-----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, MQykehOLpAkHi5Y3D7QaLKJ1J4Ol3OiHJhTo79SuATHY+i++T2u/qP03CvbQfaFx Oup1ddL33cCKyox0GEG2IA== 0001047469-99-015926.txt : 19990426 0001047469-99-015926.hdr.sgml : 19990426 ACCESSION NUMBER: 0001047469-99-015926 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990423 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: 99599330 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: 99599331 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: 99599332 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: 99599333 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: 99599334 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: 99599335 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: PAECO 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: 99599336 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 TANKS 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: 99599337 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 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: 99599338 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: 99599339 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: 99599340 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: 99599341 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: 99599342 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: 99599343 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: 99599344 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 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999 REGISTRATION NO. 333-70365 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 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 (the "guarantors"), incorporated in the state and 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) and PATS Support, Inc. (a Maryland corporation, EIN 52-2010611). (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 APRIL 22, 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 certain 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 CERTAIN 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 April , 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, OUR ACQUISITIONS OF AVTECH CORPORATION, DETTMERS INDUSTRIES, INC. AND PATS, INC. AND OUR PROPOSED ACQUISITION OF PPI HOLDINGS, INC. [CHART: ORGANIZATION DIAGRAM OF DECRANE HOLDINGS, DECRANE AIRCRAFT AND SUBSIDIARIES, SHOWING GUARANTORS] 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." Certain 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 "--Certain Conditions to the Exchange Offer."
2 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 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.
3 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 twelve acquisitions, most recently Avtech Corporation and Dettmers Industries, Inc. in June 1998, and PATS, Inc. in January 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 March 1999, we signed an agreement to acquire 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 64 and 65. 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 notes 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, - sell assets, and - enter into mergers or consolidations. See "Description of Notes--Covenants."
6 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: (a) the Avtech, Dettmers, PATS and proposed PPI acquisitions; (b) the DLJ acquisition; and (c) 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: (a) interest, whether expensed or capitalized; (b) amortization of debt expense and discount relating to any indebtedness, whether expensed or capitalized; and (c) 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: (a) the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred; and (b) 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: (a) 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 (b) 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: (a) interest, whether expensed or capitalized; (b) amortization of debt expense and discount relating to any indebtedness, whether expensed or capitalized; and (c) 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. SUBORDINATION--YOUR RIGHTS UNDER THE NOTES ARE SUBORDINATED TO 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. 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. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify. ABILITY 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 a certain 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 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 13 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. GROWTH BY ACQUISITION--WE MAY NOT ALWAYS BE ABLE TO COMPLETE THE ACQUISITIONS WE PLAN TO MAKE. ONCE THEY ARE COMPLETED, WE MAY NOT ALWAYS REALIZE THE BENEFITS WHICH THEY ARE EXPECTED TO PRODUCE. Our ability to grow by acquisition depends on the availability of suitable acquisition candidates and capital, and by restrictions contained in our bank credit facility and the indenture. We are continually engaged in discussions with potential acquisition candidates. However, it is not certain that we will complete any potential acquisition. It is also not certain whether we will be able to identify suitable acquisition candidates, complete acquisitions or obtain satisfactory financing for them. Also, we may have difficulty integrating the operations and personnel of acquired companies. We may not always be able to retain the key employees of acquired companies. 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. 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 planned acquisition of PPI. In addition, 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 certain circumstances, those contracts may allow Boeing to enforce alternative economic terms, which would make the contracts less commercially favorable to us. 14 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. If we had completed our planned 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. PRODUCTS INSURANCE--WE COULD INCUR PRODUCTS LIABILITY LOSSES IN EXCESS OF OUR INSURANCE COVERAGE. We currently carry aviation products insurance. However, we cannot assure you that our existing insurance coverage will be adequate to cover claims, or that such coverage can be renewed. 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 certain aircraft design modifications on behalf of the FAA. Our ability to arrange for rapid government certification of the systems integration services that 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. Certain 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 15 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. YEAR 2000--SOME OF OUR ADMINISTRATIVE AND MANUFACTURING SYSTEMS INCLUDE COMPUTER-CONTROLLED AND DATE-CONTROLLED MACHINERY WHICH 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, 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 presently 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 systems is not significant. We are not aware of any material customer- or vendor-related Year 2000 issues. Our review of third-party compliance risks from our key vendors and customers is not yet complete. However, even assuming that our non-responding vendors and customers suffer interruptions to their operations due to Year 2000 systems failures, our management does not anticipate encountering any significant resulting failures in our systems, products or supply chain that would disrupt our operations to a material degree. 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. It is difficult, if not impossible, to assess with any degree of accuracy the impact on any of these three areas of the failure of one or more aspects of our risk analysis and compliance efforts. The novelty and complexity of the issues presented and solutions proposed, and our dependence on the technical skills of employees and independent contractors and on the representations and preparedness of third parties are among the factors that could cause our efforts to be less than fully effective. Moreover, 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. 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 risks will not have a material adverse effect on our business, financial condition or results of operations. We have not developed a contingency plan which assumes significant and protracted failures of major vendors, customers or systems as a result of Year 2000-related risks. 16 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 certain 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. 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. 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 certain obligations to be undone or rescinded if certain 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. 17 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. It is not certain what standard a given court would apply 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. 18 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. 19 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 certain 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 March 1999, we agreed to acquire 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 certain 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. We expect the transaction to close during the second quarter of 1999. 20 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. 21 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 proposed PPI acquisitions. 22 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 proposed purchase of all of the outstanding stock of PPI. 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: (a) June 25, 1998 for Avtech; (b) June 29, 1998 for Dettmers; and (c) December 31, 1998 for PATS and PPI. 26 (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 certain former employees and changes to employment agreements for certain 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: (a) by DeCrane Aircraft on behalf of its stockholders related to the DLJ acquisition; and (b) 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. 27 (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. 28 (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 proposed PPI acquisition, deferred financing costs of $.1 million, net of income tax benefit, will be 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 29 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: (a) interest, whether expensed or capitalized; (b) amortization of debt expense and discount relating to any indebtedness, whether expensed or capitalized; and (c) one-third of rental expense under operating leases which is considered to be a reasonable approximation of the interest portion of such expense. 30 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 31 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Includes the effect of: (a) the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred; and (b) 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: (a) 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; (b) 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 (c) 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: (a) interest, whether expensed or capitalized; (b) amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and (c) 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. 32 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 twelve acquisitions of businesses or assets. The most recent acquisition, PATS, was acquired in January 1999. We also anticipate completing the acquisition of PPI in the second quarter of 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 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. 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. 33 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 make certain investments. 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 after 1999. 34 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: (a) $20.2 million of revenues from Audio International, which was acquired on November 14, 1997; (b) $25.2 million of revenues from Avtech, which was acquired on June 26, 1998; and (c) $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: (a) $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; (b) $10.3 million due to the higher overall gross margins of the acquired companies; and (c) $1.8 million due to overall margin improvements at existing companies. The increase was ofset by: (a) a $1.2 million decrease due to a decline in electrical contact revenues; and (b) a $4.4 million charge for the portion of the DLJ acquisition purchase price allocated to inventory and expensed as the inventory was sold during the four months ended December 31, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for the year ended December 31, 1998 from $15.8 million for the year ended December 31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for the year ended December 31, 1998 from 14.5% for the year ended December 31, 1997. SG&A expenses increased primarily as a result of: (a) the inclusion of $9.2 million of expenses pertaining to Audio International, Avtech and Dettmers which were acquired during 1997 and 1998; (b) $3.6 of non-capitalizable costs associated with the DLJ acquisition; and (c) a $1.9 million increase in research and development costs related to new product introductions at Audio International and Dettmers. 35 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: (a) the $4.4 million charge for the portion of the DLJ purchase price allocated to inventory; (b) $3.6 million of higher amortization expense associated with acquisitions, including the DLJ acquisition; and (c) 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: (a) $21.0 million attributable to Audio International; (b) $15.4 million attributable to Avtech; and (c) $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. 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: (a) the inclusion of $10.7 million of revenues from Aerospace Display Systems; (b) growth in our private labeling programs of $6.4 million; (c) growth in contact sales of $6.3 million driven by new aircraft production rate increases; (d) an increase in sales of harness assemblies for in-flight entertainment systems of $5.1 million; (e) 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; (f) 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.; (g) the inclusion of $3.0 million of revenue from Elsinore; (h) new systems integration programs for navigational systems of $1.5 million; (i) the inclusion of $1.3 million of revenue from Audio International; (j) a new systems integration program for United Parcel Service, Inc. of $0.9 million; and (k) 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) a $10.6 million increase as a result of increased sales volume, $3.8 million of which was attributable to the Aerospace Display Systems, 36 Elsinore and Audio International acquisitions; and (b) 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: (a) $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; (b) $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 (c) $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 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 certain contact product lines and the disposal of certain 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 certain 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. 37 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. 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 Certain 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 presently 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 systems is not significant. We are not aware of any material customer- or vendor-related Year 2000 issues. Our review of third-party compliance risks from our key vendors and customers is not yet complete. However, even assuming that our non-responding vendors and customers suffer interruptions to their operations due to Year 2000 systems 38 failures, our management does not anticipate encountering any significant resulting failures in our systems, products or supply chain that would disrupt our operations to a material degree. 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. It is difficult, if not impossible, to assess with any degree of accuracy the impact on any of these three areas of the failure of one or more aspects of our risk analysis and compliance efforts. The novelty and complexity of the issues presented and solutions proposed, and our dependence on the technical skills of employees and independent contractors and on the representations and preparedness of third parties are among the factors that could cause our efforts to be less than fully effective. Moreover, 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. 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. We have not developed a contingency plan which assumes significant and protracted failures of major vendors, customers or systems as a result of Year 2000-related risks. 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 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 twelve acquisitions, most recently PATS, Inc. in January 1999; one more is expected to close during the second quarter of 1999, as described in "Recent Developments--PPI." 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. 40 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, General Electric, Honeywell, Raytheon 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; - 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. 41 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 (commonly called "GPS") 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 twelve 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
One more acquisition is expected to close during the second quarter of 1999. See "Recent Developments--PPI." 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 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 certain connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft; - the primary 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 Air 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 PRO FORMA BASIS ------------------------------------------------ EXCLUDING PPI INCLUDING PPI CLASS ACQUISITION ACQUISITION --------------------- ----------------------- ----------------------- - cockpit audio, 22% 19% communications, lighting and power and control devices - electrical contacts 17% 14% - auxiliary fuel 16% 14% systems and auxiliary power units - connectors and 15% 13% harness assemblies - entertainment and 12% 26% cabin management products - integration of cabin 9% 7% and flight deck systems - liquid crystal 7% 6% display devices
No other product or service accounted for more than 5% of our pro forma revenues in 1998. 45 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 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 certain 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. 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. 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. 46 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. 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. 47 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 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 certain 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 pending PPI acquisition. See "Business--Customers" for the expected changes 48 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 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 49 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 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.
50 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. FACILITIES We lease most of our principal facilities, as described in the following table.
APPROX. LEASE LOCATION DESCRIPTION SQ. FT. EXPIRATION - ----------------------------------------------------- ------------------------------------------- --------- ----------- 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 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
At the conclusion of the pending PPI transaction, we also expect to have the following leased facilities: Wichita, KS............................... Manufacturing facility 107,000 2007 Hutchinson, KS............................ Manufacturing facility 5,300 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 51 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 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 Regulations." 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 compliant alleged, among other things, that our directors had breached their fiduciary duties by entering into the merger described in "Recent Developments--The DLJ Acquisition" with the DLJ affiliate 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 52 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 certain 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. 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 certain 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 certain change-of-control events occur, and Mr. DeCrane's employment is terminated by us for any reason other than for cause (as defined in the agreement) 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. 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. 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. 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 (or "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 CERTAIN 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. 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).... 2,976,087 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 2,826,087 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 "Certain Relationships and Related 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, 59 Suite 3000, Los Angeles, California 90067. The address of each of the other persons is 277 Park Avenue, New York, New York 10172. (4) Messrs. Dean and White and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of Merchant Banking Partners II, L.P. as well as Donaldson, Lufkin & Jennette Securities Corporation. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates separately listed in this table; Messrs. Dean and White and Ms. Schnabel disclaim beneficial ownership of those shares. (5) Messrs. Hermann and Kaminski are members of Global Technology Partners, LLC. Six members of Global Technology Partners, including Messrs. Hermann and Kaminski, acquired 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 3,500,000 shares of DeCrane Holdings Common Stock, par value $.01 per share, of which 2,846,185 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 certain 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 certain liabilities, including certain 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 certain 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 certain circumstances 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 the funds, 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 certain 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 certain claims and liabilities, including liabilities under the Securities Act. In connection with our proposed acquisition of PPI, DLJ Merchant Banking has advised us that it plans to invest an additional $12.5 million of capital in DeCrane Holdings that DeCrane Holdings will, in turn, invest in DeCrane Aircraft. The 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 its acquisition of PPI Holdings, Inc. described under "Recent Developments--PPI" and the potential for future acquisition transactions, we have sought an increase in the term loan amounts available for acquisitions under the bank credit facility. We have agreed in principle to a new Term C term loan to be added to the senior credit agreement, in an amount of up to $70 million over current term loan availability. We expect to complete negotiations with the bank credit facility lenders, and sign an amended and restated credit agreement, in April 1999 on substantially the terms set forth in the draft amended and restated credit agreement filed as an exhibit to the registration statement of which this prospectus is a part. 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 the Term A loan and revolving credit facility is 1.50% for base rate borrowings and 2.75% for Euro-Dollar borrowings, and the margin for the Term B loan is 1.75% for base rate borrowings and 3.00% for Euro-Dollar borrowings. We anticipate that the margin for Term C loan will be 2.00% for base rate borrowings and 3.25% 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, for the revolving credit facility and Term A facility, and from 0% to 1.25% over the base rate and from 1.25% to 3.00% over the reserve adjusted Euro-Dollar rate, for the Term B facility. The applicable margins and commitment fees are determined based on the ratio of consolidated total debt to consolidated EBITDA of DeCrane Aircraft and its subsidiaries (as defined 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. 63 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 certain exceptions, - with 100% of the net cash proceeds received from the issuance of debt, subject to certain exceptions, - with 100% of the net cash proceeds received from permitted asset sales, subject to certain exceptions and - with 50% of excess cash flow (as defined in the bank credit facility) for each fiscal year to the extent that the Leverage Ratio exceeds 3.5 to 1. We are required to apply all mandatory prepayment amounts first to the prepayment of the term loan facility, and thereafter to the prepayment of the revolving credit facility. DeCrane Holdings, and each of DeCrane Aircraft's wholly-owned direct and indirect domestic 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 (as defined in the bank credit facility), - a pledge by DeCrane Holdings of the stock of DeCrane Aircraft, and - a negative pledge on all assets of DeCrane Aircraft and its subsidiaries, 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. This section is a summary of the indenture's principal terms, not a complete statement. 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. 