversary of the Plan's effective date. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted. 10 EXHIBIT A Form of Award Agreement under the DeCrane Holdings Co. Management Incentive Plan Date of Grant: _________________, 1998 Name of Optionee: _______________________ Number of Shares: ______________ Exercise Price: $__________/share Expiration Date: ________________, 2008 Operating Unit: _______________________
DeCrane Holdings Co., a Delaware corporation (the "COMPANY"), hereby grants to the above named optionee (the "OPTIONEE") a performance-based vesting option (the "OPTION") to purchase from the Company, for the price per share set forth above, the number of shares of Common Stock, $0.01 par value (the "SHARES"), of the Company set forth above pursuant to the DeCrane Holdings Co. Management Incentive Plan (the "PLAN"). The Options are not intended to be treated as incentive stock options under the Code. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan. The terms and conditions of the Option granted hereby, to the extent not controlled by the terms and conditions contained in the Plan, are as follows: 1. EXERCISE PRICE. The price at which each Share subject to this Option may be purchased shall be the price set forth above. 2. NUMBER OF SHARES: EXERCISE. The number of Shares for which the Option may be exercised are set forth above. To the extent this Option has become vested in accordance with Section 3 below, the Option may be exercised at any time until the Expiration Date, subject to the terms of the Plan and of Section 7 below. 11 3. VESTING. (a) To the extent not previously vested in accordance with paragraph (b) below or Section 8, the Option shall become fully vested and exercisable on the eighth anniversary of the Date of Grant, provided the Optionee is then in the employ of the Company or a Subsidiary. (b) (i) The Option shall become vested and exercisable with respect to up to 25% of the Shares subject thereto on the thirtieth day following the availability of audited financial statements for each of the four fiscal years of the Company commencing with the fiscal year ending December 31, 1999 (each such day a "VESTING DATE"), provided the EBITDA of the operating unit of the Company to which the Optionee is assigned on the first page hereof as of the end of such fiscal year, calculated in accordance with Schedule A hereto, is at least equal to the EBITDA target values for such fiscal year set forth in such Schedule A, and provided further that the Optionee is in the employ of the Company or a Subsidiary on such Vesting Date. (ii) If any EBITDA target value set forth in Schedule A for any of the first three fiscal years referred to above is not attained, the portion of the Option that would otherwise have vested for such fiscal year shall be treated as vested and exercisable as of the Vesting Date for any subsequent fiscal year ending on or before December 31, 2002 for which the maximum EBITDA target value for such subsequent year is attained, provided, the Optionee is in the employ of the Company or a Subsidiary on such Vesting Date. 4. MANNER OF EXERCISE. The Optionee (or his representative, devisee or heir, as applicable) may exercise any portion of this Option which has become exercisable in accordance with the terms hereof as to all or any of the Shares then available for purchase by delivering to the Company written notice specifying: (i) the number of whole Shares to be purchased together with payment in full of the aggregate Exercise Price of such shares; (ii) the address to which dividends, notices, reports, etc. are to be sent; and (iii) the Optionee's social security number. Payment shall be in cash, by certified or bank cashier's check payable to the order of the Company, free from all collection charges, or in unencumbered Shares) provided such shares shall have been held by the Optionee for at least six months unless the Committee determines in its sole discretion that such six-month holding period is not necessary to comply with any accounting, legal or regulatory requirement) having a Fair Market Value equal to the full amount of the Exercise Price therefor, or such other form as may permitted by the Committee. Only one 12 stock certificate will be issued unless the Optionee otherwise requests in writing. Shares purchased upon exercise of the Option will be issued in the name of the Optionee or the Optionee's Permitted Transferee. No Shares shall be issued hereunder unless and until the Optionee (or his representative, devisee or heir, as applicable) executes and agrees to be bound by the Investors' Agreement. The Optionee shall not be entitled to any rights as a stockholder of the Company in respect of any Shares covered by this Option until such Shares shall have been paid for in full and issued to the Optionee. 5. CERTIFICATES. Certificates issued in respect of Shares acquired upon exercise of the Option shall, unless the Committee otherwise determines, be registered in the name of the Optionee or its Permitted Transferee. When the Optionee ceases to be bound by the provisions of the Investors' Agreement, the Company shall deliver such certificates to the Optionee or its Permitted Transferee upon request. Such stock certificate shall carry such appropriate legends, and such written instructions shall be given to the Company's transfer agent, as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933, any state securities laws or any other applicable laws or the Investors' Agreement. 6. NONTRANSFERABILTY. This Option is personal to the Optionee and may be exercised only by the Optionee or his or her representative in the event of the Optionee's Disability or death. This Option shall not be transferable other than by will or the laws of descent and distribution. Notwithstanding the foregoing, this Option may be transferred to a trust solely for the benefit of the Optionee or the Optionee's immediate family (which shall be deemed to include the Optionee's spouse, parents, siblings, children, stepchildren and grandchildren). 7. FORFEITURE OF OPTION: RIGHT OF REPURCHASE. (a) If the Optionee's employment with the Company and its Subsidiaries shall terminate for any reason other than by the Company or its Subsidiary for Cause, then (i) to the extent not yet vested as of the date of termination of employment, the Option shall immediately be forfeited; and (ii) to the extent vested as of the date of termination of employment, the Option may be retained and exercised, in accordance with the terms of the Plan and this Award Agreement, [DURING THE SIX MONTH PERIOD FOLLOWING SUCH TERMINATION]. (b) If the Optionee's employment with the Company and its Subsidiaries shall be terminated by the Company or its Subsidiary for Cause, then the entire Option shall immediately be forfeited, ans all Shares previously acquired upon exercise of the Option shall be subject to a right of repurchase by the Company 13 from the Participant or his or her Permitted Transferee at a price equal to the Exercise Price. 8. CHANGE OF CONTROL. Upon a Change of Control, the Option shall vest in its entirety and become immediately exercisable. 9. SALE OF UNDERLYING SHARES. The Optionee's right to sell any Shares acquired upon exercise of the Option (in the case of Optionees who are party thereto) shall be subject to the terms of the Investors' Agreement. 10. EMPLOYMENT RIGHTS. This Option does not confer on the Optionee any right to continue in the employ of the Company or any Subsidiary or interfere in any way with the right of the Company or any Subsidiary to determine the terms of the Optionee's employment. 11. TERMS OF PLAN; INTERPRETATIONS. This Option and the terms and conditions herein set forth are subject in all respects to the terms and conditions of the Plan, which shall be controlling. All interpretations or determinations of the Committee and/or the Board shall be binding and conclusive upon the Optionee and his legal representatives on any question arising hereunder. The Optionee acknowledges that he has received and reviewed a copy of the Plan. 12. DELEGATION. Optionee acknowledges that any powers, rights or responsibilities of the Board and/or the Committee set forth herein may be delegated to and exercised by any subcommittee thereof as permitted under the Plan. 13. NOTICES. All notices hereunder to the party shall be delivered or mailed to the following addresses: If to the Company: DeCrane Holdings Co. c/o DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: Thompson Dean Fax: (212) 892-7272 and 14 DeCrane Holdings Co. 2361 Rosecrans Avenue Suite 180 El Segundo, CA 90245 Attention: R. Jack DeCrane Fax: (310) 643-0746 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: George R. Bason, Jr., Esq. Fax: (212) 450-4800 If to the Optionee: To the person and at the address specified on the signature page. Such addresses for the service of notices may be changed at any time provided notice of such change is furnished in advance to the other party. 14. ENTIRE AGREEMENT. This Agreement, together with the Plan and (in the case of Optionees who are party thereto) the Investors Agreement, contains the entire understanding of the parties hereto in respect of the subject matter contained herein. This Agreement, the Plan and the Investors' Agreement supersede all prior agreements and understandings between the parties hereto with respect to the subject matter hereof. 15. GOVERNING LAW. This Award Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without application of the conflict of laws principles thereof. 16. COUNTERPARTS. This Award Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 15 IN WITNESS WHEREOF, the undersigned have caused this Award Agreement to be duly executed as of the date first above written. DECRANE HOLDINGS CO. By: ---------------------- Name: Title: OPTIONEE: ------------------------- Name: Address: c/o DeCrane Holdings Co. 2361 Rosecrans Avenue Suite 180 El Segundo, CA 90245 16 EX-10.20 5 EXHIBIT 10.20 EXHIBIT 10.20 Name: Address: c/o DeCrane Holdings Co. 2361 Rosecrans Avenue Suite 180 E1 El Segundo, CA 90245 DeCRANE AIRCRAFT HOLDINGS, INC. STOCK PURCHASE PLAN DeCrane Holdings Co. (the "Company") has adopted a management stock purchase plan ("Stock Purchase Plan") providing for the purchase of shares of common stock of the Company as incentive compensation to designated executive personnel and other key employees of the Company and its subsidiaries, with a portion of the purchase price to be loaned to the participants by the Company's subsidiary DeCrane