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 certain 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, payment of interest may be made by check mailed to the holders of the notes at their respective addresses 65 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 certain 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 (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 (1) such dividend is paid pro rata to all holders of such class of common stock and (2) 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 (1) such repurchase is made pro rata with respect to such class of common stock and (2) 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 (1) the amount of cash and Cash Equivalents received by such Restricted Subsidiary from the issue or sale thereof and (2) 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 (1) the net book value of such Investments at the time of such designation and (2) 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 (i) 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 (ii) (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, (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, 77 (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 assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, 78 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 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' 79 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; (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; 80 (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 (i) 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 (ii) 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) certain 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 certain 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. Subject to certain 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. 81 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 certain 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 (i) DeCrane Aircraft has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) 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 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, 82 (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, (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, 83 (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 certain 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 certain cases, or to realize on certain 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 certain 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 certain new notes bearing transfer restrictions, notifies us of certain 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 certain conditions relating to the provision of information. 84 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 certain 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 (a) we fail to file any of the registration statements required by the registration rights agreement when required, (b) any of those registration statements is not declared effective by the SEC by the deadlines specified above, (c) we fail to complete this exchange offer within 40 business days of the deadline for filing the related registration statement, or (d) 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 certain 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 certain 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 (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 certain indebtedness of DeCrane Aircraft, the payment of certain 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 85 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 (a "disposition") of any properties, assets or rights (including, without limitation, by way of a sale and leaseback) (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 certain Credit Agreement dated as of August 28, 1998 among DeCrane Aircraft, various financial institutions party thereto, DLJ Capital Funding, Inc., as syndication agent, and The First National Bank of Chicago, as administrative agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, modified, renewed, refunded, replaced or refinanced from time to time, including any agreement (1) extending or shortening the maturity of any Indebtedness incurred thereunder or contemplated thereby, (2) adding or deleting borrowers or guarantors thereunder, (3) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, PROVIDED that on the date such Indebtedness is incurred it would not be prohibited by clause (1) of "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (4) otherwise altering the terms and conditions thereof. Indebtedness under the bank credit facility outstanding on the date of the indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." 86 "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 S&P or "P-2" or higher according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (4) any bankers acceptances of money market deposit accounts issued by an Eligible Institution, (5) any fund investing exclusively in investments of the types described in clauses (1) through (4) above and (6) in the case of any Subsidiary organized or having its principal place of business outside the United States, investments denominated in the currency of the jurisdiction in which such Subsidiary is organized or has its principal place of business which are similar to the items specified in clauses (1) through (5) above (including without limitation any deposit with any bank that is a lender to any such Subsidiary). "CONSOLIDATED CASH FLOW" means, with respect to any person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period plus, to the extent deducted in computing Consolidated Net Income, - an amount equal to any extraordinary or non-recurring loss plus any net loss realized in connection with an Asset Sale, - provision for taxes based on income or profits of such person and its Restricted Subsidiaries for such period, - Fixed Charges of such person for such period, - depreciation, amortization, including amortization of goodwill and other intangibles, and all other non-cash charges, excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period, including charges related to non-cash minority interests, of such Person and its Restricted Subsidiaries for such period, - net periodic post-retirement benefits, - other income or expense net as set forth on the face of such person's statement of operations, - expenses and charges related to the Acquisition, the bank credit facility and the application of the proceeds thereof which are paid, taken or otherwise accounted for within 180 days of the consummation of the Acquisition, and 87 - 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. "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. 88 "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 ("S&P") or "P-2" or higher according to Moody's Investor Services, Inc. ("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. "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 (a) the Consolidated Interest Expense of such person for such period and (b) 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 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 date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (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 89 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 clause (c) 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. "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 90 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. "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. 91 "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 - 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 (1) such Person becomes a Restricted Subsidiary of DeCrane Aircraft or (2) 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; 92 - 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 (collectively, "refinancing") or successive refinancings, in whole or in part, of any Indebtedness secured by Liens referred to in the clauses above so long as such Lien does not extend to any other property other than improvements thereto; - Liens securing letters of credit entered into in the ordinary course of business and consistent with past business practice; - Liens on and pledges of the capital stock of any Unrestricted Subsidiary securing Non-Recourse Debt of such Unrestricted Subsidiary; - Liens securing Indebtedness and Obligations under the bank credit facility; and - other Liens securing indebtedness that is permitted by the terms of the Indenture to be outstanding having an aggregate principal amount at any one time outstanding not to exceed $50.0 million. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries issued within 60 days after repayment of, in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries; PROVIDED that - the principal amount accreted value, if applicable of such Permitted Refinancing Indebtedness does not exceed the principal amount of accreted value, if applicable, plus premium, if any, and accrued interest on the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded, plus the amount of reasonable expenses incurred in connection therewith, - such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded, and - if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to, the notes on terms at least as favorable, taken as a whole, to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PRINCIPALS" means DLJ Merchant Banking Partners II, L.P. and its Affiliates. "PUBLIC EQUITY OFFERING" means any issuance of common stock by DeCrane Aircraft, other than to DeCrane Holdings and other than Disqualified Stock, or common stock or preferred stock by DeCrane Holdings, other than Disqualified Stock, registered pursuant to the Securities Act, other than issuances registered on Form S-8 and issuances registered on Form S-4, excluding issuances of common stock pursuant 93 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 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 94 - 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 - 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. 95 "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 certain 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 certain 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 certain new notes bearing transfer restrictions notifies us of certain 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 certain 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 "Certain 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 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. 97 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 (i) 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 (ii) 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. 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. 98 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 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. 99 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. 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. 100 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: STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT REFERENCE: DECRANE AIRCRAFT BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER: 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 BY HAND in New York to 4:30 p.m. BY HAND in Boston to 4:30 p.m.: (as drop agent): Two International Place 61 Broadway Fourth Floor Boston, Massachusetts 12110 15th Floor ATTENTION: Corporate Trust Department Kellie Mullen Corporate Trust Window New York, NY 10006
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, 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. 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 certain 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 - SUBSEQUENT EVENT (UNAUDITED) In March 1999, the Company signed a definitive agreement to purchase 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 Company expects to complete the acquisition during the second quarter of 1999. The purchase price is $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, if completed, 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....................................................... 19 Use of Proceeds........................................................... 21 Capitalization............................................................ 22 Unaudited Pro Forma Consolidated Financial Data........................... 23 Selected Consolidated Financial Data...................................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 33 Business.................................................................. 40 Management................................................................ 54 Security Ownership of Certain 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.* 4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank & 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 & Trust Company* 4.1.2 Draft 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 & 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 (re legality) 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 and Hollingsead International*
II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------ 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.* 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)* 24.1 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. II-4 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. - 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. - That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. - Every prospectus that is filed pursuant to the immediately preceding paragraph, or that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes 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 that time shall be deemed to be the initial bona fide offering thereof. - 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 II-5 ITEM 17. UNDERTAKINGS (CONTINUED) 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 22nd day of April 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 April 22, 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 April 22, 1999 Richard J. Kaplan (principal accounting officer)
/s/ R. JACK DECRANE -------------------------------------- R. Jack DeCrane April 22, 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.* 4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank & Trust Company* 4.1.1 Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other guarantors under the Indenture, and State Street Bank & Trust Company* 4.1.2 Draft 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 & 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 (re legality) 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 and Hollingsead International* 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*
EXHIBIT NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------------------------------------- --------- 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.* 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)* 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 APRIL , 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-4.1-2 2 EXHIBIT 4.1.2 SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "SUPPLEMENTAL INDENTURE"), [to be] dated as of April 23, 1999 among Precision Pattern, Inc., PPI Holdings, Inc. (each a "GUARANTOR") and a subsidiary of DeCrane Aircraft Holdings, Inc. (or its permitted successor), a Delaware corporation (the "ISSUER"), the other Guarantors (as defined in the Indenture referred to herein) and State Street Bank and Trust Company, as trustee under the Indenture referred to below (the "TRUSTEE"). W I T N E S S E T H WHEREAS, the Issuer has heretofore executed and delivered to the Trustee an indenture (the "INDENTURE"), dated as of October 5, 1998 providing for the issuance of an aggregate principal amount of up to $100.0 million of 12% Senior Subordinated Notes due 2008 (the "NOTES"); WHEREAS, the Indenture provides that under certain circumstances each Guarantor shall execute and deliver to the Trustee a supplemental indenture, pursuant to which each Guarantor shall unconditionally guarantee all of the Issuer's Obligations under the Notes and the Indenture on the terms and conditions set forth herein (the "NOTE GUARANTEE"); and WHEREAS, pursuant to Section 9.06 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, each Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. AGREEMENT TO GUARANTEE. Each Guarantor hereby agrees as follows: (a) Along with all Guarantors named in the Indenture, to jointly and severally Guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Notes or the obligations of Issuer hereunder or thereunder, that: (i) the principal of and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, is lawful, and all other obligations of the Issuer to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against Issuer, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. (c) The following is hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever. (d) This Note Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes and the Indenture. (e) If any Holder or the Trustee is required by any court or otherwise to return to the Issuer, the Guarantors, or any Custodian, trustee, liquidator or other similar official acting in relation to either the Issuer or the Guarantors, any amount paid by either to the Trustee or such Holder, this Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (f) Each Guarantor shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. (g) As between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 of the Indenture for the purposes of this Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Note Guarantee. (h) The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Guarantee. (i) Pursuant to Section 11.03 of the Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under Article 11 of the Indenture shall result in the obligations of such Guarantor under its Note Guarantee not constituting a fraudulent transfer or conveyance. 3. EXECUTION AND DELIVERY. Each Guarantor agrees that the Note Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. 2 4. GUARANTOR MAY CONSOLIDATE ETC. ON CERTAIN TERMS. (a) No Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless: (i) subject to Section 5(a) hereof, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) 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; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) Issuer would, at the time of such transaction and after giving pro forma effect thereto and 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 Charger Coverage Ratio test set forth in Section 4.09 of the Indenture by virtue of Issuer's pro forma Cash Flow Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage Ratio test set forth in Section 4.07 of the Indenture; PROVIDED THAT, the requirements of clause (iii) of this Section 4(a) will not apply in the case of a consolidation with or merger with or into the Issuer or another Guarantor. (b) In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture executed and delivered to the Trustee in the form of Exhibit E to the Indenture or otherwise satisfactory in form to the Trustee, of the Note Guarantee and the due and punctual performance of all of the covenants and conditions of the Indenture to be performed by each Guarantor, such successor Person shall succeed to and be substituted for each Guarantor with the same effect as if it had been named herein as a Guarantor. All the Note Guarantees so issued shall in all respects have the same legal rank and benefit under the Indenture as the Note Guarantees theretofore and thereafter issued in accordance with the terms of the Indenture as though all of such Note Guarantees had been issued at the date of the execution hereof. (c) Except as set forth in Articles 4 and 5 of the Indenture, and notwithstanding clauses (a) and (b) above, nothing contained in the Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Issuer or another Guarantor, or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Issuer or another Guarantor. 5. RELEASES. (a) 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, such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) will be released and relieved of any obligations under its Note Guarantee; 3 PROVIDED that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture, including without limitation Section 4.10 of the Indenture. Upon delivery by the Issuer to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Issuer in accordance with the applicable provisions of the Indenture, including, without limitation, Section 4.10 of the Indenture, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Note Guarantee. (b) Any Guarantor not released from its obligations under its Note Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under the Indenture as provided in Article 11 of the Indenture. 6. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, stockholder or agent of each Guarantor, as such, shall have any liability for any obligations of the Issuer or any Guarantor under the Notes, any Note Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the 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 Commission that such a waiver is against public policy. 7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 10. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by each Guarantor and the Issuer. 4 SIGNATURES Dated as of April ___, 1999 DECRANE AIRCRAFT HOLDINGS, INC. BY: ---------------------------- Name: Title: AEROSPACE DISPLAY SYSTEMS, INC. BY: ---------------------------- Name: Title: AUDIO INTERNATIONAL, INC. BY: ---------------------------- Name: Title: AVTECH CORPORATION BY: ---------------------------- Name: Title: CORY COMPONENTS, INC. BY: ---------------------------- Name: Title: DETTMERS INDUSTRIES, INC. BY: ---------------------------- Name: Title: 5 ELSINORE AEROSPACE SERVICES, INC. BY: ---------------------------- Name: Title: ELSINORE ENGINEERING, INC. BY: ---------------------------- Name: Title: HOLLINGSEAD INTERNATIONAL, INC. BY: ---------------------------- Name: Title: TRI-STAR ELECTRONICS INTERNATIONAL, INC. BY: ---------------------------- Name: Title: PATS, INC. BY: ---------------------------- Name: Title: PATRICK AIRCRAFT TANK SYSTEMS, INC. BY: ---------------------------- Name: Title: PATS SUPPORT, INC. BY: ---------------------------- Name: Title: 6 PATS AIRCRAFT AND ENGINEERING CORPORATION BY: ---------------------------- Name: Title: FLIGHT REFUELING, INC. BY: ---------------------------- Name: Title: PRECISION PATTERN, INC. BY: ---------------------------- Name: Title: PPI HOLDINGS, INC. BY: ---------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY BY: ---------------------------- Name: Title: 7 EX-10.10-2 3 EXHIBIT 10.10.2 U.S. $220,000,000 AMENDED AND RESTATED CREDIT AGREEMENT [TO BE] DATED AS OF APRIL 23, 1999 AMONG DECRANE AIRCRAFT HOLDINGS, INC., as Borrower, THE LENDERS LISTED HEREIN, as Lenders, DLJ CAPITAL FUNDING, INC., as Syndication Agent, and THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent, SOLE LEAD ARRANGER AND BOOK RUNNER: DLJ CAPITAL FUNDING, INC. DECRANE AIRCRAFT HOLDINGS, INC. CREDIT AGREEMENT TABLE OF CONTENTS Section 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.1 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 35 1.3 Other Definitional Provisions and Rules of Construction. . . . . . . . 35 Section 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS . . . . . . . . . . . . . . 36 2.1 Commitments; Making of Loans; Notes. . . . . . . . . . . . . . . . . . 36 2.2 Interest on the Loans. . . . . . . . . . . . . . . . . . . . . . . . . 46 2.3 Fees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.4 Repayments, Prepayments and Reductions in Loan Commitments; General Provisions Regarding Payments. . . . . . . . . . . . . . 56 2.5 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 2.6 Special Provisions Governing Eurodollar Rate Loans.. . . . . . . . . . 69 2.7 Increased Costs; Taxes; Capital Adequacy.. . . . . . . . . . . . . . . 71 2.8 Obligation of Lenders and Issuing Lenders to Mitigate; Replacement of Lender. . . . . . . . . . . . . . . . . . . . . . 76 Section 3. LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . . . 77 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein.. . . . . . . . . . . . . . . . . . . . . 77 3.2 Letter of Credit Fees. . . . . . . . . . . . . . . . . . . . . . . . . 80 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.4 Obligations Absolute.. . . . . . . . . . . . . . . . . . . . . . . . . 83 3.5 Indemnification; Nature of Issuing Lenders' Duties.. . . . . . . . . . 84 3.6 Increased Costs and Taxes Relating to Letters of Credit. . . . . . . . 85 Section 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT. . . . . . . . . . . . . . . 86 4.1 Conditions to Initial Loans. . . . . . . . . . . . . . . . . . . . . . 86 4.2 Conditions to Loans Made on Merger Date. . . . . . . . . . . . . . . . 91 4.3 Conditions to Acquisition Loans. . . . . . . . . . . . . . . . . . . . 93 4.4 Conditions to Loans Made on Each Funding Date. . . . . . . . . . . . . 93 4.5 Conditions to Letters of Credit. . . . . . . . . . . . . . . . . . . . 94 i 4.6 Conditions to the Additional Tranche B Term Loans. . . . . . . . . . . 94 4.7 Conditions to the Tranche C Term Loans.. . . . . . . . . . . . . . . . 94 Section 5. COMPANY'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 94 5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries.. . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.2 Authorization of Borrowing, etc. . . . . . . . . . . . . . . . . . . . 95 5.3 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . 96 5.4 No Material Adverse Change; No Restricted Junior Payments. . . . . . . 97 5.5 Title to Properties; Liens; Real Property. . . . . . . . . . . . . . . 97 5.6 Litigation; Adverse Facts. . . . . . . . . . . . . . . . . . . . . . . 97 5.7 Payment of Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.8 Governmental Regulation. . . . . . . . . . . . . . . . . . . . . . . . 98 5.9 Securities Activities. . . . . . . . . . . . . . . . . . . . . . . . . 98 5.10 Employee Benefit Plans.. . . . . . . . . . . . . . . . . . . . . . . . 98 5.11 Environmental Protection.. . . . . . . . . . . . . . . . . . . . . . . 99 5.12 Employee Matters.. . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.13 Solvency.