Aircraft Holdings, Inc., available to persons and in amounts determined by the compensation committee of the Board from time to time, employing the attached forms of Subscription Agreement and Promissory Note and Pledge to be entered into by individual participants. The compensation committee of the Board has approved a one-time offer of loans under that plan, for the purchase of up to 173,913 shares in the aggregate (calculated on the basis of $4,000,000 divided by $23.00 per share) at the price of $23.00 per share. FORM OF SUBSCRIPTION AGREEMENT SUBSCRIPTION AGREEMENT (this "AGREEMENT") dated as of __________, 19__, by and among DeCrane Holdings Co., a Delaware corporation (the "COMPANY" and ___________ (the "INVESTOR"). WHEREAS, the Investor desires to subscribe for, and the Company desires to issue to the Investor, the number of shares of common stock, par value $0.01 per share (the "COMMON STOCK"), of the Company set forth on Exhibit A hereto (such shares of Common Stock to be subscribed for by the Investor and issued to the Investor by the Company, the "SHARES"). NOW, THEREFORE, IT IS AGREED: ARTICLE I ISSUANCE OF SHARES; CONSIDERATION Section 1.01. ISSUANCE OF SHARES. Upon the terms set forth in this Agreement, the Company hereby agrees to issue to the Investor, and the Investor hereby subscribes for, the Shares. Section 1.02. SUBSCRIPTION. In consideration for the issuance by the Company of the Shares, the Investor shall: (a) pay to the Company, by wire transfer of immediately available funds to an account specified by the Company, an amount equal to 50% of the aggregate subscription price set forth on Exhibit A hereto; and (b) execute and deliver to the Company a Promissory Note and Pledge Agreement (the "PROMISSORY NOTE AND PLEDGE") in the form of Exhibit C hereto in a principal amount equal to 50% of the aggregate subscription price set forth on Exhibit A hereto. Section 1.03. INVESTORS' AGREEMENT. As a condition to the issuance of the Shares, the Investor shall execute and deliver to the Company an agreement in the form of Exhibit B hereto, pursuant to which the Investor agrees to be bound by the terms of the Amended and Restated Investors' Agreement, dated as of October 2, 1998, by and among the Company and the stockholders of the Company named therein (the "DLJ ENTITIES"). ARTICLE II REPRESENTATIONS OF THE COMPANY Section 2.01. CORPORATE EXISTENCE AND POWER. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has all corporate power to own its properties and to carry on its business as now conducted. Section 2.02. AUTHORITY AND APPROVAL. The execution and delivery of this Agreement are within the corporate powers of the Company and have been duly authorized by all necessary corporate action on the part of the Company. This Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against it in accordance with its terms, except to the extent that its enforceability may be subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. Section 2.03. SHARES. When issued to the Investor in accordance with the terms hereof, the Shares will be duly authorized, validly issued, fully paid and non-assessable. Section 2.04. CAPITALIZATION. The authorized capital stock of the Company (prior to giving effect to the issuance of the Shares) consists of (i) 3,500,000 shares of Common Stock, of which 2,826,087 shares are issued and outstanding as of the date hereof, and (ii) 2,500,000 shares of Preferred Stock, of which 340,000 shares are issued and outstanding as of the date hereof. Except for (i) the Preferred Stock, and (ii) warrants to purchase an aggregate of 155,000 shares of Common Stock issued to the DLJ Entities on October 2, 1998 and warrants to purchase an aggregate of 155,000 shares of Common Stock issued in connection with the Company's 12% Senior Subordinated Notes due 2008 on October 5, 1998, there are no outstanding securities convertible into or exchangeable for the capital stock of the Company and no outstanding options, rights or warrants to purchase or subscribe for any shares of the capital stock of the Company. 2 ARTICLE III REPRESENTATIONS OF THE INVESTOR Section 3.01. AUTHORIZATION. The Investor has full power and authority to enter into this Agreement and the Promissory Note and Pledge and to perform his obligations hereunder and thereunder. Section 3.02. ENFORCEABILITY. Each of this Agreement and the Promissory Note and Pledge has been duly executed and delivered by the Investor and constitutes a legal, valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms, except to the extent that its enforceability may be subject to applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. Section 3.03. PRIVATE PLACEMENT. (a) The Investor understands that the offering and sale of the Shares to the Investor as contemplated hereby is intended to be exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT") pursuant to Regulation D and Section 4(2) thereunder. (b) The Shares to be acquired by the Investor pursuant to this Agreement are being acquired for his own account for investment and without a view to the public distribution of the Shares or any interest therein. The Investor understands that the Shares may not be transferred or sold unless registered under the 1933 Act or an exemption