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.14 Matters Relating to Collateral.. . . . . . . . . . . . . . . . . . . .100 5.15 Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 5.16 Year 2000 Compliance.. . . . . . . . . . . . . . . . . . . . . . . . .101 5.17 Amendment Representations. . . . . . . . . . . . . . . . . . . . . . .101 Section 6. COMPANY'S AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . .101 6.1 Financial Statements and Other Reports.. . . . . . . . . . . . . . . .101 6.2 Legal Existence, etc.. . . . . . . . . . . . . . . . . . . . . . . . .105 6.3 Payment of Taxes and Claims; Tax Consolidation.. . . . . . . . . . . .105 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds. . . . . . . . . . . . . . . . .105 6.5 Inspection Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .106 6.6 Compliance with Laws, etc. . . . . . . . . . . . . . . . . . . . . . .106 6.7 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries; IP Collateral.. . . . . . . . . . . . . . . . . .107 6.8 Future Leased Property and Future Acquisitions of Real Property: Future Acquisition of Other Property. . . . . . . . .108 6.9 Merger.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 6.10 Second Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 ii 6.11 Year 2000 Compliance.. . . . . . . . . . . . . . . . . . . . . . . . .110 6.12 PTO and CO Cover Sheets, Etc.. . . . . . . . . . . . . . . . . . . . .110 6.13 Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 Section 7. COMPANY'S NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . .111 7.1 Indebtedness.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .111 7.2 Liens and Related Matters. . . . . . . . . . . . . . . . . . . . . . .112 7.3 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114 7.4 Contingent Obligations.. . . . . . . . . . . . . . . . . . . . . . . .116 7.5 Restricted Junior Payments.. . . . . . . . . . . . . . . . . . . . . .116 7.6 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . . . .118 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions.. . . . . . . . . . . . . . . . . . . . . . . . . .120 7.8 Consolidated Capital Expenditures. . . . . . . . . . . . . . . . . . .122 7.9 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123 7.10 Sales and Lease-Backs. . . . . . . . . . . . . . . . . . . . . . . . .123 7.11 Sale or Discount of Receivables. . . . . . . . . . . . . . . . . . . .124 7.12 Transactions with Stockholders and Affiliates. . . . . . . . . . . . .124 7.13 Issuance of Subsidiary Equity. . . . . . . . . . . . . . . . . . . . .124 7.14 Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . . . .125 7.15 Amendments or Waivers of Merger Agreement; Amendments of Documents Relating to Subordinated Indebtedness. . . . . . . . .125 Section 8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . .125 8.1 Failure to Make Payments When Due. . . . . . . . . . . . . . . . . . .125 8.2 Default in Other Agreements. . . . . . . . . . . . . . . . . . . . . .126 8.3 Breach of Certain Covenants. . . . . . . . . . . . . . . . . . . . . .126 8.4 Breach of Warranty.. . . . . . . . . . . . . . . . . . . . . . . . . .126 8.5 Other Defaults Under Loan Documents. . . . . . . . . . . . . . . . . .126 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc.. . . . . . . . .126 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc.. . . . . . . . . .127 8.8 Judgments and Attachments. . . . . . . . . . . . . . . . . . . . . . .127 8.9 Dissolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127 8.10 Employee Benefit Plans.. . . . . . . . . . . . . . . . . . . . . . . .127 8.11 Change in Control. . . . . . . . . . . . . . . . . . . . . . . . . . .128 8.12 Invalidity of Guaranties; Failure of Security; Repudiation of Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . .128 iii 8.13 Mergers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128 Section 9. THE AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130 9.1 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130 9.2 Powers and Duties; General Immunity. . . . . . . . . . . . . . . . . .131 9.3 Successor Agents and Swing Line Lender.. . . . . . . . . . . . . . . .134 9.4 Collateral Documents and Guaranties. . . . . . . . . . . . . . . . . .135 Section 10. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .136 10.1 Assignments and Participations in Loans and Letters of Credit.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .136 10.2 Expenses.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138 10.3 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139 10.4 Set-Off; Security Interest in Deposit Accounts.. . . . . . . . . . . .140 10.5 Ratable Sharing. . . . . . . . . . . . . . . . . . . . . . . . . . . .140 10.6 Amendments and Waivers.. . . . . . . . . . . . . . . . . . . . . . . .141 10.7 Independence of Covenants. . . . . . . . . . . . . . . . . . . . . . .142 10.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142 10.9 Survival of Representations, Warranties and Agreements.. . . . . . . .143 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative. . . . . . . . .143 10.11 Marshalling; Payments Set Aside. . . . . . . . . . . . . . . . . . . .143 10.12 Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .143 10.13 Obligations Several; Independent Nature of Lenders' Rights.. . . . . .143 10.14 Headings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144 10.15 Applicable Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . .144 10.16 Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . . .144 10.17 Consent to Jurisdiction and Service of Process.. . . . . . . . . . . .144 10.18 Waiver of Jury Trial.. . . . . . . . . . . . . . . . . . . . . . . . .145 10.19 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . .146 10.20 Counterparts; Effectiveness. . . . . . . . . . . . . . . . . . . . . .146 Signature pages S-1
iv DECRANE AIRCRAFT HOLDINGS, INC. AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is [to be] dated as of April 23, 1999, and entered into by and among DECRANE AIRCRAFT HOLDINGS, INC., a Delaware corporation ("DAH"), THE LENDERS LISTED ON SCHEDULE I ATTACHED HERETO (each individually referred to herein as a "LENDER" and collectively as "LENDERS"), DLJ CAPITAL FUNDING, INC. ("DLJ"), as syndication agent hereunder for Lenders (in such capacity, "SYNDICATION AGENT"), and THE FIRST NATIONAL BANK OF CHICAGO, as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"). R E C I T A L S WHEREAS, DLJMB formed Parent, Finance Co. and Acquisition Co. for the purpose of tendering in the Tender Offer for the purchase of all the outstanding DAH Common Stock and to acquire any DAH Common Stock not so purchased in the Tender Offer in the Merger (capitalized terms used herein without definition shall have the meanings set forth therefor in subsection 1.1 of this Agreement); WHEREAS, as soon after the consummation of the Tender Offer as was practical, Acquisition Co. and DAH consummated the Merger and as soon thereafter as was practical Finance Co. and DAH consummated the Second Merger, all with the effect that DLJMB and management of DAH and its Subsidiaries indirectly own all of the outstanding capital stock of DAH; WHEREAS, pursuant to the Credit Agreement dated as of August 28, 1998, among Company, the financial institutions listed on the signature pages thereof, Syndication Agent and Administrative Agent (the "ORIGINAL CREDIT AGREEMENT"), Lenders agreed to extend certain credit facilities to Company to be used for the purposes of providing funds for (x) the Acquisition Financing Requirements, (y) working capital and/or other general purposes of Company and its Subsidiaries and (z) financing Permitted Acquisitions; WHEREAS, Parent and Acquisition Co. guaranteed the Obligations under the Original Credit Agreement and under the other Loan Documents and Parent agreed to secure its guaranty by granting to Administrative Agent on behalf of Lenders, a first priority Lien on all of the capital stock of Company; WHEREAS, upon consummation of the Merger and the Second Merger, Company secured all of the Obligations hereunder and under the other Loan Documents by granting to Administrative Agent, on behalf of Lenders, a first priority Lien on substantially all of its personal property and its real property, including a pledge of all of the capital stock of its Domestic Subsidiaries and a pledge of 65% of the capital stock of its Foreign Subsidiaries that are owned by Company or a Domestic Subsidiary; WHEREAS, upon consummation of the Merger and the Second Merger, each of Company's Domestic Subsidiaries guaranteed the Obligations hereunder and under the other Loan Documents and secured its guaranty by granting to Administrative Agent on behalf of Lenders, a first priority Lien on substantially all of its personal property and real property, including a pledge of all of the capital stock of each of its Domestic Subsidiaries and 65% of the capital stock of each of its direct Foreign Subsidiaries; 1 WHEREAS, DAH, the lenders that executed the signature pages thereof (which lenders constituted the Requisite Lenders and all Tranche B Term Loan Lenders having an Additional Tranche B Term Loan Commitment), the Subsidiaries of DAH listed on the signature pages thereof (for the limited purposes set forth therein), Syndication Agent and Administrative Agent have entered into that certain First Amendment to Credit Agreement, dated as of January 22, 1999 (the "FIRST AMENDMENT"), whereby (i) the aggregate amount of the Tranche B Term Loans were increased from $45,000,000 to $65,000,000, (ii) the interest rate margins applicable to the Loans were increased and (iii) certain other amendments were made as set forth therein; WHEREAS, DAH, the lenders that executed the signature pages thereof (which lenders constituted the Requisite Lenders and all Tranche C Term Loan Lenders having a Tranche C Term Loan Commitment), the Subsidiaries of DAH listed on the signature pages thereof (for the limited purposes set forth therein), Parent (for the limited purposes set forth therein), Syndication Agent and Administrative Agent have entered into that certain Amendment Agreement to Credit Agreement dated as of April 23, 1999 (the "AMENDMENT AGREEMENT"), pursuant to which the Original Credit Agreement, as amended by the First Amendment, has been amended and restated in its entirety as set forth herein; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders, Syndication Agent and Administrative Agent agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. The following terms used in this Agreement shall have the following meanings: "ACQUIRED CONTROLLED PERSON" means any Person (i) in which Company or any of its Subsidiaries has made an Investment permitted under subsection 7.3(viii) and (ii) as to which Company or such Subsidiary exercises control. For purposes hereof, "control" means the power to appoint a majority of the board of directors (or other equivalent governing body) of such Person or to otherwise direct or cause the direction of the management or policies of such Person, whether by contractual arrangement or otherwise. "ACQUISITION CO." means DeCrane Acquisition Co., a Delaware corporation. "ACQUISITION CO. GUARANTY" means the Acquisition Co. Guaranty executed and delivered by Acquisition Co. on the Closing Date, substantially in the form of EXHIBIT XVII hereto, as such Acquisition Co. Guaranty may be amended, supplemented or otherwise modified from time to time. "ACQUISITION FINANCING REQUIREMENTS" means the aggregate of all amounts necessary (i) to finance the purchase price of the DAH Common Stock in the Tender Offer and the Merger, (ii) to repay in full the Existing DAH Debt and (iii) to pay Transaction Costs. "ACQUISITION LENDER" means a Lender having an Acquisition Loan Commitment. "ACQUISITION LOANS" means the Loans made by Acquisition Lenders to Company pursuant to subsection 2.1A(v). 2 "ACQUISITION LOAN COMMITMENT" means the commitment of an Acquisition Lender to make Acquisition Loans to Company pursuant to subsection 2.1A(v), and "ACQUISITION LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "ACQUISITION LOAN COMMITMENT TERMINATION DATE" means September 30, 2004. "ACQUISITION LOAN EXPOSURE" means, with respect to any Acquisition Lender as of any date of determination (i) prior to the termination of the Acquisition Loan Commitments, that Acquisition Lender's Acquisition Loan Commitment and (ii) after the termination of the Acquisition Loan Commitments, the aggregate outstanding principal amount of the Acquisition Loans of that Acquisition Lender. "ACQUISITION NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(v) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Acquisition Loan Commitments and Acquisition Loans of any Acquisition Lenders, in each case substantially in the form of EXHIBIT VIII annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "ADDITIONAL TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make an Additional Tranche B Term Loan to Company on the First Amendment Closing Date pursuant to subsection 2.1A(ii), and "ADDITIONAL TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "ADDITIONAL TRANCHE B TERM LOANS" means only those Tranche B Term Loans made by Tranche B Term Loan Lenders to Company on the First Amendment Closing Date pursuant to subsection 2.1A(ii). "ADDITIONAL TRANCHE B TERM NOTES" means the promissory notes of Company issued pursuant to subsection 2.1D on the First Amendment Closing Date, substantially in the form of EXHIBIT V annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "ADJUSTED EURODOLLAR RATE" means, with respect to a Eurodollar Rate Loan for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period. The Eurodollar Rate shall be rounded to the next higher multiple of 1/100 of 1% if the rate is not such a multiple. "ADMINISTRATIVE AGENT" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.3A. "AFFECTED LENDER" has the meaning assigned to that term in subsection 2.6C. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. 3 "AFFILIATED FUND" means, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "AGENTS" means, collectively, the Syndication Agent and the Administrative Agent. "AGREEMENT" means this Amended and Restated Credit Agreement dated as of April 23, 1999, as it may be amended, supplemented or otherwise modified from time to time. "AMENDED AND RESTATED CREDIT AGREEMENT CLOSING DATE" means the date on or before May 6, 1999 on which the Tranche C Term Loans are made. "AMENDMENT AGREEMENT" has the meaning assigned to that term in the Recitals. "ANNUALIZED" means (i) with respect to the Fiscal Quarter of Company ending December 31, 1998, the applicable amount for such Fiscal Quarter multiplied by four, (ii) with respect to the Fiscal Quarter of Company ending March 31, 1999, the applicable amount for such Fiscal Quarter and the immediately preceding Fiscal Quarter multiplied by two, and (iii) with respect to the Fiscal Quarter of Company ending June 30, 1999, the applicable amount for such Fiscal Quarter and the immediately preceding two Fiscal Quarters multiplied by one and one-third. "ARRANGER" means DLJ Capital Funding, Inc., as sole lead arranger and as book runner of the credit facilities described herein. "ASSET SALE" means the sale, lease, assignment or other transfer (whether voluntary or involuntary) for value (collectively, a "transfer") by Company or any of its Subsidiaries to any Person other than Company or any of its Wholly-Owned Subsidiaries of (i) any of the equity ownership of any of Company's Subsidiaries, (ii) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory and obsolete or worn out equipment sold in the ordinary course of business, (b) Cash Equivalents, and (c) any such other assets to the extent that the aggregate value of such assets transferred in any single transaction or related series of transactions is equal to $250,000 or less). "ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially the form of EXHIBIT XII annexed hereto. "ASSUMED INDEBTEDNESS" means Indebtedness of a Person which (i) is in existence at the time such Person becomes a Subsidiary of Company, or (ii) is assumed in connection with an Investment in or acquisition of such Person, and has not been incurred or created by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Subsidiary of Company. "AUTHORIZED OFFICER" means, relative to any Loan Party, its chief executive officer, president, treasurer, chief financial officer or chief accounting officer and any of its other officers whose signatures and incumbency shall have been certified to Administrative Agent and the Lenders pursuant to Sections 4.1A(iv) and 4.2A(iv). "AVTECH" means Avtech corporation, a Washington corporation, and its successors. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. 4 "BASE RATE" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "BUSINESS DAY" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Base Rate, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago, New York and Los Angeles for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and Los Angeles for the conduct of substantially all of their commercial lending activities. "CAPITAL LEASE", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CASH" means money, currency or a credit balance in a Deposit Account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more than 270 days from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank (including a U.S. branch of a foreign bank) that is a member of the Federal Reserve and has a combined capital and surplus and undivided profits of at least $500,000,000); (v) repurchase agreements which (a) are entered into with any entity referred to in clauses (iii) or (iv) above or any other financial institution whose unsecured long-term debt (or the unsecured long-term debt of whose holding company) is rated at least A- or better by S&P or A3 or better by Moody's and maturing not more than one year after such time; and (b) are secured by a fully perfected security interest in securities of a type referred to in clauses (i) or (ii) above and which have a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such counterparty entity with whom such repurchase agreement has been entered into; (vi) short-term tax exempt securities that are rated not lower than MIG-1/1+ or either Moody's or S&P with provisions for liquidity or maturity accommodations of 183 days or less; (vii) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) through (vi) and as to which withdrawals are permitted at least every 90 days and (viii) in the case of any Subsidiary of the Company organized or having its principal place of business outside the United States, investments denominated in the currency of the jurisdiction in which such Subsidiary 5 is organized or has its principal place of business which are similar to the items specified in clauses (i) through (vii) above. "CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in the form of EXHIBIT XIII annexed hereto delivered by a Lender to Administrative Agent pursuant to subsection 2.7B(iv). "CHANGE IN CONTROL" means (i) the failure of Parent at any time to own, directly or indirectly, free and clear of all Liens and encumbrances (other than Liens created under the Loan Documents and Liens described in clauses (i) and (iv) of the definition of "Permitted Encumbrances"), all right, title and interest in 100% of the capital stock of the Company; (ii) the failure of the DLJMB and the Affiliates of any entity included in the definition of "DLJMB" to own at least 51% (on a fully diluted basis) of the economic and voting interest in the voting stock of Parent; (iii) the failure of DLJMB and the Affiliates of any entity included in the definition of "DLJMB" at any time to have the right to designate or nominate at least 51% of the Board of Directors of Parent; or (iv) the occurrence of a "Change of Control" as defined under any agreement governing any Subordinated Indebtedness issued by Company or the PIK Preferred Stock or PIK Notes issued by Parent. "CLOSING DATE" means August 28, 1998. "CO" means the United States Copyright Office or any successor or substitute office in which filings are necessary or, in the opinion of Administrative Agent, desirable in order to create or perfect Liens on any IP Collateral. "COLLATERAL" means, collectively, all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "COLLATERAL ACCOUNT" has the meaning assigned to that term in the Collateral Account Agreement. "COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account Agreement executed and delivered by Company and Administrative Agent on the Closing Date, substantially in the form of EXHIBIT XXIII annexed hereto, as such Collateral Account Agreement may hereafter be amended, supplemented or otherwise modified from time to time. "COLLATERAL DOCUMENTS" means (i) prior to the consummation of the Merger and the Second Merger, the Parent Pledge Agreement, the Finance Co. Pledge Agreement, the Collateral Account Agreement and the Investment Account Agreement and (ii) from and after the consummation of the Merger and the Second Merger, the Parent Pledge Agreement, the Security Agreement, the DAH Pledge Agreement, the Subsidiary Pledge Agreements and the Mortgages, and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "COMMITMENTS" means the commitments of Lenders to make Loans as set forth in subsection 2.1A. "COMPANY" means (i) until the consummation of the Second Merger, Finance Co. and (ii) upon and after the consummation of the Second Merger, DAH. 6 "COMPANY EXCESS CASH FLOW AMOUNT" means, at any date, the portion of Consolidated Excess Cash Flow for each Fiscal Year ending prior to such date (commencing with the Fiscal Year Ending December 31, 1999) not required to be applied to prepay the Loans in accordance with subsection 2.4B(iii)(d). "COMPLIANCE CERTIFICATE" means a certificate substantially in the form of EXHIBIT IX annexed hereto delivered to Agents and Lenders by Company pursuant to subsection 6.1(iii). "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "additions to property, plant or equipment" or comparable items reflected in the consolidated statement of cash flows of Company and its Subsidiaries; PROVIDED that Consolidated Capital Expenditures shall not include any such expenditures (x) made from the proceeds of (i) Net Insurance/Condemnation Proceeds as permitted under Section 7.7(ix) or (ii) proceeds from Assets Sales permitted pursuant to Section 7.7(xi) or (iii) proceeds from assets dispositions permitted by subsection 7.7(iii) , or dispositions of assets excluded from the definition of Asset Sales pursuant to clause (c) of the definition of "Asset Sale" or (y) that constitute an Investment made under subsection 7.3 (other than subsection 7.3(vii)). "CONSOLIDATED CURRENT ASSETS" means, as at any date of determination, the total assets of Company and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP, excluding Cash and Cash Equivalents. "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of determination, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP, excluding the current portion of any Indebtedness that by its terms or by the terms of any instrument or agreement relating thereto matures more than one year from, or is renewable or extendable at the option of Company or a Subsidiary from, the date of creation thereof. "CONSOLIDATED EBITDA" means, for any period, subject to subsections 1.2(b) and 1.2(c), the sum (without duplication) of the amounts for such period of (i) Consolidated Net Income, (ii) any amount deducted on account of minority interests in determining Consolidated Net Income, (iii) Consolidated Interest Expense, (iv) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees and costs incurred in connection with the Transaction), (v) all amounts deducted on account of income taxes in determining Consolidated Net Income, (vi) total depreciation expense, (vii) total amortization expense, (viii) the amount deducted in determining Consolidated Net Income representing any net loss (or less any net gain) realized in connection with any sale, lease, conveyance or other disposition of any asset (other than in the ordinary course of business and other than from Company or any of its Subsidiaries to Company or any of its Subsidiaries), (ix) the amount deducted in determining Consolidated Net Income representing any extraordinary or non-recurring loss, (x) foreign currency translation and transaction losses (or minus foreign currency translation and transaction gains) and (xi) any other non-cash items reducing Consolidated Net Income LESS (a) other items increasing Consolidated Net Income constituting extraordinary gains and (b) Restricted Junior Payments of the type referred to in clause (iii)(x) of Subsection 7.5 made during such period, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. 7 "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount (if positive) equal to (i) the sum, without duplication, of the amounts for such period of (a) Consolidated EBITDA and (b) the Consolidated Working Capital Adjustment MINUS (ii) the sum, without duplication, of the amounts for such period of (a) mandatory and scheduled repayments of the Loans and scheduled, mandatory and optional repayments of other Consolidated Total Debt (excluding repayments of Working Capital Loans and Acquisition Loans except to the extent the Working Capital Loan Commitments or the Acquisition Loan Commitments, as the case may be, are permanently reduced in connection with such repayments) in each case to the extent actually made during such period, (b) Consolidated Capital Expenditures paid in cash (without duplication, net of any proceeds of any related financings with respect to such expenditures), (c) Consolidated Interest Expense paid in cash, (d) the amount of taxes based on income of Company and its Subsidiaries paid or payable in cash during such period, (e) the amount paid for Permitted Acquisitions permitted and actually made under subsection 7.7(viii) and Investments permitted and actually made under subsection 7.3(xiii) but only to extent paid in cash from Company's or its Subsidiaries cash balances; (f) any payments with respect to Earn-Outs actually paid during such period, (g) gains on any sale, lease, conveyance, or other disposition of any asset (other than in the ordinary course of business), and (h) any distributions with respect to minority interests made during such period. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, at the end of any Fiscal Quarter, subject to subsections 1.2(b) and 1.2(c), the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately preceding Fiscal Quarters of Consolidated EBITDA to Consolidated Fixed Charges; PROVIDED that with respect to Consolidated Fixed Charges for the Fiscal Quarters ending December 31, 1998, March 31, 1999 and June 30, 1999, Consolidated Interest Expense and scheduled principal payments on Consolidated Total Debt shall be determined on an Annualized basis. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without duplication) of the amounts for such period of (i) the cash portion of Consolidated Interest Expense (net of cash interest income), (ii) taxes based on income actually paid or payable, (iii) scheduled principal payments in respect of Consolidated Total Debt, (iv) Consolidated Capital Expenditures actually made pursuant to clause (i) of subsection 7.8 (excluding the portion of such Consolidated Capital Expenditures constituting Indebtedness under a Capital Lease or purchase money Indebtedness and excluding the portion of such Consolidated Capital Expenditures made pursuant to clause (i) of subsection 7.8 in reliance on the $10,000,000 incremental basket provided therein), and (v) dividend payments made by Company to Parent to enable Parent to pay cash interest or dividends on the Parent P-I-K Securities pursuant to subsection 7.5(iv), all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "CONSOLIDATED INTEREST COVERAGE RATIO" means, at the end of any Fiscal Quarter, subject to subsections 1.2(b) and 1.2(c), the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately preceding Fiscal Quarters of Consolidated EBITDA to the cash portion of Consolidated Interest Expense other than commitment fees to the extent included therein (net of cash interest income); PROVIDED that for the Fiscal Quarters ending December 31, 1998, March 31, 1999 and June 30, 1999, Consolidated Interest Expense shall be determined on an Annualized basis. "CONSOLIDATED INTEREST EXPENSE" means, for any period, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate 8 Agreements determined in accordance with GAAP, but excluding, to the extent included in such total interest expense, up-front fees and expenses and the amortization of all deferred financing costs. "CONSOLIDATED LEVERAGE RATIO" means, at the end of any Fiscal Quarter, subject to subsections 1.2(b) and 1.2(c), the ratio of (a) Consolidated Total Debt (less Cash and Cash Equivalents) as of the last day of such Fiscal Quarter to (b) Consolidated EBITDA for the consecutive four Fiscal Quarters ending on the last day of such Fiscal Quarter. "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness and Contingent Obligations with respect to letters of credit (other than letters of credit issued in connection with trade payables) of Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED WORKING CAPITAL" means, as at any date of determination, the excess (or deficit) of Consolidated Current Assets over Consolidated Current Liabilities. "CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any period on a consolidated basis, the amount (which may be a negative number) by which Consolidated Working Capital as of the beginning of such period exceeds (or is less than) Consolidated Working Capital as of the end of such period. "CONTINGENT OBLIGATION", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness of another that such Indebtedness of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such Indebtedness will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "CONTRACTUAL OBLIGATION", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, 9 agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CORPORATE BASE RATE" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "DAH" means DeCrane Aircraft Holdings, Inc., a Delaware corporation. "DAH COMMON STOCK" means the common stock, $0.01 par value, of DAH. "DAH PLEDGE AGREEMENT" means the DAH Pledge Agreement executed and delivered by DAH on the Merger Date with respect to DAH's Subsidiaries on the Merger Date, substantially in the form of EXHIBIT XV annexed hereto, as such DAH Pledge Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DLJ" has the meaning assigned to that term in the introduction to this Agreement. "DLJMB" means DLJ Merchant Banking Partners II, L.P., certain affiliated funds and entities described in the Tender Offer Materials and shall include Global Technology Partners, L.L.C. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. "DOMESTIC SUBSIDIARY" means a Subsidiary organized under the laws of the United States or any state or territory thereof or the District of Columbia. "EARN-OUTS" means any obligations by Company or any of its Subsidiaries to pay any amounts constituting the payment of deferred purchase price with respect to any acquisition of a business (whether through the purchase of assets or shares of capital stock), the amount of which payments is calculated on the basis of, or by reference to, bona fide financial or other operating performance of such business or specified portion thereof or any other similar arrangement. "ELIGIBLE ASSIGNEE" means (A) (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; PROVIDED that (x) such bank is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (iv) any other entity which extends credit or buys or invests in loans as one of its businesses including insurance companies, mutual funds and lease financing companies; and (B) any Lender, any Affiliate of any Lender and any Affiliated Fund of any Lender; PROVIDED that no Affiliate of Company shall be an Eligible Assignee. 10 "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "ENVIRONMENTAL CLAIM" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive, by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to natural resources or the environment. "ENVIRONMENTAL LAWS" means any and all current or future statutes, ordinances, orders, rules, regulations, judgments, Governmental Authorizations, or any other requirements of governmental authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) the effect of the environment on human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 ET SEQ.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 ET SEQ.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 ET SEQ.), the Clean Air Act (42 U.S.C. Section 7401 ET SEQ.), the Toxic Substances Control Act (15 U.S.C. Section 2601 ET SEQ.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.), the Oil Pollution Act (33 U.S.C. Section 2701 ET SEQ.) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. Section 11001 ET SEQ.), each as amended or supplemented, any analogous present or future state or local statutes or laws, and any regulations promulgated pursuant to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA AFFILIATE" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan 11 pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which could reasonably constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR BASE RATE" means, with respect to a Eurodollar Rate Loan for the relevant Interest Period, the rate determined by Administrative Agent to be the rate at which First Chicago offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Rate Loan and having a maturity equal to such Interest Period. "EURODOLLAR RATE LOANS" means Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "EVENT OF DEFAULT" means each of the events set forth in Section 8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXCLUDED EQUITY PROCEEDS" means any proceeds received by Parent, Company or any of its Subsidiaries from the issuance or sale or exercise of their respective equity Securities, in each case pursuant to any such sale or issuance or exercise constituting or resulting from (i) capital contributions to Company, or equity Securities issuances by Parent, Company or any of its Subsidiaries, including without limitation, the issuance of the PIK Preferred Stock and any such issuances as payment of accrued dividends on the PIK Preferred Stock (excluding any such contributions or issuance resulting from a public offering or a widely distributed private offering of 12 common equity exempted from the registration requirements of Section 5 of the Securities Act of 1933, as amended ("Section 5") other than any such issuances (A) the proceeds of which are required to be and are applied to refinance the Senior Subordinated Bridge Notes then outstanding, in accordance with their terms or (B) resulting from or in connection with any resale by DLJMB of the PIK Preferred Stock, or any subsequent registration thereof under Section 5), (ii) any subscription agreements, incentive plan or similar arrangements with any officer, employee or director of Parent, the Company or any of its Subsidiaries, (iii) any loan made by the Company or any of its Subsidiaries pursuant to Section 7.3(xi), (iv) the sale of any equity Securities of Parent to any officer, director or employee of Parent, the Company or any of their Subsidiaries; PROVIDED such proceeds do not exceed $5,000,000 in the aggregate, (v) the exercise of any options or warrants issued to any officer, employee or director of Parent, the Company or any of its Subsidiaries or to any purchasers of the PIK Preferred Stock, or (vi) issuances by any Subsidiary of Company to Company or any other Subsidiary of Company or by Company to Parent or any Subsidiary of Company. "EXISTING DAH DEBT" means the Loan and Security Agreement dated as of April 15, 1997, as amended, among DAH, Bank of America Illinois, as Agent and the lenders signatory thereto. "FACILITIES" means any and all real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company or any of its Subsidiaries or any of their respective predecessors. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 A.M. (Chicago time) on such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent in its sole discretion. "FINANCE CO." means DeCrane Finance Co., a Delaware corporation. "FINANCE CO. PLEDGE AGREEMENT" means the Finance Co. Pledge Agreement executed and delivered by Finance Co. on the Closing Date with respect to Acquisition Co, substantially in the form of EXHIBIT XIV annexed hereto, as such Finance Co. Pledge Agreement may be amended, supplemented or otherwise modified from time to time. "FINANCIAL PLAN" has the meaning assigned to that term in subsection 6.1(xi). "FIRST AMENDMENT" has the meaning assigned to that term in the Recitals. "FIRST AMENDMENT CLOSING DATE" means January 22, 1999. "FIRST CHICAGO" means The First National Bank of Chicago in its individual capacity, and its successors. "FIRST PRIORITY" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral (other than Permitted Encumbrances and other Liens permitted pursuant to subsections 7.2A(iii), (iv), (vi), (vii), (viii), (ix) and (to the extent arising in connection with Capital Leases and 13 purchase money Indebtedness and applying to the assets whose acquisition or improvement was financed therewith) (x) and (ii) such Lien is the only Lien (other than Permitted Encumbrances and Liens permitted pursuant to subsection 7.2A) to which such Collateral is subject. "FISCAL QUARTER" means a fiscal quarter of any Fiscal Year. "FISCAL YEAR" means the fiscal year of Company and its Subsidiaries ending on December 31 of each calendar year. "FLOOD HAZARD PROPERTY" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "FOREIGN SUBSIDIARY" means any Subsidiary that is not a Domestic Subsidiary. "FUNDING AND PAYMENT OFFICE" means (i) the office of Administrative Agent and Swing Line Lender located at One First National Plaza, Chicago, Illinois, 60670 or (ii) such other office of Administrative Agent and Swing Line Lender as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent and Swing Line Lender to Company and each Lender. "FUNDING DATE" means the date of the funding of a Loan. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in 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, in each case as the same are applicable to the circumstances as of the date of determination. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "GUARANTIES" means the Parent Guaranty, the Acquisition Co. Guaranty and the Subsidiary Guaranty. "HAZARDOUS MATERIALS" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) any asbestos-containing materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any 14 governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons at the Facilities or to the indoor or outdoor environment. "HAZARDOUS MATERIALS ACTIVITY" means any activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, Release, discharge, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "HEDGE AGREEMENT" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively. "IMMATERIAL SUBSIDIARY" means each Subsidiary of Company that (a) accounted for no more than 3% of the consolidated gross revenues of Company and its Subsidiaries for the most recently completed Fiscal Quarter with respect to which, pursuant to Section 6.1(i) or 6.1(ii), financial statements have been, or are required to have been, delivered by Company on or before the date as of which any such determination is made, as reflected in such financial statements; and (b) has assets which represent no more than 3% of the consolidated gross assets of Company and its Subsidiaries as of the last day of the most recently completed Fiscal Quarter with respect to which, pursuant to Section 6.1(i) or 6.1(ii), financial statements have been, or are required to have been, delivered by Company on or before the date as of which any such determination is made, as reflected in such financial statements. "IMPERMISSIBLE QUALIFICATION" means, relative to the opinion or certification of any independent public accountant as to any financial statement of Company, any qualification or exception to such opinion or certification (i) which is of a "going concern" or similar nature, (ii) which relates to the limited scope of examination of matters relevant to such financial statement (except, in the case of matters relating to any acquired business or assets, in respect of the period prior to the acquisition by Company of such business or asset), or (iii) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause Company to be in default of any of its obligations under Section 7.6. "INDEBTEDNESS", as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which purchase price is (a) except in the case of accounts payable arising in the ordinary course of business, due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument (including in respect of Earn-Outs, but solely to the extent included as liabilities in accordance with GAAP), and (v) all obligations of the types referred to in clauses (i) through (iv) above, secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements and Currency Agreements constitute (X) in the case of Hedge Agreements, Contingent Obligations, and (Y) in all other cases, Investments, and in neither case constitute Indebtedness. "INDEMNITEE" has the meaning assigned to that term in subsection 10.3. 15 "INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. "INTERCOMPANY NOTE RELATING TO TRANCHE A TERM LOANS AND WORKING CAPITAL LOANS" means the Promissory Note executed by DAH in favor of Finance Co. on the Closing Date, substantially in the form of EXHIBIT XXVIII annexed hereto, evidencing the borrowings made by DAH from Finance Co. from time to time (other than borrowings evidenced by the Intercompany Note Relating to Tranche B Term Loans), as such Intercompany Note may be amended, supplemented or otherwise modified from time to time. "INTERCOMPANY NOTE RELATING TO TRANCHE B TERM LOANS" means the Promissory Note executed by DAH in favor of Finance Co. on the Closing Date, substantially in the form of EXHIBIT XXIV annexed hereto, evidencing the borrowings made by DAH from Finance Co. from the proceeds of Tranche B Term Loans, as such Intercompany Note Relating to Tranche B Term Loans may be amended, supplemented or otherwise modified from time to time. "INTERCOMPANY NOTES" means, collectively, the Intercompany Note Relating to Tranche A Term Loans and Working Capital Loans and the Intercompany Note Relating to Tranche B Term Loans. "INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan, each Quarterly Date, commencing on the first such Quarterly Date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; PROVIDED that in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include each date that is three months, or an multiple thereof, after the commencement of such Interest Period. "INTEREST PERIOD" has the meaning assigned to that term in subsection 2.2B. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (including any Subsidiary of Company), (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its Subsidiaries, of any equity Securities of such Subsidiary, or (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person (other than a wholly-owned Subsidiary of Company). The amount of any Investment shall be the original cost of such Investment PLUS the cost 16 of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "INVESTMENT ACCOUNT AGREEMENT" means the Investment Account Agreement executed and delivered by Company and Administrative Agent on the Closing Date, substantially in the form of EXHIBIT XXVII annexed hereto, as such Investment Account Agreement may hereafter be amended, supplemented or otherwise modified from time to time. "INVESTMENT ACCOUNTS" means the "Investments Accounts" as defined in the Investment Account Agreement. "IP COLLATERAL" means, collectively, the Intellectual Property Collateral under the Security Agreement. "ISSUING LENDER" means, First Chicago in its capacity as issuer of a Letter of Credit or, if First Chicago declines to issue such Letter of Credit in accordance with subsection 3.1B(ii), then any other Working Capital Lender that at the request of Company agrees to issue a Letter of Credit pursuant to subsection 3.1B(ii). "LC REFUNDING LOAN" has the meaning assigned to that term in subsection 2.1B. "LEASEHOLD PROPERTY" means any leasehold interest of any Loan Party as lessee under any lease of real property. "LENDER" and "LENDERS" means the persons identified as "Lenders" and listed on Schedule I attached to this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1, and the term "Lenders" shall include Swing Line Lender unless the context otherwise requires. "LETTER OF CREDIT" or "LETTERS OF CREDIT" means Letters of Credit issued or to be issued by Issuing Lenders for the account of Company pursuant to subsection 3.1. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is available for drawing under all Letters of Credit then outstanding (whether or not any conditions to any such drawing can then be met), PLUS (ii) the aggregate amount of all drawings under Letters of Credit honored by Issuing Lenders and not theretofore reimbursed by Company. "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means one or more of the Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Working Capital Loans, Swing Line Loans or Acquisition Loans or any combination thereof. "LOAN DOCUMENTS" means this Agreement, the Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of an Issuing Lender relating to, the Letters of Credit), the Guaranties and the Collateral Documents. 17 "LOAN PARTY" means each of Parent, Acquisition Co., Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "LOAN PARTIES" means all such Persons, collectively. "MARGIN DETERMINATION CERTIFICATE" means an Officer's Certificate of Company delivered pursuant to subsection 6.1(iv) setting forth in reasonable detail, and calculating in accordance with subsections 1.2(b) and 1.2(c), the Consolidated Leverage Ratio for the four-Fiscal Quarter period ending as of the last day of the Fiscal Quarter with respect to which such Officer's Certificate is delivered. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL ADVERSE EFFECT" means (i) a material adverse effect upon the business, operations, properties, assets, financial condition or prospects of Company and its Subsidiaries taken as a whole or of DAH and its Subsidiaries taken as a whole or (ii) the material impairment of the ability of the Loan Parties to perform, or of Agents or Lenders to enforce, the Obligations. "MATERIAL CONTRACT" means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. "MERGER" means the merger of Acquisition Co. with and into DAH pursuant to the Merger Agreement. "MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of July 16, 1998 between Acquisition Co. and DAH, as in effect on the date hereof and as such agreement may be amended from time to time to the extent permitted under subsection 7.15. "MERGER DATE" means the date upon which the Merger and the Second Merger are consummated. "MERGER DATE FEE MORTGAGED PROPERTY" means each owned property listed on Schedule 6.8. "MERGER DATE LEASEHOLD MORTGAGED PROPERTY" means each leased property listed on Schedule 6.8 to the extent that DAH or the applicable Subsidiary is able to obtain the agreement of the applicable lessor referred to in subsection 6.8C. "MERGER DATE MORTGAGED PROPERTY" means, collectively, the Merger Date Fee Mortgaged Properties and the Merger Date Leasehold Mortgaged Properties. "MINIMUM SHARES" means, at the date of determination, a majority of the total number of shares of DAH Common Stock outstanding on a fully diluted basis but not less than a sufficient number of such shares to permit Acquisition Co. acting alone to cause the Merger to be approved by the stockholders of DAH. "MORTGAGE" means (i) a security instrument (whether designated as a deed of trust or a mortgage or by any similar title) executed and delivered by any Loan Party, substantially in such form as may be reasonably approved by Agents in their sole discretion, in each case with such changes thereto as may be recommended by Administrative Agent's local counsel based on local laws or customary local mortgage or deed of trust practices, or (ii) at the option of Agents, in the 18 case of any future Mortgaged Property, an amendment to an existing Mortgage or a new Mortgage, in form satisfactory to Agents, adding such future Mortgaged Property to the Real Property Assets encumbered by such existing Mortgage, in either case as such security instrument or amendment may be amended, supplemented or otherwise modified from time to time. "MORTGAGES" means all such instruments, including any future Mortgages, collectively. "MORTGAGED PROPERTY" means a Merger Date Mortgaged Property (as defined in subsection 6.13) or a property mortgaged in the future pursuant to subsection 6.8. "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs incurred in connection with such Asset Sale, including (i) income taxes and all other governmental costs and expenses reasonably estimated to be actually payable in connection with such Asset Sale (including, in the event of any Asset Sale with respect to non-U.S. assets, any such taxes, costs, and expenses resulting from repatriating such proceeds to the U.S.), (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale, (iii) all reasonable and customary fees and expenses with respect to legal, investment banking, brokerage, accounting and other professional fees, sales commissions and disbursements, (iv) reserves for purchase price adjustments and retained liabilities reasonably expected to be payable by Company and its Subsidiaries in cash in connection therewith and (v) solely with respect to any Asset Sale consummated by a Subsidiary, the pro rata portion of any such Cash payments required to be distributed to any shareholders of such Subsidiary or any other Subsidiary that, directly or indirectly, holds the capital stock of such Subsidiary (but excluding in each case Company and its Subsidiaries). "NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof, but excluding (x) any such payments or proceeds thereunder required to be paid to a creditor (other than the holders of the Loans) secured by such assets that is required to be repaid under the terms thereof as a result of the relevant covered loss or taking, (y) any income taxes and all other taxes, governmental costs and expenses reasonably estimated to be actually payable in connection with the receipt of such Net Insurance/Condemnation Proceeds and (z) solely with respect to any Net Insurance/Condemnation Proceeds received by a Subsidiary, the pro rata portion of any such Cash payments required to be distributed to any shareholders of such Subsidiary or any other Subsidiary that, directly or indirectly, holds the capital stock of such Subsidiary (but excluding in each case Company and its Subsidiaries). "NET SECURITIES PROCEEDS " has the meaning set forth in subsection 2.4B(iii)(c). "NON-CONSENTING LENDER" means any Lender that, in response to any request by Company or Administrative Agent to a departure from, waiver of or amendment to any provision of any Loan 19 Document that requires the agreement of all Lenders or all Lenders holding Commitments or Loans (and , if applicable, participations in letters of credit) of a particular type, which departure , waiver or amendment received the consent of the Required Lenders or the holders of a majority of the Commitments or (if the applicable Commitments of such type shall have expired or been terminated) outstanding Loans of such type, and, if applicable, participations in letters of credit, as the case may be, shall not have given its consent to such departure, waiver or amendment. "NON-FUNDING LENDER" means a Lender that shall have failed to fund any Loan hereunder that it was required to have funded in accordance with the terms hereof, which Loan was included in any borrowings in respect of which a majority of the aggregate amount of all Loans included in such borrowings were funded by the Lenders party hereto (other than any Lender not required to do so as a result of the provisions of Section 2.6C or 2.6D being applicable to such Lender with respect to such borrowing). "NON-WHOLLY-OWNED SUBSIDIARY" means any Subsidiary of Company that is not a Wholly-Owned Subsidiary. "NOTES" means one or more of the Tranche A Term Notes, Tranche B Term Notes, Tranche C Term Notes, Working Capital Notes, Swing Line Notes or Acquisition Notes or any combination thereof. "NOTICE OF BORROWING" means a notice substantially in the form of EXHIBIT I annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in the form of EXHIBIT II annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein. "NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice substantially in the form of EXHIBIT III annexed hereto delivered by Company to Administrative Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. "OBLIGATIONS" means all obligations of every nature of each Loan Party from time to time owed to Agents, Lenders or any of them under the Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "OFFICER'S CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chief executive officer, president, treasurer or its chief financial officer (or if there is no chief financial officer, its chief accounting officer). "OPERATING LEASE" means, as applied to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease in accordance with GAAP other than any such lease under which that Person is the lessor. "ORIGINAL TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche B Term Loan to Company on the Closing Date pursuant to subsection 2.1A(ii), and 20 "ORIGINAL TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "ORIGINAL TRANCHE B TERM LOANS" means only those Tranche B Term Loans made by Tranche B Term Loan Lenders to Company on the Closing Date pursuant to subsection 2.1A(ii). "PARENT" means DeCrane Holdings Co., a Delaware corporation. "PARENT GUARANTY" means the Parent Guaranty executed and delivered by Parent on the Closing Date, substantially in the form of EXHIBIT XXI annexed hereto, as such Parent Guaranty may be amended, supplemented or otherwise modified from time to time. "PARENT P-I-K SECURITIES" means the PIK Notes and the PIK Preferred Stock. "PARENT PLEDGE AGREEMENT" means the Pledge Agreement executed and delivered by Parent on the Closing Date, substantially in the form of EXHIBIT XX annexed hereto, as such Parent Pledge Agreement may be amended, supplemented or otherwise modified from time to time. "PATS ACQUISITION" means the acquisition by Company of 100% of the capital stock of PATS, Inc. for an equity purchase price of approximately $41,500,000 pursuant to that certain Stock Purchase and Sale Agreement dated as of December 15, 1998, by and among PATS, Inc., the principal shareholders of PATS, Inc. and Company. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ACQUISITION" means the acquisition of a business (whether through the purchase of assets or of shares of capital stock) by Company or one of its Subsidiaries (w) which is in a line of business similar or related to the lines of business of Company and its Subsidiaries, (x) for total consideration, for acquisitions made after the Amended and Restated Credit Agreement Closing Date, (including without limitation, cash purchase price, deferred or financed purchase price and the assumption of Indebtedness, including Assumed Indebtedness, and other liabilities) of not more than $25,000,000 for any single acquisition or series of related acquisitions and, which consideration, when aggregated with the consideration for all other Permitted Acquisitions made after the Amended and Restated Credit Agreement Closing Date, does not exceed $50,000,000; PROVIDED that such aggregate total consideration for Permitted Acquisitions of or by Subsidiaries that are not Subsidiary Guarantors shall not exceed an aggregate of $30,000,000 plus the Company Excess Cash Flow Amount; AND PROVIDED FURTHER that such aggregate total consideration for Permitted Acquisitions of or by Non-Wholly-Owned Subsidiaries that are not Subsidiary Guarantors shall not exceed an aggregate of $10,000,000 plus the Company Excess Cash Flow Amount, (y) at a time at which no Event of Default or Potential Event of Default shall exist or shall occur as a result of giving effect to such proposed acquisition, and (z) after giving effect to such acquisition, including without limitation giving effect to the incurrence or assumption of any Indebtedness or any other costs and expenditures or the making of any distributions and other payments in connection with or otherwise relating to such Permitted Acquisition, Company shall be in pro forma compliance with each of the financial covenants set forth in subsection 7.6 for the immediately preceding four Fiscal Quarter period prior to such date of determination. 21 "PERMITTED ACQUISITION COMPLIANCE CERTIFICATE" means an Officer's Certificate substantially in the form of EXHIBIT XXVI annexed hereto delivered to Administrative Agent by Company pursuant to subsection 7.7(vii). "PERMITTED ENCUMBRANCES" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3; (ii) Liens of landlords (except as may be waived or released as more particularly described in subsection 6.8), Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen, contractors and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 30 days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; (v) leases or subleases granted to third parties and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries; (vi) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not materially detract from the value or impair the use by the Company or any of its Subsidiaries in the ordinary conduct of the business of Company or any of its Subsidiaries; (vii) any (a) interest or title of a lessor or sublessor under any permitted lease, (b) restriction or encumbrance to which the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b); (viii) Liens arising from filing UCC financing statements relating solely to leases not prohibited by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; 22 (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company or such Subsidiary; and (xiii) the general and special exceptions approved by Agents, which exceptions appear on the mortgagee title insurance policies with respect to the owned and leased properties to be encumbered by a Mortgage, pursuant to subsections 6.8B, 6.8C and 6.13. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "PIK NOTES" means Senior Pay-in-Kind Notes, if any, issued by Parent, in exchange for PIK Preferred Stock which notes shall (i) provide for the payment of interest by accretion of the original face amount thereof or by the issuance of additional PIK Notes for a period of not less than five years after the Closing Date, (ii) not provide for any scheduled redemptions or prepayments or any sinking fund installment payments or maturities prior to a date which is seven and one-half years after the Closing Date, and (iii) have terms and conditions not less favorable to Parent and Lenders than those set forth in the draft "Description of Exchange Debentures" dated August 27, 1998, a copy of which has been distributed to the Lenders. "PIK PREFERRED STOCK" means Pay-in-Kind Preferred Stock issued by Parent, the face amount thereof to be issued on the Closing date being not less than $34,000,000, providing for the payment of dividends thereon by the issuance of additional shares of such Pay-in-Kind Preferred Stock or by accretion of the original face amount thereof for a period of not less than five years from the Closing Date, which Pay-in-Kind Preferred Stock shall be unsecured and unguaranteed, shall not provide for any scheduled redemptions or prepayments prior to a date which is seven-and-a-half years after the Closing Date, as amended from time to time to the extent permitted under the Parent Guaranty. "PLEDGED COLLATERAL" means, collectively, at any time, the "Pledged Collateral" as defined in any of the Finance Co. Pledge Agreement, the DAH Pledge Agreement, the Parent Pledge Agreement and the Subsidiary Pledge Agreements as is a Collateral Document at such time. "POTENTIAL EVENT OF DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "PPI ACQUISITION" means the acquisition by Company of 100% of the capital stock of PPI Holdings, Inc. for an equity purchase price of approximately $50,800,000 pursuant to that certain Stock Purchase and Sale Agreement dated as of March 26, 1999, by and among PPI Holdings, Inc.; the persons named as shareholders on the signature pages thereof, owners of the capital stock of PPI Holdings, Inc.; and Company. 23 "PROPERTY REINVESTMENT APPLICATION" means the application of Net Asset Sale Proceeds or Net Insurance/Condemnation Proceeds, as the case may be, to the acquisition by Company or its Subsidiaries of tangible or intangible property or assets (other than property or assets that constitute current assets under GAAP, unless the acquisition thereof is incidental to the acquisition of a materially greater amount of non-current assets) that is to be used in the business of Company and its Subsidiaries. "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Tranche A Term Loan Commitment or the Tranche A Term Loan of any Lender, the percentage obtained by DIVIDING (x) the Tranche A Term Loan Exposure of that Lender BY (y) the aggregate Tranche A Term Loan Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Tranche B Term Loan Commitments or the Tranche B Term Loan of any Lender, the percentage obtained by DIVIDING (1) the Tranche B Term Loan Exposure of that Lender BY (2) the aggregate Tranche B Term Loan Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the Working Capital Loan Commitment or the Working Capital Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender or any participations in any Swing Line Loans purchased or deemed purchased by any Working Capital Lender, the percentage obtained by DIVIDING (x) the Working Capital Loan Exposure of that Lender BY (y) the aggregate Working Capital Loan Exposure of all Lenders, (iv) with respect to all payments, computations and other matters relating to the Acquisition Loan Commitment or the Acquisition Loans of any Lender, the percentage obtained by DIVIDING (x) the Acquisition Loan Exposure of that Acquisition Lender BY (y) the aggregate Acquisition Loan Exposure of all Lenders, (v) with respect to all payments, computations and other matters relating to the Tranche C Term Loan Commitment or the Tranche C Term Loan of any Lender, the percentage obtained by DIVIDING (x) the Tranche C Term Loan Exposure of that Lender BY (y) the aggregate Tranche C Term Loan Exposure of all Lenders, and (vi) for all other purposes with respect to each Lender, the percentage obtained by DIVIDING (x) the sum of the Tranche A Term Loan Exposure of that Lender PLUS the Tranche B Term Loan Exposure of that Lender PLUS the Tranche C Term Loan Exposure of that Lender PLUS the Working Capital Loan Exposure of that Lender plus the Acquisition Loan Exposure of that Lender BY (y) the sum of the aggregate Tranche A Term Loan Exposure of all Lenders PLUS the aggregate Tranche B Term Loan Exposure of all Lenders PLUS the aggregate Tranche C Term Loan Exposure of all Lenders PLUS the aggregate Working Capital Loan Exposure of all Lenders PLUS the aggregate Acquisition Loan Exposure of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. The initial Pro Rata Share of each Lender as of the Closing Date for purposes of each of clauses (i), (ii), (iii) and (iv) of the preceding sentence is set forth opposite the name of that Lender in SCHEDULE 2.1 annexed to the Original Credit Agreement. "PTO" means the United States Patent and Trademark Office or any successor or substitute office in which filings are necessary or, in the opinion of Administrative Agent, desirable in order to create or perfect Liens on any IP Collateral. "QUARTERLY DATE" means each March 31, June 30, September 30 and December 31. "REAL PROPERTY ASSET" means, at any time of determination, any interest then owned by any Loan Party in any real property. "REFUNDED SWING LINE LOANS" has the meaning assigned to that term in subsection 2.1A(iv). 24 "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT DATE" has the meaning assigned to that term in subsection 3.3B. "RELATED AGREEMENTS" means, collectively, the Intercompany Notes, the Merger Agreement, the Senior Subordinated Bridge Note Agreement, if any, the Senior Subordinated Bridge Notes, if any, any guaranties related thereto and, if and when executed, the Senior Subordinated Note Indenture and the Senior Subordinated Notes and any guaranties related to any of the foregoing, the Parent PIK Securities and the agreements or other instruments pursuant to which the Parent PIK Securities have been issued or are governed, including without limitation any note purchase agreement, any indenture or any certificate of designation and all other agreements or instruments delivered pursuant to or in connection with any of the foregoing including any registration rights agreement. "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater. "REQUISITE LENDERS" means on any date, Lenders having or holding more than 50% of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders PLUS (ii) the aggregate Tranche B Term Loan Exposure of all Lenders PLUS (iii) the aggregate Tranche C Term Loan Exposure of all Lenders PLUS (iv) the aggregate Working Capital Loan Exposure of all Lenders PLUS (v) the aggregate Acquisition Loan Exposure of all Lenders, in each case on such date. "RESERVE REQUIREMENT" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "RESTRICTED JUNIOR PAYMENT" means (i) any distribution, direct or indirect, on account of any class of stock of Company now or hereafter outstanding, except a distribution payable solely in shares of that class or a junior class of stock payable solely to holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness. "SECOND MERGER" means the merger of Finance Co. with and into DAH. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. 25 "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SECURITY AGREEMENT" means the Security Agreement executed and delivered on the Merger Date by Company and each then existing Subsidiary Guarantor on the Merger Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.7, substantially in the form of EXHIBIT XVI annexed hereto, as such Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "SENIOR SUBORDINATED BRIDGE NOTE AGREEMENT" means that certain Securities Purchase Agreement, if any, pursuant to which the Senior Subordinated Bridge Notes, if any, are issued, as in effect on the date of execution of this Agreement and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.15. "SENIOR SUBORDINATED BRIDGE NOTES" means the senior subordinated increasing rate notes, if any, issued by Company on the Closing Date, which notes (i) are unsecured and subordinated to the Obligations, (ii) mature at least one year after the Closing Date; and (iii) provide that the maturity thereof will be automatically extended to the date which is seven and one-half years after the Closing Date, subject to satisfaction of certain conditions, as such notes may be amended from time to time thereafter to the extent permitted under subsection 7.15. "SENIOR SUBORDINATED NOTE INDENTURE" means the senior subordinated note indenture, if any, executed by Company and a trustee named thereunder pursuant to which the Senior Subordinated Notes, if any, are issued, as such indenture may be amended from time to time to the extent permitted under subsection 7.15. "SENIOR SUBORDINATED NOTES" means the senior subordinated notes, if any, issued by Company which notes shall be unsecured and shall not provide for any scheduled redemptions or prepayments or any sinking fund installment payments or maturities prior to a date which is seven and one-half years after the Closing Date, which shall have terms and conditions substantially as set forth in the Preliminary Offering Memorandum dated August 12, 1998 or otherwise in form and substance satisfactory to Agents, as such notes may be amended from time to time to the extent permitted under subsection 7.15. "Senior Subordinated Notes" shall also refer to the registered Securities, if any, having the same terms and conditions as the notes described above which are issued by Company in exchange for such notes upon exercise of the customary registration rights accompanying such notes. "SOLVENCY CERTIFICATE" means an Officer's Certificate substantially in the form of EXHIBIT XXII annexed hereto. "SOLVENT" means, with respect to any Person, that as of the date of determination (i) the then fair value of the property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person and (ii) the then fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (iii) such Person's capital is not unreasonably small in relation to its business; and (iv) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at 26 such time, represents the amount that can reasonably be expected to become an actual or matured liability. "STANDBY LETTER OF CREDIT" means any standby letter of credit or similar instrument issued for the purpose of supporting (i) Indebtedness of Company or any of its Subsidiaries, (ii) workers' compensation liabilities of Company or any of its Subsidiaries, (iii) the obligations of third party insurers of Company or any of its Subsidiaries, (iv) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (v) performance, payment, deposit, surety or other obligations of Company or any of its Subsidiaries. "SUBORDINATED INDEBTEDNESS" means Indebtedness of Company subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to Agents and Requisite Lenders. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) constituting members of the governing body of such entity is at the time owned and controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. For purposes of this Agreement and the other Loan Documents, any Acquired Controlled Person shall be deemed to be a "Subsidiary" of Company for purposes of subsections 5.1, 5.5, 5.6, 5.7, 5.9, 5.10, 6.4A and the first sentence of 6.4B, 6.6, 6.9, 7.1, 7.2A, 7.2C, 7.3, 7.4, 7.5, 7.7, 7.10, 7.11, 7.12 and 7.14 and, to the extent (and only to the extent) that it relates to any of the foregoing subsections, Section 8. "SUBSIDIARY GUARANTOR" means (i) at any time prior to the consummation of the Merger, Acquisition Co. and (ii) any time upon and after the consummation of the Merger, any Subsidiary of Company that executes and delivers a counterpart of the Subsidiary Guaranty on the Merger Date or from time to time thereafter pursuant to subsection 6.7; PROVIDED that prior to the consummation of the Merger, DAH and the Wholly-Owned Domestic Subsidiaries of DAH shall be deemed to be Subsidiary Guarantors. "SUBSIDIARY GUARANTY" means the Subsidiary Guaranty executed and delivered by Acquisition Co. on the Closing Date and by existing Subsidiaries of Company on the Merger Date and to be executed and delivered by additional Subsidiaries of Company from time to time thereafter in accordance with subsection 6.7, substantially in the form of EXHIBIT XVIII annexed hereto, as such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time. "SUBSIDIARY PLEDGE AGREEMENT" means each Subsidiary Pledge Agreement executed and delivered by an existing Subsidiary Guarantor on the Merger Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.7, in each case substantially in the form of EXHIBIT XIX annexed hereto, as such Subsidiary Pledge Agreement may be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY PLEDGE AGREEMENTS" means all such Subsidiary Pledge Agreements, collectively. "SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to that term in subsection 9.1B. 27 "SWING LINE LENDER" means First Chicago, or any Person serving as a successor Administrative Agent hereunder, in its capacity as Swing Line Lender hereunder. "SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(iv). "SWING LINE LOANS" means the Loans made by Swing Line Lender to Company pursuant to subsection 2.1A(iv). "SWING LINE NOTE" means (i) the promissory note of Company issued pursuant to subsection 2.1D(iv) on the Closing Date and (ii) any promissory note issued by Company to any successor Administrative Agent and Swing Line Lender pursuant to the last sentence of subsection 9.3B, in each case substantially in the form of EXHIBIT VII annexed hereto, as it may be amended, supplemented or otherwise modified from time to time. "SYNDICATION AGENT" has the meaning assigned to that term in the introduction to this Agreement. "TAX" or "TAXES" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, imposed by any taxing authority, from or through which payments originate or are made or deemed made by or to the Company, but excluding any income, excise, stamp or franchise taxes and other similar taxes, fees, duties, withholdings or other charges imposed on any Lender or any Agent as a result of a present or former connection between the applicable lending office (or, in the case of any Agent, the office through which it performs any of its actions as Agent) of such Lender or Agent, and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from such Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or taken any action to enforce, this Agreement or the other Loan Documents). "TENDER OFFER" means the offer by Acquisition Co. to purchase for $23.00 per share in cash all of the outstanding shares of DAH Common Stock pursuant to the Tender Offer Materials. "TENDER OFFER MATERIALS" means the Tender Offer Statement on Schedule 14D-1 filed by Acquisition Co. on July 22, 1998 with the Securities and Exchange Commission pursuant to Section 14(d)(1) of the Exchange Act, together with all exhibits, supplements and amendments thereto entered into on or prior to the date hereof and any amendments entered into after the date hereof that relate only to any extension of time during which the offer to purchase set forth therein remains outstanding and other amendments that are approved by Requisite Lenders. "TERM LOANS" means, collectively, the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans. "TITLE COMPANY" means one or more title insurance companies selected by Company and reasonably satisfactory to Agents. "TOTAL UTILIZATION OF WORKING CAPITAL LOAN COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Working Capital Loans PLUS (ii) the aggregate principal amount of all outstanding Swing Line Loans PLUS (iii) the Letter of Credit Usage. 28 "TRADE LETTERS OF CREDIT" means Letters of Credit issued for the purpose of providing the principal payment mechanism for the purchase of goods through the presentation of documents to the Issuing Lender. "TRANCHE A TERM LOAN COMMITMENT" means the commitment of a Lender to make Tranche A Term Loans to Company pursuant to subsection 2.1A(i), and "TRANCHE A TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE A TERM LOAN EXPOSURE" means, with respect to any Tranche A Term Loan Lender as of any date of determination the sum, without duplication, of (i) that Lender's unused Tranche A Term Loan Commitment and (ii) the outstanding principal amount of the Tranche A Term Loans of that Lender. "TRANCHE A TERM LOAN LENDER" means any Lender who holds a Tranche A Term Loan Commitment, or who has made a Tranche A Term Loan hereunder and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE A TERM LOANS" means the Tranche A Term Loans made by Tranche A Term Loan Lenders to Company pursuant to subsection 2.1A(i). "TRANCHE A TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(i) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche A Term Loan Commitments or Tranche A Term Loans of any Tranche A Term Loan Lenders, in each case substantially in the form of EXHIBIT IV annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(ii), and "TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE B TERM LOAN EXPOSURE" means, with respect to any Tranche B Term Loan Lender as of any date of determination (i) prior to the funding of the Tranche B Term Loans, that Lender's Tranche B Term Loan Commitment and (ii) after the funding of the Tranche B Term Loans, the outstanding principal amount of the Tranche B Term Loan of that Lender. "TRANCHE B TERM LOAN LENDER" means any Lender who holds a Tranche B Term Loan Commitment or who has made a Tranche B Term Loan hereunder, and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE B TERM LOANS" means the Tranche B Term Loans, including both the Original Tranche B Term Loans and the Additional Tranche B Term Loans, made by Tranche B Term Loan Lenders to Company pursuant to subsection 2.1A(ii). "TRANCHE B TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(ii) on the Closing Date, (ii) the Additional Tranche B Term Notes and (iii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche B Term Loan Commitments or Tranche B Term Loans of any Tranche B Term Loan Lenders, in each case substantially in the form of EXHIBIT V annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. 29 "TRANCHE C TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche C Term Loan to Company pursuant to subsection 2.1A(vi), and "TRANCHE C TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE C TERM LOAN EXPOSURE" means, with respect to any Tranche C Term Loan Lender as of any date of determination, the sum, without duplication, of (i) that Lender's unused Tranche C Term Loan Commitment and (ii) the outstanding principal amount of the Tranche C Term Loans of that Lender. "TRANCHE C TERM LOAN LENDER" means any Lender who holds a Tranche C Term Loan Commitment or who has made a Tranche C Term Loan hereunder, and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE C TERM LOANS" means the Tranche C Term Loans made by Tranche C Term Loan Lenders to Company pursuant to subsection 2.1A(vi). "TRANCHE C TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(vi) on the Amended and Restated Credit Agreement Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche C Term Loan Commitments or Tranche C Term Loans of any Tranche C Term Loan Lenders, in each case substantially in the form of EXHIBIT XXXI annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "TRANSACTION" means the Tender Offer, the Merger, the Second Merger and the financings thereof pursuant to this Agreement, the Senior Subordinated Bridge Notes, if any, the Senior Subordinated Notes, if any, and the PIK Preferred Stock. "TRANSACTION COSTS" means the fees, costs and expenses payable by any Loan Party in connection with the Tender Offer, the Mergers and the related financing and other transactions contemplated hereby. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "WHOLLY-OWNED SUBSIDIARY" means any Subsidiary of Company all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by Company and/or one or more of Company's other Wholly-Owned Subsidiaries. "WORKING CAPITAL LENDER" means a Lender having a Working Capital Loan Commitment. "WORKING CAPITAL LOAN COMMITMENT" means the commitment of a Lender to make Working Capital Loans to Company pursuant to subsection 2.1A(iii), and "WORKING CAPITAL LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "WORKING CAPITAL LOAN COMMITMENT" means the commitment of a Working Capital Lender to make Working Capital Loans to Company pursuant to subsection 2.1A(iii), and "WORKING CAPITAL LOAN COMMITMENTS" means such commitments of all Working Capital Lenders in the aggregate. "WORKING CAPITAL LOAN COMMITMENT TERMINATION DATE" means September 30, 2004. 