from such registration becomes available. (c) The Investor has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of his investment in the Shares and the Investor is capable of bearing the economic risks of such investment, including a complete loss of his investment in the Shares. (d) The Investor has been given the opportunity to ask questions of and receive answers from the Company concerning the Company, the Shares and other related matters. The Investor further represents and warrants to the Company that he has been furnished with all information he deems necessary or desirable to evaluate the merits and risks of the acquisition of the Shares and that the Company has made available to the Investor or his agents all documents and information relating to an investment in the Shares requested by or on behalf of the Investor. In evaluating the suitability of an investment in the Shares, the Investor has 3 not relied upon any other representations or other information (other than as contemplated by the preceding sentences) whether oral or written made by or on behalf of the Company. (e) The Investor is an "Accredited Investor" as such term is defined in Regulation D under the 1933 Act. ARTICLE IV MISCELLANEOUS Section 4.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission to the recipient's then current facsimile number) and shall be given, if to the Investor, to the address set forth on the signature page, and if to the Company, to: DeCrane Holdings Co. 2361 Rosecrans Avenue Suite 180 El Segundo, Ca 90245 Attn: R. Jack DeCrane Fax: (310) 643-0746 Section 4.02. AMENDMENTS AND WAIVERS. Any provision of this Agreement may be amended modified, supplemented or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. Section 4.03. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of each other party hereto. Section 4.05. COUNTERPARTS; THIRD PARTY BENEFICIARIES. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. No provision 4 of this Agreement is intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 4.06. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement. Section 4.07. CAPTIONS. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. Section 4.08. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with laws of the State of New York. 5 IN WITNESS WHEREOF, the Investor has executed this Agreement and the Company has caused its corporate name to be hereunto subscribed by its officers thereunto duly authorized, all as of the day and year first above written. DECRANE HOLDINGS CO. By: --------------------------------- Name: Title: INVESTOR By: --------------------------------- Name: Title: Address: Fax: 6 EXHIBIT A
- -------------------------------------------------------------------------------- NUMBER OF AMOUNT OF SHARES OF SUBSCRIPTION PRICE SUBSCRIBED FOR - -------------------------------------------------------------------------------- COMMON STOCK - $ - - --------------------------------------------------------------------------------
7 EXHIBIT B FORM OF AGREEMENT TO BE BOUND ______________, 19__ To the Parties to the Amended and Restated Investors' Agreement dated as of October 2, 1998 Ladies and Gentlemen: Reference is made to the Amended and Restated Investors' Agreement dated as of October 2, 1998 (the "INVESTORS' AGREEMENT") among DeCrane Holdings Co. and the other Persons listed on the signature pages thereof and each other Person who has or shall become a party to the Investors' Agreement as provided therein. Capitalized terms used herein and not defined have the meanings ascribed to them in the Investors' Agreement. In consideration of the covenants and agreements contained in the Investors' Agreement, the undersigned hereby confirms and agrees that it shall be bound as a "Stockholder" by all of the provisions thereof. This letter shall be construed and enforced in accordance with the internal laws of the State of Delaware. Very truly yours, 8 FORM OF PROMISSORY NOTE AND PLEDGE New York, New York ____________, 19__ For value received, _________________ (the "INVESTOR") promises to pay to the order of DeCrane Holdings Co., a Delaware corporation (the "COMPANY", also referred to herein as the "LENDER"). $__________ (the "LOAN") the principal amount of which will be repayable in full on the eighth anniversary of the date hereof (the "PAYMENT DATE") subject to prepayment as set forth below; PROVIDED that if at any time the Investor disposes of any shares of Common Stock, par value $0.01 per share, of the Company (the "COMMON SHARES") pledged hereunder, the proceeds of any such sale shall be used by the Investor as follows: first to pay any accrued but unpaid interest on the Loan, and second to repay the principal amount of the Loan (or portion thereof), promptly upon receipt of such proceeds. The Investor promises to pay on the Payment Date, all accrued and unpaid interest on the Loan on such date as well as all outstanding principal on such date. Interest will accrue on the outstanding principal amount of the Loan, and will be compounded annually, at a rate equal to the applicable federal rate as published by the Treasury Department of the United States of America on October ___, 1998. All payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of the Company c/o DLJ Merchant Banking Partners IL, L.P., 277 Park Avenue, New York, New York 10172, or as otherwise notified to the Investor by the Company. The Investor may pay the Loan without penalty in whole at any time, or from time to time in part, by paying the principal amount to be paid at such time, together with all accrued interest to the date of payment. To secure payment of the principal of and all interest on the Loan, the Investor hereby assigns, pledges and grants to DLJ Merchant Banking II, Inc. (the "AGENT") for the ratable benefit of the Lender a security interest in and, to the extent not previously delivered, delivers to the Agent (i) - Common Shares acquired by the Investor from the Company as of the date hereof and all other shares of capital stock acquired by the Investor from the Lender (collectively, the "PLEDGED SHARES"), (ii) all rights and privileges with respect to the Pledged Shares, (iii) all income and profits thereon, (iv) all dividends, payments and other distributions with respect thereto, and (v) all proceeds thereof and substitutions therefor other than any cash income, profits, dividends, payments, distributions or proceeds so long as the Investor is not in default hereunder (collectively, the "COLLATERAL"). The Investor is delivering to the Agent certificates representing the Shares in pledge hereunder. The Company's recourse under this Promissory Note and Pledge is limited solely to the Collateral. Certificates evidencing the Pledged Shares shall remain in the physical custody of the Agent at all times until the Investor has made payment in full of all principal of and interest on the Loan, except for transfers permitted hereunder so long as the proceeds of such sale are applied as provided herein and, in its reasonable discretion, the Agent determines that the remaining Collateral is sufficient. This Promissory Note and Pledge constitutes a security agreement for purposes of the Uniform Commercial Code in all relevant jurisdictions. Upon the nonpayment of principal or interest when due hereunder or under any other note issued in connection with any other Loan (a "DEFAULT"), the Agent (i) may, by notice to the Investor, declare the Loan (together with accrued and unpaid interest thereon) to be, and the Loan shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Investor, and (ii) shall have all the rights and remedies of a secured party provided in the Uniform Commercial Code in force in New York. The Pledged Shares are granted as security only and shall not subject the Agent or the Company to, or in any way affect or modify, any obligation or liability of the Investor with respect to any of its Collateral or any transaction in connection therewith. The Investor agrees that it will, at the Company's expense and in such manner and from as the Agent may reasonably require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be reasonably necessary or desirable, or that the Agent may reasonably request, in order to create, preserve, perfect or validate any security interest or to enable the Agent to exercise and enforce its rights hereunder with respect to any of the Collateral. To the extent permitted by applicable law, the Investor hereby authorizes the Agent to execute and file, in the name of the Investor or otherwise, Uniform Commercial Code financing statements (which may be carbon, photographic, photostatic or other reproductions of this Promissory Note and Pledge or of a financing statement relating to this Promissory Note and Pledge) which the Agent in its sole discretion may deem necessary or appropriate to further perfect its security interest in the Collateral. To the extent a Default shall have occurred and be continuing, the Agent may cause any or all of the Pledged Shares to be transferred of record into the name of the Agent or its nominee. The Investor will promptly give to the Agent copies of any notices or other communications received by him with respect to Pledged Shares registered in the name of the Investor, and the Agent will promptly give to the Investor copies of any notices and communications received by the Agent with respect to Pledged Shares registered in the name of the Agent or its nominee. If a Default shall have occurred and be continuing, the Agent shall have the right to receive and to retain as Collateral hereunder for the benefit of the Company all 2 dividends, interest and other payments and distributions made upon or with respect to the Collateral, and the Investor shall take all such action as the Agent may deem necessary or appropriate to give effect to such right. Unless a Default shall have occurred and be continuing, the Investor shall have the right, from time to time, to receive and retain all cash dividends, interest and other payments and distributions made upon or with respect to the Collateral and to vote and to give consents, ratifications and waivers with respect to the Pledged Shares, and the Agent shall deliver to the Investor such proxies, powers of attorney, consents, ratifications and waivers in respect of any of the Pledged Shares which are registered in the name of the Agent or its nominee as the Investor shall request. If a Default shall have occurred and be continuing, the Agent shall have the right to the extent permitted by