30 "WORKING CAPITAL LOAN EXPOSURE" means, with respect to any Working Capital Lender as of any date of determination (i) prior to the termination of the Working Capital Loan Commitments, that Working Capital Lender's Working Capital Loan Commitment and (ii) after the termination of the Working Capital Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Working Capital Loans of that Working Capital Lender PLUS (b) in the event that Working Capital Lender is an Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Working Capital Lender (in each case net of any participations purchased by other Working Capital Lenders in such Letters of Credit or any unreimbursed drawings thereunder) PLUS (c) the aggregate amount of all participations purchased by that Working Capital Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit PLUS (d) in the case of Swing Line Lender, the aggregate outstanding principal amount of all Swing Line Loans (net of any participations therein purchased by other Working Capital Lenders) PLUS (e) the aggregate amount of all participations purchased by that Working Capital Lender in any outstanding Swing Line Loans. "WORKING CAPITAL LOANS" means the Loans made by Working Capital Lenders to Company pursuant to subsection 2.1A(iii). "WORKING CAPITAL NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(iii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Working Capital Loan Commitments and Working Capital Loans of any Working Capital Lenders, in each case substantially in the form of EXHIBIT VI annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. 1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS UNDER AGREEMENT. (a) Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder (including under subsection 7.6) shall be prepared, in accordance with GAAP, as in effect in the United States on December 31, 1997 and, unless expressly provided herein, shall be computed or determined on a consolidated basis and without duplication. (b) For purposes of computing the Consolidated Fixed Charge Coverage Ratio, Consolidated Interest Coverage Ratio and Consolidated Leverage Ratio (and any financial calculations required to be made or included within such ratios) as of the end of any Fiscal Quarter and for purposes of computing Consolidated EBITDA in connection with subsection 7.6C (but not for purposes of computing Consolidated Excess Cash Flow for any period), as at the end of any Fiscal Quarter, all components of such ratios (other than Consolidated Capital Expenditures) or Consolidated EBITDA for the period of four Fiscal Quarters ending at the end of such Fiscal Quarter shall include or exclude, as the case may be, without duplication, such components of such ratios or Consolidated EBITDA attributable to any business or assets that have been acquired or disposed of by the Company or any of its Subsidiaries (including through mergers or consolidations) after the first day of such period of four Fiscal Quarters and prior to the end of such period, as determined in good faith by the Company on a pro forma basis for such period of four Fiscal Quarters as if such acquisition or disposition had occurred on such first day of such period (including, whether or not such inclusion would be permitted under GAAP or Regulation S-X of the Securities and Exchange Commission, cost savings that would have been realized had such acquisition occurred on such day. (c) All calculations of Consolidated EBITDA, Consolidated Fixed Charge Coverage Ratio 31 and Consolidated Interest Coverage Ratio (and related definitions) for any period ending prior to or including the Merger Date shall be made on a pro-forma basis assuming the Tender Offer and the Merger were consummated on the first day of such period and all calculations of Consolidated Interest Expense and interest expense included in the calculation of Consolidated Interest Coverage Ratio and Consolidated Fixed Charge Coverage Ratio shall be calculated on a pro forma basis as if the Merger were consummated on the Closing Date and Annualized as set forth in the definitions of Consolidated Interest Coverage Ratio and Consolidated Fixed Charge Coverage Ratio. All calculations of Consolidated Total Debt on any date prior to the Merger Date shall be made on a pro forma basis assuming the Merger was consummated on such date. 1.3 OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION. A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. C. The use in any of the Loan Documents of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 COMMITMENTS; MAKING OF LOANS; NOTES. A. COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Tranche A Term Loan Lender hereby severally agrees to make the Tranche A Term Loans described in subsection 2.1A(i), each Tranche B Term Loan Lender hereby severally agrees to make the Tranche B Term Loans described in subsection 2.1A(ii), each Working Capital Lender hereby severally agrees to make the Working Capital Loans described in subsection 2.1A(iii), Swing Line Lender hereby agrees to make the Swing Line Loans described in subsection 2.1A(iv), each Acquisition Lender hereby severally agrees to make the Acquisition Loans described in subsection 2.1A(v) and each Tranche C Term Loan Lender hereby severally agrees to make the Tranche C Term Loans described in subsection 2.1A(vi). (i) TRANCHE A TERM LOANS. Each Tranche A Term Loan Lender severally agrees to lend to Company on the Closing Date and on the Merger Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche A Term Loan Commitments to be used for the purposes identified in subsection 2.5A; PROVIDED that prior to, or simultaneously with the funding of the initial Tranche A Term Loans, the Tranche B Term Loans shall have been funded in full. The amount of each Tranche A Term Loan Lender's Tranche A Term Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate amount of the Tranche A Term Loan Commitments is $35,000,000; PROVIDED that the Tranche A Term Loan Commitments of the Tranche A Term Loan Lenders shall be adjusted to give effect to any assignments of the Tranche A Term 32 Loan Commitments pursuant to subsection 10.1B and to any reductions thereof pursuant to Section 2.4B(ii). Each Tranche A Term Loan Lender's Term Loan Commitment (i) shall expire immediately and without further action on October 31, 1998, if the initial Tranche A Term Loans are not made on or before that date, (ii) shall be reduced by an amount equal to the principal amount of the Tranche A Term Loan, if any, made by such Tranche A Term Loan Lender on the Closing Date, immediately after giving effect thereto on the Closing Date, and (iii) to the extent unused, shall expire on the close of business on the Merger Date. Company may make a borrowing under the Tranche A Term Loan Commitments on the Closing Date and on the Merger Date. Amounts borrowed under this subsection 2.1A(i) and subsequently repaid or prepaid may not be reborrowed. (ii) TRANCHE B TERM LOANS. Each Tranche B Term Loan Lender having an Original Tranche B Term Loan Commitment severally agrees to lend to Company on the Closing Date an amount not exceeding its pro rata share of the aggregate amount of the Original Tranche B Term Loan Commitments, which pro rata share is set forth opposite its name on SCHEDULE 2.1 attached hereto, and each Tranche B Term Loan Lender having an Additional Tranche B Term Loan Commitment severally agrees to lend to Company on the First Amendment Closing Date an amount not exceeding its pro rata share of the aggregate amount of the Additional Tranche B Term Loan Commitments, which pro rata share is set forth opposite its name on SCHEDULE 2.1 attached hereto, in each case to be used for the purposes identified in subsection 2.5A. The amounts of each Tranche B Term Loan Lender's Original Tranche B Term Loan Commitment and each Tranche B Term Loan Lender's Additional Tranche B Term Loan Commitment are set forth opposite such Tranche B Term Loan Lender's name on SCHEDULE 2.1 annexed hereto. The aggregate amount of the Original Tranche B Term Loan Commitments is $45,000,000, the aggregate amount of the Additional Tranche B Term Loan Commitments is $20,000,000 and the aggregate amount of the Tranche B Term Loan Commitments is $65,000,000; PROVIDED that the Tranche B Term Loan Commitments of Tranche B Term Loan Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Tranche B Term Loan Lender's Original Tranche B Term Loan Commitment shall expire immediately and without further action on the earlier of (i) October 31, 1998, if the Original Tranche B Term Loans are not made on or before that date and (ii) at the close of business on the Closing Date. Company may make only one borrowing under the Original Tranche B Term Loan Commitments and may make only one borrowing under the Additional Tranche B Term Loan Commitments. Amounts borrowed under this subsection 2.1A(ii) and subsequently repaid or prepaid may not be reborrowed. (iii) WORKING CAPITAL LOANS. Each Working Capital Lender severally agrees, subject to the limitations set forth below with respect to the maximum amount of Working Capital Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Closing Date to but excluding the Working Capital Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Working Capital Loan Commitments to be used for the purposes identified in subsection 2.5B. The original amount of each Working Capital Lender's Working Capital Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate original amount of the Working Capital Loan Commitments is $25,000,000; PROVIDED that the Working Capital Loan Commitments of the Working Capital Lenders shall be adjusted to give effect to any assignments of the Working Capital Loan Commitments pursuant to subsection 10.1B; PROVIDED FURTHER the Working Capital Loan Commitments may be increased pursuant to the immediately succeeding paragraph of this subsection 2.1A(iii); and PROVIDED STILL FURTHER that the amount of the Working Capital Loan 33 Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsection 2.4B(ii). Each Working Capital Lender's Working Capital Loan Commitment shall expire on the Working Capital Loan Commitment Termination Date and all Working Capital Loans and all other amounts owed hereunder with respect to the Working Capital Loans and the Working Capital Loan Commitments shall be paid in full no later than that date; PROVIDED that each Working Capital Lender's Working Capital Loan Commitment shall expire immediately and without further action on October 31, 1998, if the Tranche B Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(iii) may be repaid and, at any time to but excluding the Working Capital Loan Commitment Termination Date, reborrowed. At any time that no Potential Event of Default or Event of Default has occurred and is continuing, the Company may, by notice to the Agents, request that, on the terms and subject to the conditions contained in this Agreement, the Lenders and/or other financial institutions not then a party to this Agreement that are satisfactory to the Agents provide up to an aggregate amount of $20,000,000 in additional Working Capital Loan Commitments. Upon receipt of such notice, the Syndication Agent shall use all commercially reasonable efforts to arrange for the Lenders or other financial institutions to provide such additional Working Capital Loan Commitments; PROVIDED that the Syndication Agent will first offer each of the Lenders that then has a Pro Rata Share of any Working Capital Loan Commitments a pro rata portion (based upon the aggregate amount of the Working Capital Loan Commitments at such time) of any such additional Working Capital Loan Commitment. Alternatively, any Lender may commit to provide the full amount of the requested additional Working Capital Loan Commitments and then offer portions of such additional Working Capital Loan Commitments to the other Lenders or other financial institutions, subject to the proviso in the immediately preceding sentence. Nothing contained in this paragraph or otherwise in this Agreement is intended to commit any Lender or any Agent to provide any portion of any such additional Working Capital Loan Commitments. If and to the extent that any Lenders and/or other financial institutions agree, in their sole discretion, to provide any such additional Working Capital Loan Commitments, (i) the aggregate amount of the Working Capital Loan Commitments shall be increased by the amount of the additional Working Capital Loan Commitments agreed to be so provided, (ii) the Pro Rata Shares of the respective Lenders in respect of the Working Capital Loan Commitments shall be proportionally adjusted, (iii) at such time and in such manner as Company and the Syndication Agent shall agree (it being understood that Company and the Agents will use all commercially reasonable efforts to avoid the prepayment or assignment of any Eurodollar Rate Loan on a day other than the last day of the Interest Period applicable thereto), the Lenders shall assign and assume outstanding Working Capital Loans and participations in outstanding Letters of Credit so as to cause the amount of such Working Capital Loans and participations in Letters of Credit held by each Lender to conform to the respective percentages of the applicable Working Capital Loan Commitments of the Lenders and (iv) Company shall execute and deliver any additional Notes or other amendments or modifications to this Agreement or any other Loan Document as the Agents may reasonably request. Anything contained in this Agreement to the contrary notwithstanding, in no event shall the Total Utilization of Working Capital Loan Commitments at any time exceed the Working Capital Loan Commitments then in effect. (iv) SWING LINE LOANS. Swing Line Lender hereby agrees, subject to the limitations set forth below with respect to the maximum amount of Swing Line Loans 34 permitted to be outstanding from time to time, to make a portion of the Working Capital Loan Commitments available to Company from time to time during the period from the Closing Date to but excluding the Working Capital Loan Commitment Termination Date by making Swing Line Loans to Company in an aggregate amount not exceeding the amount of the Swing Line Loan Commitment to be used for the purposes identified in subsection 2.5B, notwithstanding the fact that such Swing Line Loans, when aggregated with Swing Line Lender's outstanding Working Capital Loans and Swing Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect, may exceed Swing Line Lender's Working Capital Loan Commitment. The original amount of the Swing Line Loan Commitment is $5,000,000; PROVIDED that any reduction of the Working Capital Loan Commitments made pursuant to subsection 2.4B(ii) which reduces the aggregate Working Capital Loan Commitments to an amount less than the then current amount of the Swing Line Loan Commitment shall result in an automatic corresponding reduction of the Swing Line Loan Commitment to the amount of the Working Capital Loan Commitments, as so reduced, without any further action on the part of Company, Administrative Agent or Swing Line Lender. The Swing Line Loan Commitment shall expire on the Working Capital Loan Commitment Termination Date and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans shall be paid in full no later than that date; PROVIDED that the Swing Line Loan Commitment shall expire immediately and without further action on October 31, 1998, if the Tranche B Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(iv) may be repaid and, at any time to but excluding the Working Capital Loan Commitment Termination Date, reborrowed. Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the limitation that in no event shall the Total Utilization of Working Capital Loan Commitments at any time exceed the Working Capital Loan Commitments then in effect. With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to subsection 2.4B(i), Swing Line Lender may, at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to Company), no later than 9:00 A.M. (Chicago time) on the first Business Day in advance of the proposed Funding Date, a notice (which shall be deemed to be a Notice of Borrowing given by Company) requesting Working Capital Lenders to make Working Capital Loans that are Base Rate Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which Swing Line Lender requests Working Capital Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Working Capital Loans made by Working Capital Lenders other than Swing Line Lender shall be immediately delivered by Administrative Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and (ii) on the day such Working Capital Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Working Capital Loan made by Swing Line Lender, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note of Swing Line Lender but shall instead constitute part of Swing Line Lender's outstanding Working Capital Loans and shall be due under the Working Capital Note of Swing Line Lender and the participations of each Working Capital Lender in such Refunded Swing Line Loan shall be extinguished without further action. Company hereby authorizes Administrative Agent and Swing Line Lender to charge Company's accounts with Administrative Agent and Swing Line Lender (up to the amount available in each such 35 account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Working Capital Loans made by Working Capital Lenders, including the Working Capital Loan deemed to be made by Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Working Capital Lenders in the manner contemplated by subsection 10.5. Immediately upon funding of any Swing Line Loan, each Working Capital Lender shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans in an amount equal to its Pro Rata Share of the principal amount of such Swing Line Loans. Upon one Business Day's notice from Swing Line Lender, each Working Capital Lender shall deliver to Swing Line Lender an amount equal to its respective participation in any outstanding Swing Line Loans in same day funds at the Funding and Payment Office. Each such amount so delivered by any Working Capital Lender shall be deemed to be a Base Rate Working Capital Loan of such Working Capital Lender, and the Swing Line Lender's participation, in its capacity as a Working Capital Lender, in any outstanding Swing Line Loans shall be deemed to be converted to a Working Capital Loan of the Swing Line Lender made in its capacity as a Working Capital Lender. In the event any Working Capital Lender fails to make available to Swing Line Lender the amount of such Working Capital Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Working Capital Lender together with interest thereon at the rate customarily used by Swing Line Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. In the event Swing Line Lender receives a payment of any amount in which other Working Capital Lenders have purchased participations as provided in this paragraph, Swing Line Lender shall promptly distribute to each such other Working Capital Lender its Pro Rata Share of such payment. Anything contained herein to the contrary notwithstanding, each Working Capital Lender's obligation to make Working Capital Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Working Capital Lender's obligation to purchase a participation in Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including (a) any set-off, counterclaim, recoupment, defense or other right which such Working Capital Lender may have against Swing Line Lender, Company or any other Person for any reason whatsoever; (b) the occurrence or continuation of an Event of Default or a Potential Event of Default (subject to the proviso set forth below); (c) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (d) any breach of this Agreement or any other Loan Document by any party thereto; or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; PROVIDED that such obligations of each Working Capital Lender are subject to satisfaction of one of the following conditions (X) Swing Line Lender believed in good faith that all conditions under Section 4 to the making of the applicable Refunded Swing Line Loans were satisfied at the time such Refunded Swing Line Loans or unpaid Swing Line Loans were made or (Y) the satisfaction of any such condition not satisfied had been waived in accordance with subsection 10.6. 36 (v) ACQUISITION LOANS. Each Acquisition Lender severally agrees, subject to the limitations set forth below with respect to the maximum amount of Acquisition Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Merger Date to but excluding the Acquisition Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Acquisition Loan Commitments to be used for the purposes identified in subsection 2.5C. The original amount of each Acquisition Lender's Acquisition Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate original amount of the Acquisition Loan Commitments is $25,000,000; PROVIDED that the Acquisition Loan Commitments of the Acquisition Lenders shall be adjusted to give effect to any assignments of the Acquisition Loan Commitments pursuant to subsection 10.1B; PROVIDED FURTHER that the amount of the Acquisition Loan Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Acquisition Lender's Acquisition Loan Commitment shall expire on the Acquisition Loan Commitment Termination Date and all Acquisition Loans and all other amounts owed hereunder with respect to the Acquisition Loans and the Acquisition Loan Commitments shall be paid in full no later than that date; PROVIDED that each Acquisition Lender's Acquisition Loan Commitment shall expire immediately and without further action on October 31, 1998, if the Tranche B Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(v) may be repaid and reborrowed to but excluding the Acquisition Loan Commitment Termination Date. (vi) TRANCHE C TERM LOANS. Each Tranche C Term Loan Lender having a Tranche C Term Loan Commitment severally agrees to lend to Company on the Amended and Restated Credit Agreement Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche C Term Loan Commitments, to be used for the purposes identified in subsection 2.5A. The amount of each Tranche C Term Loan Lender's Tranche C Term Loan Commitment is set forth opposite such Tranche C Term Loan Lender's name on SCHEDULE 2.1 annexed hereto, and the aggregate amount of the Tranche C Term Loan Commitments is $70,000,000; PROVIDED that the Tranche C Term Loan Commitments of Tranche C Term Loan Lenders shall be adjusted to give effect to any assignments of the Tranche C Term Loan Commitments pursuant to subsection 10.1B. Each Tranche C Term Loan Lender's Tranche C Term Loan Commitment shall expire immediately and without further action on the earlier of (i) May 6, 1999, if the Tranche C Term Loans are not made on or before that date and (ii) at the close of business on the Amended and Restated Credit Agreement Closing Date. Company may make only one borrowing under the Tranche C Term Loan Commitments. Amounts borrowed under this subsection 2.1A(vi) and subsequently repaid or prepaid may not be reborrowed. B. BORROWING MECHANICS. Loans made on any Funding Date (other than Working Capital Loans deemed made pursuant to a request by Swing Line Lender pursuant to subsection 2.1A(iv) for the purpose of repaying any Refunded Swing Line Loans or Working Capital Loans made pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it ("LC REFUNDING LOANS")) shall be in an aggregate minimum amount of $1,000,000 and multiples of $100,000 in excess of that amount. Swing Line Loans made on any Funding Date shall be in an aggregate minimum amount of $250,000 and multiples of $10,000 in excess of that amount. Whenever Company desires that Lenders make Loans (other than Swing Line Loans or LC Refunding Loans) it shall deliver to Administrative Agent a Notice of Borrowing no later than 12:00 Noon (Chicago time) at least three Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan, other than Eurodollar Loans to be made on the Closing Date or the Merger Date, if the Merger Date occurs on or prior to three 37 Business Days after the Closing Date) or 12:00 Noon (Chicago time) on the proposed Funding Date (in the case of a Base Rate Loan). Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall deliver to Administrative Agent a Notice of Borrowing no later than 12:00 Noon (Chicago time) on the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and type of Loans requested, (iii) in the case of Swing Line Loans, that such Loans shall be Base Rate Loans, (iv) in the case of any other Loans, whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor. Term Loans and Working Capital Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; PROVIDED that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the applicable Funding Date. Any Loans made on the Closing Date and on the Merger Date (if the Merger Date occurs on or prior to three Business Days after the Closing Date) may be Eurodollar Loans regardless of whether this Agreement has been executed at least three Business Days prior to such date and so long as Company has delivered a Notice of Borrowing with respect thereto on or prior to three Business Days prior to such date and has also delivered an indemnity agreement covering broken funding losses in form and substance reasonably satisfactory to Agents. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have borrowed Loans hereunder. Company shall notify Administrative Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing as being true and correct on any applicable Funding Date is not true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing as being true and correct on such Funding Date. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith or to pay the amounts payable pursuant to Section 2.6D as a result of the failure to make such borrowing. C. DISBURSEMENT OF FUNDS. All Loans (other than Swing Line Loans) under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares of the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan Commitment, the Working Capital Loan Commitment and the Acquisition Loan Commitment, as the case may be, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of 38 Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender or Swing Line Lender, as the case may be, of the proposed borrowing. Each Lender shall make the amount of its Loan available to Administrative Agent not later than 1:00 P.M. (Chicago time) on the applicable Funding Date, in each case in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 2.1A(iv) or subsection 3.3B with respect to Working Capital Loans used to repay Refunded Swing Line Loans or to reimburse any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 (in the case of Loans made on the Closing Date), 4.2 (in the case of Loans made on the Merger Date), 4.3 (in the case of Acquisition Loans) and 4.4 (in the case of all Loans (other than Tranche A Term Loans made on the Merger Date)), Administrative Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by 2:00 P.M. (Chicago time), by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders or Swing Line Lender, as the case may be, to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the Federal Funds Effective Rate for three Business Days and thereafter at the interest rate applicable to the relevant Loan. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Loans of the type made on the Funding Date on which, and with respect to which, Administrative Agent made available such amount. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. Unless Administrative Agent shall have been notified by Company prior to the date on which it is scheduled to make payment to Administrative Agent of a payment of principal, interest or fees to Administrative Agent for the account of Lenders that Company does not intend to make available to Administrative Agent such amount on such date, Administrative Agent may assume that Company has made such amount available to Administrative Agent on such date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Lenders a corresponding amount on such date. If such corresponding amount is not in fact made available to Administrative Agent by Company, Administrative Agent shall be entitled to recover such corresponding amount on demand from Company together with interest thereon, for each day from such scheduled payment until the date such amount is paid to Administrative Agent, at the interest rate applicable to the relevant Loan. If Company does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Lenders and Lenders shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from the scheduled payment date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Loans of the 39 type made on such scheduled payment date on which, and with respect to which, Administrative Agent made available such amount. D. NOTES. Company shall execute and deliver on the Closing Date (i) to each Tranche A Term Loan Lender (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the Closing Date a Tranche A Term Note substantially in the form of EXHIBIT IV annexed hereto to evidence that Lender's Tranche A Term Loan, in the principal amount of that Lender's Tranche A Term Loan Commitment and with other appropriate insertions, (ii) to each Tranche B Term Loan Lender (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the Closing Date a Tranche B Term Note substantially in the form of EXHIBIT V annexed hereto to evidence that Lender's Tranche B Term Loan, in the principal amount of that Lender's Tranche B Term Loan and with other appropriate insertions, (iii) to each Working Capital Lender (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the Closing Date a Working Capital Note substantially in the form of EXHIBIT VI annexed hereto to evidence that Lender's Working Capital Loans, in the principal amount of that Lender's Working Capital Loan Commitment and with other appropriate insertions, (iv) to Swing Line Lender (or to Administrative Agent for Swing Line Lender) if the Swing Line Lender has so requested at least one Business Day prior to the Closing Date a Swing Line Note substantially in the form of EXHIBIT VII annexed hereto to evidence Swing Line Lender's Swing Line Loans, in the principal amount of the Swing Line Loan Commitment and with other appropriate insertions, (v) to each Acquisition Lender (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the Closing Date an Acquisition Note substantially in the form of EXHIBIT VIII annexed hereto to evidence that Lender's Acquisition Loan, in the principal amount of that Lender's Acquisition Loan Commitment and with other appropriate insertions and (vi) to each Tranche C Term Loan Lender (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the Amended and Restated Credit Agreement Closing Date a Tranche C Term Note substantially in the form of EXHIBIT XXXI annexed hereto to evidence that Lender's Tranche C Term Loan, in the principal amount of that Lender's Tranche C Term Loan and with other appropriate insertions. Company shall execute and deliver on the First Amendment Closing Date to each Tranche B Term Loan Lender with an Additional Tranche B Term Loan Commitment (or to Administrative Agent for that Lender) that has so requested at least one Business Day prior to the First Amendment Closing Date an Additional Tranche B Term Note substantially in the form of EXHIBIT V annexed hereto to evidence that Lender's Additional Tranche B Term Loan, in the principal amount of that Lender's Additional Tranche B Term Loan and with other appropriate insertions. E. REGISTER. (a) Each Lender may maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of Company to such Lender resulting from each Loan made by such Lender to Company, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. In the case of a Lender that does not request, pursuant to the preceding paragraph, execution and delivery of a Note or Notes evidencing the Loans made by such Lender to Company, such account or accounts shall, to the extent not inconsistent with the notations made by Administrative Agent in the Register (as defined below), be conclusive and binding on Company absent manifest error; PROVIDED, HOWEVER, that the failure of any Lender to maintain such account or accounts shall not limit or otherwise affect any Obligations of Company or any other Loan Party. (b)(i) Company hereby designates Administrative Agent to serve as its agent, solely for the purpose of this subsection (b)(i), to maintain a register (the "REGISTER") on which Administrative Agent will record each Lender's Commitments, the Loans made by each Lender to Company, the Interest Period, if any, with respect thereto and each repayment 40 in respect of the principal amount of the Loans of each Lender to Company and annexed to which Administrative Agent shall retain a copy of each Assignment Agreement delivered to Administrative Agent pursuant to Section 10.1. Failure to make any recordation, or any error in such recordation, shall not affect Company's obligations in respect of such Loans. The entries in the Register shall be conclusive, in the absence of manifest error, and Company, Administrative Agent and the Lenders shall treat each Person in whose name a Loan (and as provided in subsection (b)(ii), the Note evidencing such Loan, if any) is registered as the owner thereof for all purposes of this Agreement notwithstanding notice or any provision herein to the contrary. Any Commitment of any Lender and the Loans made pursuant thereto may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer in the Register. Any assignment or transfer of any Commitment of any Lender or the Loans made pursuant thereto shall be registered in the Register only upon delivery to Administrative Agent of an Assignment Agreement duly executed by the assignor thereof. No assignment or transfer of any Commitment of any Lender or the Loans made pursuant thereto shall be effective, unless such assignment or transfer shall have been recorded in the Register by Administrative Agent as provided in this Section. (ii) Company agrees that, upon the request by any Lender which becomes a party to this Agreement after the date hereof to Administrative Agent, Company will execute and deliver to such Lender a Note evidencing the Loans made by such Lender to Company. Company authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Notes (or on any continuation of such grid), which notations, if made, shall evidence, INTER ALIA, the date of, the outstanding principal amount of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall, to the extent not consistent with the notations made by Administrative Agent in the Register, be conclusive and binding on Company absent manifest error; PROVIDED, HOWEVER, that the failure of any Lender to make any such notations or any error in any such notations shall not limit or otherwise affect any Obligations of Company or any other Loan Party. The Loans evidenced by any such Note and interest thereon shall at all times (including after assignment pursuant to Section 10.1) be represented by one or more Notes payable to the order of the payee named therein and its registered assigns. A Note and the obligations evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Note and the obligation evidenced thereby in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of an obligation evidenced by a Note shall be registered in the Register only upon surrender for registration of assignment or transfer of the Note evidencing such obligation, accompanied by an Assignment Agreement duly executed by the assignor thereof, and thereupon, if requested by the assignee, one or more new Notes shall be issued by Company to the designated assignee marked "exchanged". No assignment of a Note and the obligation evidenced thereby shall be effective unless it shall have been recorded in the Register by Administrative Agent as provided in this Section. 2.2 INTEREST ON THE LOANS. A. RATE OF INTEREST. Subject to the provisions of subsection 2.6, each Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. Each Swing Line Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by 41 reference to the Base Rate. The applicable basis for determining the rate of interest with respect to any Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Loan may be changed from time to time pursuant to subsection 2.2D. (i) (a) Subject to the provisions of subsection 2.2E, the Tranche A Term Loans, the Working Capital Loans and the Acquisition Loans shall bear interest through maturity as follows: (1) if a Base Rate Loan, then at the sum of the Base Rate PLUS the Base Rate Margin set forth in the table below opposite the Consolidated Leverage Ratio as set forth in the most recent Margin Determination Certificate delivered pursuant to subsection 6.1(iv); or (2) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate for the Interest Period applicable to such Loan PLUS the Eurodollar Rate Margin set forth in the table below opposite the Consolidated Leverage Ratio as set forth in the most recent Margin Determination Certificate delivered pursuant to subsection 6.1(iv):
Applicable Eurodollar Rate Applicable Base Consolidated Leverage Ratio Margin Rate Margin --------------------------- ----------- --------------- Greater than or equal to 2.75% 1.50% 5:00:1.00 Greater than or equal to 2.50% 1.25% 4.50:1.00 but less than Greater than or equal to 2.25% 1.00% 4.00:1.00 but less than 4.50:1.00 Greater than or equal to 1.75% 0.50% 3.50:1.00 but less than 4.00:1.00 Greater than or equal to 1.50% 0.25% 3.00:1.00 but less than 3.50:1.00 Less than 3.00:1.00 1.00% 0.00%
PROVIDED that until the First Amendment Closing Date, the applicable margin for Tranche A Term Loans, Working Capital Loans and Acquisition Loans that are Eurodollar Rate Loans shall be 2.25% per annum and for Tranche A Term Loans, Working Capital Loans, Swing Line Loans and Acquisition Loans that are Base Rate Loans shall be 1.00% per annum; PROVIDED FURTHER that from the First Amendment Closing Date until the delivery of the first Margin Determination Certificate pursuant to 42 subsection 6.1(iv) after the six-month anniversary of the First Amendment Closing Date, the applicable margin for Tranche A Term Loans, Working Capital Loans and Acquisition Loans that are Eurodollar Rate Loans shall be 2.75% per annum and for Tranche A Term Loans, Working Capital Loans, Swing Line Loans and Acquisition Loans that are Base Rate Loans shall be 1.50% per annum. Changes in the applicable margin for Tranche A Term Loans, Working Capital Loans and Acquisition Loans resulting from a change in the Consolidated Leverage Ratio shall become effective as provided in subsection 2.3C. If at any time a Margin Determination Certificate is not delivered at the time required pursuant to subsection 6.1(iv), from the time such Margin Determination Certificate was required to be delivered until delivery of such Margin Determination Certificate, such applicable margins shall be the maximum percentage amount for the relevant Loan set forth above. (b) Subject to the provisions of subsection 2.2E, the Tranche B Term Loans shall bear interest through maturity as follows: (1) if a Base Rate Loan, then (A) from the Closing Date until the First Amendment Closing Date, at the sum of the Base Rate PLUS 1.25% per annum and (B) from the First Amendment Closing Date until maturity, at the sum of the Base Rate PLUS 1.75% per annum; or (2) if a Eurodollar Rate Loan, then (A) from the Closing Date until the First Amendment Closing Date, at the sum of the Adjusted Eurodollar Rate for the Interest Period applicable to such Loan PLUS 2.50% per annum and (B) from the First Amendment Closing Date until maturity, at the sum of the Adjusted Eurodollar Rate for the Interest Period applicable to such Loan PLUS 3.00% per annum; (c) Subject to the provisions of subsection 2.2E, the Tranche C Term Loans shall bear interest through maturity as follows: (1) if a Base Rate Loan, then at the sum of the Base Rate PLUS 2.00% per annum; or (2) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate for the Interest Period applicable to such Loan PLUS 3.25% per annum; PROVIDED that in the event that at any time during the period from the Closing Date until the consummation of the Merger, Acquisition Co. shall own less than the Minimum Shares, then for each day or part of a day that Acquisition Co. owns less than the Minimum Shares, the applicable margins shall be increased by an additional 1.00% per annum. (ii) Subject to the provisions of subsection 2.2E, the Swing Line Loans shall bear interest through maturity at the sum of the Base Rate PLUS the Base Rate Margin for Working Capital Loans minus the commitment fee percentage then in effect for Working Capital Loans as determined pursuant to subsection 2.3A(i). B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case 43 may be, select an interest period (each an "INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall be, at Company's option, either a one, two, three, six, or, if available to each Lender, nine or twelve month period; PROVIDED that: (i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a Eurodollar Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a Eurodollar Rate Loan; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; PROVIDED that, if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond September 30, 2004, no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond September 30, 2005, no Interest Period with respect to any portion of the Tranche C Term Loans shall extend beyond April 23, 2006, no Interest Period with respect to any portion of the Working Capital Loans shall extend beyond the Working Capital Loan Commitment Termination Date and no Interest Period with respect to any portion of the Acquisition Loans shall extend the Acquisition Loan Commitment Termination Date; (vi) no Interest Period with respect to any portion of the Tranche A Term Loans, the Tranche B Term Loans or the Tranche C Term Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal of the Tranche A Term Loans, the Tranche B Term Loans or the Tranche C Term Loans, as the case may be, unless the sum of (a) the aggregate principal amount of Tranche A Term Loans, Tranche B Term Loans or Tranche C Term Loans, as the case may be, that are Base Rate Loans PLUS (b) the aggregate principal amount of Tranche A Term Loans, Tranche B Term Loans or Tranche C Term Loans, as the case may be, that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the Tranche A Term Loans, Tranche B Term Loans or Tranche C Term Loans, as the case may be, on such date; (vii) there shall be outstanding at any time no more than four Interest Periods with respect to the Tranche A Term Loans, four Interest Periods with respect to the Tranche B Term Loans, four Interest Periods with respect to the Tranche C Term Loans, six Interest Periods with respect to the Working Capital Loans and four Interest Periods with respect to the Acquisition Loans; and 44 (viii) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month ; PROVIDED that with respect to each Term Loan made on the Closing Date, the Merger Date or the Amended and Restated Credit Agreement Closing Date, the initial Interest Period will commence on the Business Day on which such Term Loan is made (or, if such Term Loan is made as a Base Rate Loan, the initial Interest Period will commence on the date specified in the Notice of Conversion delivered with respect thereto) and shall end on the last Business Day of the month following the month in which such Term Loan is made. C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity); PROVIDED that in the event any Swing Line Loans or any Working Capital Loans or any Acquisition Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i), interest accrued on such Swing Line Loans or Working Capital Loans or Acquisition Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding Loans equal to $1,000,000 and multiples of $100,000 in excess of that amount from Loans bearing interest at the Base Rate to Loans bearing interest at the Eurodollar Rate or all or any part of its outstanding Loans equal to $1,000,000 and multiples of $100,000 in excess of that amount from Loans bearing interest at the Eurodollar Rate to Loans bearing interest at the Base Rate or (ii) upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $1,000,000 and multiples of $100,000 in excess of that amount as a Eurodollar Rate Loan. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 10:00 A.M. (Chicago time) on the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing as of the date of the proposed conversion/continuation. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; PROVIDED that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of 45 Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith or to pay the amounts payable pursuant to Section 2.6D as a result of the failure to effect such continuation/conversion. E. DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, at the request of Administrative Agent, the outstanding principal amount of all Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans that are Working Capital Loans); PROVIDED that, in the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of any Agent or any Lender. F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed (i) in the case of Base Rate Loans, on the basis of a 365-day or 366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan (if payment is received prior to 2:00 P.M. (Chicago time)) or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded, provided that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. 2.3 FEES. A. COMMITMENT FEES. (i) WORKING CAPITAL COMMITMENTS. Company agrees to pay to Administrative Agent, for distribution to each Working Capital Lender in proportion to that Lender's Pro Rata Share of the Working Capital Loan Commitments, commitment fees for each day during the period from and including the Closing Date to and excluding the Working Capital Loan Commitment Termination Date (or, if earlier, the date of termination of the Working 46 Capital Loan Commitments in their entirety) on the excess on such day of the Working Capital Loan Commitments over the sum of (i) the aggregate principal amount of outstanding Working Capital Loans on such day plus (ii) the Letter of Credit Usage (but not including any outstanding Swing Line Loans) on such day at a rate per annum equal to the commitment fee percentage set forth below opposite the Consolidated Leverage Ratio as set forth in the most recent Margin Determination Certificate delivered pursuant to subsection 6.1(iv):
Working Capital Loan Consolidated Leverage Ratio Commitment Fee Percentage ----------------------------------------------------------------------- Greater than or equal to 5.00:1.00 0.500% Greater than or equal to 4.00:1.00 0.375% but less than 5.00:1.00 Greater than or equal to 3.00:1.00 0.300% but less than 4.00:1.00 Less than 3.00:1.00 0.250%
such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on each Quarterly Date of each year, commencing on the first such date to occur after the Closing Date, and on the Working Capital Loan Commitment Termination Date; PROVIDED that until the delivery of the first Margin Determination Certificate pursuant to subsection 6.1(iv) after the six-month anniversary of the Closing Date the applicable commitment fee percentage for the Working Capital Loan Commitments shall be 0.50%. Changes in the applicable commitment fee rate for Working Capital Loan Commitments resulting from a change in the Consolidated Leverage Ratio shall become effective as provided in subsection 2.3C. In the event that Company fails to deliver a Margin Determination Certificate timely in accordance with the provisions of subsection 6.1(iv), from the time such Margin Determination Certificate was required to be delivered until such date as such a Margin Determination Certificate is actually delivered, the applicable commitment fee percentage shall be the maximum percentage amount set forth above per annum. (ii) ACQUISITION LOAN COMMITMENTS. Company agrees to pay to Administrative Agent, for distribution to each Acquisition Lender in proportion to that Acquisition Lender's Pro Rata Share of the Acquisition Loan Commitments, commitment fees for each day during the period from and including the Closing Date to and excluding the Acquisition Loan Commitment Termination Date (or, if earlier, the date of termination of the Acquisition Loan Commitments in their entirety) on the excess on such day of the Acquisition Loan Commitments over the aggregate principal amount of outstanding Acquisition Loans on such date, (the "Unused Acquisition Loan Commitment Amount") at a rate per annum equal to the commitment fee percentage set out below opposite the Consolidated Leverage Ratio as set forth in the most recent Margin Determination Certificate delivered pursuant to subsection 6.1(iv), PROVIDED that on any date prior to the date of the delivery of the first Margin Determination Certificate after the six month anniversary of the Closing Date, if the Unused Acquisition Loan Commitment Amount on such date is less than 50% of the aggregate 47 Acquisition Loan Commitments, the applicable commitment fee percentage on such date shall be 0.75% per annum and if the Unused Acquisition Loan Commitment Amount on such date is equal to or greater than 50% of the aggregate Acquisition Loan Commitments, the applicable commitment fee percentage on such date shall be 0.50% per annum:
Acquisition Loan Commitment Fee Percentage ------------------------- Consolidated Leverage Ratio Utilization Utilization < 50% X 50% --------------------------------------------------------------------- Greater than or equal to 5.00:1.00 0.750% 0.500% Greater than or equal to 4.00:1.00 0.625% 0.375% but less than 5.00:1.00 Greater than or equal to 3.00:1.00 but less than 4.00:1.00 0.550% 0.300% Less than 3.00:1.00 0.500% 0.250%