law and the Investor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consents, ratifications and waivers, and take any other action with respect to any or all of the Pledged Shares with the same force and effect as if the Agent were the absolute and sole owner thereof. The Investor hereby irrevocably appoints the Agent its true and lawful attorney, with full power of substitution, in the name of the Investor, the Agent or otherwise, for the sole use and benefit of the Agent, but at the expense of the Agent, to the extent permitted by law, to exercise, at any time and from time to time while a Default has occurred and is continuing, all or any of the following powers with respect to all or any of the Collateral: (i) to demand, sue for, collect, receive and give acquittance for any and all monies due to become due upon or by virtue thereof; (ii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; (iii) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectually as if the Agent were the absolute owner thereof; and (iv) to extent the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; PROVIDED that the Agent shall give the Investor not less than ten days' prior written notice of the time and place of any sale or other intended disposition of any of the Collateral. The Agent and the Investor agree that such notice constitutes "reasonable notification" within the meaning of Section 9-504(3) of the Uniform Commercial Code. 3 The Investor covenants and agrees that in the event that any of the Collateral shall become subject to any lien or security interest other than the liens and security interests in favor of the Agent created hereunder, or the lien on and security interest in the Collateral in favor of the Agent shall cease to be a first priority perfected security interest in and lien on any of such Collateral except pursuant to a release herein contemplated, the Investor will promptly take whatever reasonable action may be necessary to release such other liens or security interests or to restore the Agent's lien on and security interest in the Collateral as a first priority perfected security interest or lien, as the case may be. The Investor acknowledges that money damages would not be a sufficient remedy for the breach of the Investor's covenant in this paragraph and that, in addition to all other remedies that may be available, the Agent shall be entitled to specific performance as a remedy for any such breach. The Investor agrees that it will forthwith upon demand pay to the Agent and the Company, as the case may be, the amount of any and all reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel and of any other experts, which the Agent or the Company may incur in connection with (w) the enforcement of this Promissory Note and Pledge, including such expenses as are incurred to preserve the value of the Collateral and the validity, perfection, rank and value of any security interest, (x) the collection, sale or other disposition of any of the Collateral, (y) the exercise by the Agent of any of the rights conferred upon its hereunder or (z) any Default; PROVIDED, HOWEVER, that in no event shall the total amount collected pursuant to this paragraph exceed the value of the Collateral. For the purpose of this Promissory Note and Pledge, notices and all other communications provided for in this Promissory Note and Pledge shall be in writing and shall be given to the respective addresses or telecopy numbers set forth below: if to the Investor, to the address set forth on the signature page hereof; if to the Company, to: DeCrane Holdings Co. 2361 Rosecrans Avenue Suite 180 El Segundo, CA 90245 Telefax: (310) 643-0746 if to the Agent, to: DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, NY 10172 Attention: Thompson Dean Telefax: (212) 892-7272 4 PROVIDED, that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith. Each such notice or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this paragraph and telephonic confirmation of receipt thereof is obtained, (ii) if given by prepaid overnight courier, one business day after deposit with such courier or (iii) if given by United States certified or registered mail, postage prepaid, three business days after deposit with the United States postal service; PROVIDED that notice of change of address shall be effective only upon receipt. No failure or delay by the Agent in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Any provision of this Promissory Note and Pledge may be amended or waived if, and only if, such amendment or waiver is in writing and is signed by the Investor, the Company and the Agent. The provisions of this Promissory Note and Pledge shall be binding upon the Investor and its successors, assigns, personal representatives, estate and heirs and shall inure to the benefit of the Company and its successors and assigns. This Promissory Note and Pledge shall be governed by and construed in accordance with the laws of the State of New York. Upon the repayment in full of the principal of and interest on the Loan, the security interest shall terminate and all rights to the Collateral shall revert to the Investor, and the Agent shall take all actions which may reasonably be requested by the Investor to reflect the termination of such security interest. In addition, in the case of a transfer of the Collateral permitted hereunder in which the proceeds are applied as provided herein, the security interest in the Collateral so transferred shall terminate and the Agent shall take all actions which may reasonably be requested by the Investor to reflect the termination of such security interest. 5 This Promissory Note and Pledge constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. By: ------------------------------ Name: Address: Fax: Agreed and Acknowledged: DECRANE HOLDINGS CO. By: ------------------------------ Name: Title: DLJ MERCHANT BANKING II, INC. By: ------------------------------ Name: Title: 6 EX-10.21 6 EXHIBIT 10.21 DeCRANE AIRCRAFT HOLDINGS, INC. CASH INCENTIVE BONUS PLAN The Company has approved a cash incentive bonus plan ("Incentive Bonus Plan") providing for the allocation of a bonus pool each year for incentive compensation to designated executive personnel and other key employees of the Company and its subsidiaries, as the exclusive sources of elective merit raises by the Company during the next four years, to persons and in amounts determined by the compensation committee of the Board from time to time; with the bonus pool for participants for the next four years to be based on EBITDA and cash flow changes from year to year at the relevant participant's operating unit; and in the case of the designated senior executives of DeCrane Aircraft Holdings, Inc., from a pool adjusted for each performance year by 5% of the change in consolidated EBITDA due to acquisitions during the year (plus 3% of EBITDA of PATS, only for performance year 1999) and by 5% of 15% (representing cost of capital) of the EBITDA generated from existing operations during the year, net of consolidated capital expenditures and plus (or minus) consolidated working capital for such periods. For the 1999 performance year only, such awards to participants who have become executives of the Company on after January 1, 1999, are limited to a maximum of 100% of their base salary for 1999. The Company additionally has adopted a 3% cost of living increase per year to base salaries for participants in the foregoing plan. EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of Amendment No. 3 of this Registration Statement on Form S-1 of our report dated February 19, 1999 relating to the consolidated financial statements of DeCrane Aircraft Holdings, Inc., our report dated June 12, 1998 relating to the financial statements of Avtech Corporation, and our report dated January 25, 1999 relating to the consolidated financial statements of PATS, Inc., which appear in such Prospectus. We also consent to the application of our report dated February 19, 1999 to the Financial Statement Schedule for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in our report dated February 19, 1999 also included this schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICEWATERHOUSECOOPERS LLP Los Angeles, California May 12, 1999 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use, in the Prospectus constituting part of this Registration Statement on Form S-1, of our report dated January 28, 1999, relating to the consolidated financial statements of PPI Holdings, Inc. and subsidiary, and the financial statements of Precision Pattern, Inc. (the predecessor to PPI Holdings, Inc.) which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. BAIRD, KURTZ & DOBSON Wichita, Kansas May [12], 1999 EX-24 9 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints R. Jack DeCrane and John R. Hinson, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to take such actions in, and file with the appropriate authorities in, whatever states said attorneys-in-fact and agents, and each of them, shall determine, such applications, statements, consents and other documents as may be necessary or expedient to register securities of the Company for sale, granting unto said attorneys-in-fact and agents full power and authority to do so and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf. This Registration Statement and Power of Attorney, pursuant to the requirement of the Securities Act of 1933, as amended, have been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ------------------------------ -------------------------- ------------------- /s/ THOMPSON DEAN - ------------------------------ Chairman of the Board of January 8, 1999 Thompson Dean Directors /s/ R. JACK DECRANE - ------------------------------ Chief Executive Officer January 8, 1999 R. Jack DeCrane and Director /s/ JOHN F. FORT, III - ------------------------------ Director January 8, 1999 John F. Fort, III /s/ DR. ROBERT J. HERMANN - ------------------------------ Director January 8, 1999 Dr. Robert J. Hermann /s/ DR. PAUL KAMINSKI - ------------------------------ Director January 8, 1999 Dr. Paul Kaminski /s/ SUSAN SCHNABEL - ------------------------------ Director January 8, 1999 Susan Schnabel /s/ TIMOTHY J. WHITE - ------------------------------ Director January 8, 1999 Timothy J. White Chief Financial Officer, /s/ JOHN R. HINSON Secretary and Treasurer - ------------------------------ (principal accounting January 8, 1999 John R. Hinson officer)
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