such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on each Quarterly Date of each year, commencing on the first such date to occur after the Closing Date, and on the Acquisition Loan Commitment Termination Date. Changes in the applicable commitment fee rate for Acquisition Loan Commitments resulting from a change in the Consolidated Leverage Ratio shall become effective as provided in subsection 2.3C. In the event that Company fails to deliver a Margin Determination Certificate timely in accordance with the provisions of subsection 6.1(iv), from the time such Margin Determination Certificate was required to be delivered until such date as such a Margin Determination Certificate is actually delivered, the applicable commitment fee percentage shall be the maximum percentage amount set forth above per annum. (iii) TRANCHE A TERM LOAN COMMITMENTS. Company agrees to pay to Administrative Agent, for distribution to each Tranche A Term Loan Lender in proportion to that Tranche A Term Loan Lender's Pro Rata Share of the Tranche A Term Loan Commitments, commitment fees for the period from and including the Closing Date to and excluding the Merger Date (or, if earlier, the date of termination of the Tranche A Term Loan Commitments in their entirety) on the daily average unused Tranche A Term Loan Commitments during such period at a rate per annum equal to 2.25%; such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly on each Quarterly Date, commencing on the first such date to occur after the Closing Date and on the Merger Date. B. OTHER FEES. Company agrees to pay to Arranger and Agents such other fees in the amounts and at the times separately agreed upon between Company, Agents and Arranger. 48 C. DETERMINATION OF APPLICABLE MARGINS. Subject to the last sentence of subsection 2.2A(i)(a), the last sentence of subsection 2.3A(i) and the last sentence of subsection 2.3A(ii), the Consolidated Leverage Ratio used to compute the applicable margin for Tranche A Term Loans, Working Capital Loans and Acquisition Loans for purposes of subsection 2.2A(i) and subsection 3.2 and the applicable commitment fee rates for the Working Capital Loan Commitments and the Acquisition Loan Commitments for purposes of subsection 2.3A (such applicable margins and commitment fee rates being referred to in this subsection 2.3C as the "APPLICABLE MARGINS") for any day shall be the Consolidated Leverage Ratio set forth in the Margin Determination Certificate most recently delivered by Company to Administrative Agent on or prior to such day pursuant to subsection 6.1(iv). Changes in the Applicable Margins resulting from a change in the Consolidated Leverage Ratio shall become effective on the first Business Day following delivery by Company to Administrative Agent of a new Margin Determination Certificate pursuant to subsection 6.1(iv). Notwithstanding the foregoing, Company may, in its sole discretion, within ten Business Days following the end of any Fiscal Quarter, deliver to Administrative Agent a written estimate (the "LEVERAGE RATIO ESTIMATE") setting forth Company's good faith estimate of the Consolidated Leverage Ratio (based on calculations contained in a Margin Determination Certificate) that will be set forth in the next Margin Determination Certificate required to be delivered by Company to Administrative Agent pursuant to subsection 6.1(iv). In the event that the Leverage Ratio Estimate indicates that there would be a change in the Applicable Margins resulting from a change in the Consolidated Leverage Ratio, such change will become effective on the first Business Day following delivery of the Leverage Ratio Estimate. In the event that, once the next Margin Determination Certificate is delivered, the Consolidated Leverage Ratio as set forth in such Margin Determination Certificate differs from that calculated in the Leverage Ratio Estimate delivered for the Fiscal Quarter with respect to which such Margin Determination Certificate has been delivered, and such difference results in Applicable Margins which are greater or lesser than the Applicable Margins theretofore in effect, then (A) such greater or lesser Applicable Margins shall be deemed to be in effect for all purposes of this Agreement from the first Business Day following the delivery of the Leverage Ratio Estimate and (B) if Company shall have theretofore made any payment of interest, commitment fees or letter of credit fees in respect of the period from the first Business Day following the delivery of the Leverage Ratio Estimate to the Business Day following actual date of delivery of the Margin Determination Certificate, then, on the next Quarterly Date, either (x) if the new Applicable Margins are greater than the Applicable Margins theretofore in effect, Company shall pay as a supplemental payment of interest, commitment fees and/or letter of credit fees, as applicable, an amount which equals the difference between the amount of interest, commitment fees and/or letter of credit fees that would otherwise have been paid based on such new Consolidated Leverage Ratio and the amount of interest, commitment ees and/or letter of credit fees, as applicable, actually so paid, or (y) if the new Applicable Margins are less than the Applicable Margins theretofore in effect, an amount shall be deducted from the interest, commitment fees and/or letter of credit fees, as applicable, then otherwise payable in an amount which equals the difference between the amount of interest, commitment fees and/or letter of credit fees, as applicable, so paid and the amount of interest, commitment fees and/or letter of credit fees, as applicable, that would otherwise have been paid based on such new Consolidated Leverage Ratio (or, if no such payment is owed by Company to the applicable Lenders on such next Quarterly Date, or if such amount owed by Company is less than such difference, the applicable Lenders shall pay to Company on such next Quarterly Date the amount of such difference less the amount, if any, owed by Company to such Lenders on such Quarterly Date). 49 2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN LOAN COMMITMENTS; GENERAL PROVISIONS REGARDING PAYMENTS. A. SCHEDULED PAYMENTS OF TRANCHE A TERM LOANS, TRANCHE B TERM LOANS AND TRANCHE C TERM LOANS. (i) SCHEDULED PAYMENTS OF TRANCHE A TERM LOANS. Company shall make principal payments on the Tranche A Term Loans on each of the following dates in the aggregate amount, expressed as a percentage of the Tranche A Term Loan Lenders' aggregate original Tranche A Term Loan Commitments, set forth opposite such date in the table set forth below:
------------------------------------------------------------------- Scheduled Repayment Date Scheduled Repayment of Tranche A Term Loans ------------------------------------------------------------------- December 31, 1999 1.25% March 31, 2000 1.25% June 30, 2000 1.25% September 30, 2000 1.25% December 31, 2000 2.50% March 31, 2001 2.50% June 30, 2001 2.50% September 30, 2001 2.50% December 31, 2001 5.00% March 31, 2002 5.00% June 30, 2002 5.00% September 30, 2002 5.00% December 31, 2002 6.25% March 31, 2003 6.25% June 30, 2003 6.25% September 30, 2003 6.25% December 31, 2003 10.00% March 31, 2004 10.00% June 30, 2004 10.00% September 30, 2004 10.00% ------------------------- Total 100.00%
; PROVIDED that the scheduled installments of principal of the Tranche A Term Loans set forth above shall be reduced by an amount equal to the aggregate principal amount of any voluntary or mandatory prepayments of the Tranche A Term Loans in accordance with subsection 2.4B(iv); and PROVIDED, FURTHER that the Tranche A Term Loans and all other amounts owed hereunder with respect to the Tranche A Term Loans shall be paid in full no later than September 30, 2004, and the final installment payable by Company in respect of the Tranche A Term Loans on such date shall be in an amount, if such amount is different 50 from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche A Term Loans. (ii) SCHEDULED PAYMENTS OF TRANCHE B TERM LOANS. Company shall make principal payments on the Tranche B Term Loans in installments on each of the following dates in the aggregate amount set forth opposite such date in the table set forth below:
------------------------------------------------------------------- Scheduled Repayment Date Scheduled Repayment of Tranche B Term Loans ------------------------------------------------------------------- December 31, 1998 $112,500 March 31, 1999 $162,500 June 30, 1999 $162,500 September 30, 1999 $162,500 December 31, 1999 $162,500 March 31, 2000 $162,500 June 30, 2000 $162,500 September 30, 2000 $162,500 December 31, 2000 $162,500 March 31, 2001 $162,500 June 30, 2001 $162,500 September 30, 2001 $162,500 December 31, 2001 $162,500 March 31, 2002 $162,500 June 30, 2002 $162,500 September 30, 2002 $162,500 December 31, 2002 $162,500 March 31, 2003 $162,500 June 30, 2003 $162,500 September 30, 2003 $162,500 December 31, 2003 $162,500 March 31, 2004 $162,500 June 30, 2004 $162,500 September 30, 2004 $162,500 December 31, 2004 $15,287,500 March 31, 2005 $15,287,500 June 30, 2005 $15,287,500 September 30, 2005 $15,287,500 --------------- Total $65,000,000
; PROVIDED that the scheduled installments of principal of the Tranche B Term Loans set forth above shall be reduced by an amount equal to the aggregate principal amount of any voluntary or mandatory prepayments of the Tranche B Term Loans in accordance with subsection 2.4B(iv); and 51 PROVIDED, FURTHER that the Tranche B Term Loans and all other amounts owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later than September 30, 2005, and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans. (iii) SCHEDULED PAYMENTS OF TRANCHE C TERM LOANS. Company shall make principal payments on the Tranche C Term Loans in installments on each of the following dates in the aggregate amount set forth opposite such date in the table set forth below: 52
------------------------------------------------------------------- Scheduled Repayment Date Scheduled Repayment of Tranche C Term Loans ------------------------------------------------------------------- June 30, 1999 $175,000 September 30, 1999 $175,000 December 31, 1999 $175,000 March 31, 2000 $175,000 June 30, 2000 $175,000 September 30, 2000 $175,000 December 31, 2000 $175,000 March 31, 2001 $175,000 June 30, 2001 $175,000 September 30, 2001 $175,000 December 31, 2001 $175,000 March 31, 2002 $175,000 June 30, 2002 $175,000 September 30, 2002 $175,000 December 31, 2002 $175,000 March 31, 2003 $175,000 June 30, 2003 $175,000 September 30, 2003 $175,000 December 31, 2003 $175,000 March 31, 2004 $175,000 June 30, 2004 $175,000 September 30, 2004 $175,000 December 31, 2004 $175,000 March 31, 2005 $175,000 June 30, 2005 $16,450,000 September 30, 2005 $16,450,000 December 31, 2005 $16,450,000 April 23, 2006 $16,450,000 ------------------------- Total $70,000,000
; PROVIDED that the scheduled installments of principal of the Tranche C Term Loans set forth above shall be reduced by an amount equal to the aggregate principal amount of any voluntary or mandatory prepayments of the Tranche C Term Loans in accordance with subsection 2.4B(iv); and PROVIDED, FURTHER that the Tranche C Term Loans and all other amounts owed hereunder with respect to the Tranche C Term Loans shall be paid in full no later than April 23, 2006, and the final installment payable by Company in respect of the Tranche C Term Loans on such date shall be in an 53 amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche C Term Loans. B. PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN COMMITMENTS. (i) VOLUNTARY PREPAYMENTS. Company may, upon written or telephonic notice to Administrative Agent on or prior to 2:00 PM (Chicago time) on the date of prepayment, which notice, if telephonic, shall be promptly confirmed in writing, at any time and from time to time prepay any Swing Line Loan on any Business Day in whole or in part in an aggregate minimum amount of $250,000 and multiples of $10,000 in excess of that amount. Company may, upon one Business Day's prior written or telephonic notice by 12:00 Noon (Chicago time), in the case of Base Rate Loans (other than Swing Line Loans), and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Administrative Agent by 11:00 A.M. (Chicago time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any such Loans on any Business Day in whole or in part in an aggregate minimum amount of $1,000,000 and multiples of $100,000 in excess of that amount, subject in the case of prepayments of Eurodollar Loans to compliance with subsection 2.6D if such prepayment is made on a date prior to the expiration of the applicable Interest Period. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iv). (ii) VOLUNTARY REDUCTIONS OF LOAN COMMITMENTS. Company may, upon not less than one Business Day's prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Working Capital Lender or Acquisition Loan Lender, as the case may be), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, (a) the Working Capital Loan Commitments in an amount up to the amount by which the Working Capital Loan Commitments exceed the Total Utilization of Working Capital Loan Commitments at the time of such proposed termination or reduction, (b) the Acquisition Loan Commitments in an amount up to the amount by which the Acquisition Loan Commitments exceed the outstanding Acquisition Loans at the time of such proposed termination or reduction; PROVIDED that any such partial reduction shall be in an aggregate minimum amount of $1,000,000 and multiples of $100,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Working Capital Loan Commitments and/or the Acquisition Loan Commitments, as the case may be, shall be effective on the date specified in Company's notice and shall reduce the Working Capital Loan Commitment of each Working Capital Lender and/or the Acquisition Loan Commitments, as the case may be, of each Acquisition Loan Lender proportionately to its Pro Rata Share. (iii) MANDATORY PREPAYMENTS AND MANDATORY REDUCTIONS OF LOAN COMMITMENTS. Upon and after the Merger Date, the Loans shall be prepaid and/or the Acquisition Loan Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4B(iv): 54 (a) PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. No later than 30 calendar days following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any Asset Sale consummated after the consummation of the Merger (other than any Asset Sale permitted under subsections 7.7(iv) and 7.7(x) or an Asset Sale to Company or a Subsidiary Guarantor), Company shall prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced in an aggregate amount equal to such Net Asset Sale Proceeds; PROVIDED that if Company states in the Officers' Certificate delivered pursuant to subsection 2.4B(iii)(e) that Company or the applicable Subsidiary intends to apply, within 365 days after the receipt of such Net Asset Sale Proceeds, all or a portion (as specified in such Officers' Certificate) of such Net Asset Sale Proceeds to a Property Reinvestment Application Company shall not be required to prepay the Loans and/or the Acquisition Loan Commitments shall not be reduced by such amount to be applied to a Property Reinvestment Application; provided further that to the extent such amount of Net Asset Sale Proceeds is not applied to a Property Reinvestment Application within such 365-day period, Company shall, on the last day of such 365-day period prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced by the aggregate amount equal to such amount of Net Asset Sale Proceeds not so applied to Property Reinvestment Application. (b) PREPAYMENTS AND REDUCTIONS FROM NET INSURANCE/CONDEMNATION PROCEEDS. No later than the first Business Day following the date of receipt by Administrative Agent or by Company or any of its Subsidiaries after the Merger Date of any Net Insurance/Condemnation Proceeds in excess of $250,000 with respect to any loss or taking or series of related losses or takings, Company shall prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced in an aggregate amount equal to the amount of such Net Insurance/Condemnation Proceeds; PROVIDED, HOWEVER, that (i) no such prepayment and/or reduction shall be required to the extent under the terms of any lease or other agreement existing on the date hereof such Net Insurance/Condemnation Proceeds are required to be used to replace, rebuild or repair the asset so damaged, destroyed or taken and (ii) if Company states in the Officers' Certificate delivered pursuant to subsection 2.4B(iii)(e) that Company or the applicable Subsidiary intends to apply, within 365 days after the receipt of such Net Insurance/Condemnation Proceeds, all or a portion (as specified in such Officers' Certificate) of such Net Insurance/Condemnation Proceeds to a Property Reinvestment Application, Company shall not be required to prepay Loans and/or the Acquisition Loan Commitments shall not be reduced by such amount to be applied to a Property Reinvestment Application; PROVIDED FURTHER that to the extent such amount of Net Insurance/Condemnation Proceeds is not applied to a Property Reinvestment Application within such 365-day period, Company shall, on the last day of such 365-day period prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced by the aggregate amount equal to such amount of such Net Insurance/Condemnation Proceeds not so applied to a Property Reinvestment Application. (c) PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE OF DEBT OR EQUITY SECURITIES. On the date of receipt by Parent, Company or any of its Subsidiaries of the cash proceeds (any such cash proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including investment banking, legal, brokerage, accounting fees and expenses, being "Net 55 Securities Proceeds"), from the issuance of equity Securities of Parent, Company or any of its Subsidiaries after the Merger Date (other than Excluded Equity Proceeds) or of debt Securities of Company or any of its Subsidiaries after the Merger Date (other than the proceeds of the issuance of Indebtedness permitted by subsection 7.1 (including without limitation the proceeds from the sale of the Senior Subordinated Notes)), Company shall prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced in an aggregate amount equal to such Net Securities Proceeds in the case of the proceeds of debt Securities and in an aggregate amount equal to 50% of such Net Securities Proceeds in the case of the proceeds of equity Securities; PROVIDED the amount of such prepayment hereunder in respect of Net Securities Proceeds constituting the proceeds of the issuance and sale of equity Securities shall be limited to the amount necessary to reduce the amount of Indebtedness included in the calculation of the Consolidated Leverage Ratio to the amount that would result, on a pro forma basis after giving effect to such prepayment, in a Consolidated Leverage Ratio of 3.50:1.00 or less at the end of the Fiscal Quarter then most recently ended and (ii) no such prepayment in respect of Net Securities Proceeds constituting the proceeds of the issuance and sale of Equity Securities shall be required to be made at such times as the Consolidated Leverage Ratio at the end of the most recent Fiscal Quarter (as evidenced by a Margin Determination Certificate delivered to Administrative Agent pursuant to subsection 6.1(iv)) is equal to or less than 3.50:1.00. (d) PREPAYMENTS AND REDUCTIONS FROM CONSOLIDATED EXCESS CASH FLOW. In the event that there shall be Consolidated Excess Cash Flow for any Fiscal Year (commencing with the Fiscal Year ending December 31,1999), Company shall, no later than the fifth Business Day after the delivery of financial statements for such Fiscal Year, prepay the Loans and/or the Acquisition Loan Commitments shall be permanently reduced in an aggregate amount equal to 50% of such Consolidated Excess Cash Flow less the aggregate amount of all voluntary prepayments of Term Loans actually made in such Fiscal Year pursuant to subsection 2.4B(i); PROVIDED that (i) the amount of such prepayment hereunder in respect of Excess Cash Flow shall be limited to the amount necessary to reduce the amount of Indebtedness included in the calculation of the Consolidated Leverage Ratio to the amount that would result, on a pro forma basis after giving effect to such prepayment, in a Consolidated Leverage Ratio of 3.50:1 or less at the end of the Fiscal Quarter then most recently ended and (ii) if as of the last day of such Fiscal Year, the Consolidated Leverage Ratio (as evidenced by a Margin Determination Certificate delivered to Administrative Agent pursuant to subsection 6.1(iv)) is equal to or less than 3.50:1.00, no prepayments of any Loans and no reduction of the Acquisition Loan Commitments or amount of Consolidated Excess Cash Flow need be made. (e) CALCULATIONS OF NET PROCEEDS AMOUNTS; ADDITIONAL PREPAYMENTS AND REDUCTIONS BASED ON SUBSEQUENT CALCULATIONS. Concurrently with any prepayment of the Loans and/or reduction of the Acquisition Loan Commitments pursuant to subsections 2.4B(iii)(a)-(d) and on the date any such prepayment and/or reduction would have been required to be made pursuant to subsections 2.4B(iii)(a) or 2.4B(iii)(b) but for the application of the provisos to such subsections, Company shall deliver to Administrative Agent an Officer's Certificate demonstrating the calculation of the amount (the "NET PROCEEDS AMOUNT") of the applicable Net Asset Sale Proceeds or Net Insurance/Condemnation Proceeds, or Net Securities Proceeds (as such term is defined in subsection 2.4B(iii)(c)), or the applicable Consolidated 56 Excess Cash Flow, as the case may be (and which, in the case of Consolidated Excess Cash Flow, may be the Officer's Certificate delivered pursuant to subsection 6.1(iii) with respect to the financial statements for the Fiscal Year to which such excess cash flow relates if such Officer's Certificate contains the required information). In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officer's Certificate, Company shall promptly make an additional prepayment of the Loans (and/or, if applicable, the Acquisition Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officer's Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess. (f) Company shall not be required to make any prepayment of Loans otherwise required by subsections 2.4B(iii)(a), (b), (c) or (d) (and no reduction of the Acquisition Loan Commitments shall take effect) unless and until the aggregate principal amount of the Loans to be prepaid and/or Acquisition Loan Commitments to be reduced is at least equal to $250,000. (iv) APPLICATION OF PREPAYMENTS. (a) APPLICATION OF VOLUNTARY PREPAYMENTS BY TYPE OF LOANS AND ORDER OF MATURITY. Any voluntary prepayments pursuant to subsection 2.4B(i) shall be applied to the Loans as specified by Company in the applicable notice of prepayment; PROVIDED that in the event Company fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied FIRST to repay outstanding Swing Line Loans to the full extent thereof, SECOND to repay outstanding Term Loans to the full extent thereof and THIRD to repay outstanding Acquisition Loans to the full extent thereof and FOURTH to repay outstanding Working Capital Loans to the full extent thereof. Any voluntary prepayments of the Term Loans pursuant to subsection 2.4B(i) (whether the application thereof is specified by Company or not) shall be applied to prepay the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and to reduce the scheduled installments of principal of the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans set forth in subsection 2.4A(i), 2.4A(ii) and 2.4A(iii) in forward order of maturity. (b) APPLICATION OF MANDATORY PREPAYMENTS BY TYPE OF LOANS. Any amount (the "Applied Amount") required to be applied as a mandatory prepayment of the Loans and/or a reduction of the Acquisition Loan Commitments pursuant to subsections 2.4B(iii)(a)-(d) shall be applied FIRST to prepay the Term Loans to the full extent thereof, SECOND, to the extent of any remaining portion of the Applied Amount, to prepay the Acquisition Loans to the full extent thereof and to permanently reduce the Acquisition Loan Commitments by the amount of such prepayment, and THIRD, to the extent of any remaining portion of the Applied Amount, to prepay the Swing Line Loans and thereafter to prepay Working Capital Loans to the full extent thereof but in either case without permanently reducing the Working Capital Loan Commitments by the amount of such prepayments. 57 (c) APPLICATION OF MANDATORY PREPAYMENTS OF TERM LOANS TO TRANCHE A TERM LOANS, TRANCHE B TERM LOANS AND TRANCHE C TERM LOANS AND THE SCHEDULED INSTALLMENTS OF PRINCIPAL THEREOF. Any mandatory prepayments of the Term Loans pursuant to subsection 2.4B(iii) shall be applied to prepay the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and to reduce the scheduled installments of principal of the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans set forth in subsection 2.4A(i), 2.4A(ii) and 2.4A(iii) in forward order of maturity. Notwithstanding the foregoing, in the case of any mandatory prepayment of the Tranche B Term Loans and the Tranche C Term Loans, Company may elect to offer the Tranche B Term Loan Lenders and/or the Tranche C Term Loan Lenders the option to waive the right to receive the amount of such mandatory prepayment of the Tranche B Term Loans or the Tranche C Term Loans, as applicable. If any Tranche B Term Loan Lender or Lenders or any Tranche C Term Loan Lender or Lenders, as applicable, elect to waive the right to receive the amount of such mandatory prepayment, 50% of the amount that otherwise would have been applied to mandatorily prepay the Tranche B Term Loans or the Tranche C Term Loans, as applicable, of such Lender or Lenders shall be applied instead to the further prepayment of the Tranche A Term Loans (and any such prepayment shall reduce scheduled installments of principal of the Tranche A Term Loans set forth in subsection 2.4A(i) in forward order of maturity), to the extent any are then outstanding and the remaining amount shall be retained by Company. (d) APPLICATION OF PREPAYMENTS TO BASE RATE LOANS AND EURODOLLAR RATE LOANS. Considering Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Working Capital Loans and Acquisition Loans being prepaid separately, any prepayment thereof shall be applied as specified by Company to Administrative Agent on or prior to the date of the relevant prepayment or, absent such specification, first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. C. GENERAL PROVISIONS REGARDING PAYMENTS. (i) MANNER AND TIME OF PAYMENT. All payments by Company of principal, interest, fees and other Obligations hereunder and under the Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 2:00 P.M. (Chicago time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. (ii) APPLICATION OF PAYMENTS TO PRINCIPAL AND INTEREST. Except as provided in subsection 2.2C, all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. 58 (iii) APPORTIONMENT OF PAYMENTS. Aggregate principal and interest payments in respect of Loans shall be apportioned among all outstanding Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (iv) PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. D. APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER GUARANTIES (i) APPLICATION OF PROCEEDS OF COLLATERAL. Except as provided in subsection 2.4B(iii)(a) with respect to prepayments from Net Asset Sale Proceeds or utilization thereof by Company, or subsection 2.4B(iii)(b) with respect to prepayments from Net Insurance/Condemnation Proceeds or utilization thereof by Company, all proceeds received by Administrative Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral under any Collateral Document shall be applied, upon the occurrence and during the continuance of an Event of Default, against, the applicable Secured Obligations (as defined in such Collateral Document) in the following order of priority: (a) To the payment of all costs and expenses of such sale, collection or other realization, including reasonable fees and expenses of Administrative Agent and its agents and counsel, and all other expenses and liabilities made or incurred by Administrative Agent in connection therewith, and all amounts for which Administrative Agent is entitled to indemnification under such Collateral Document and all advances made by Administrative Agent thereunder for the account of the applicable Loan Party, and to the payment of all costs and expenses paid or incurred by Administrative Agent in connection with the exercise of any right or remedy under such Collateral Document, all in accordance with the terms of this Agreement and such Collateral Document; (b) thereafter, to the extent of any excess such proceeds, to the payment of all other such Secured Obligations then due and payable for the ratable benefit of the holders thereof; (c) thereafter, to the extent of any excess such proceeds, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and 59 (d) thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of such Loan Party or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (ii) APPLICATION OF PAYMENTS UNDER GUARANTIES. All payments received by Administrative Agent under any of the Guaranties at any time at which an Event of Default has occurred and is continuing, shall be applied promptly from time to time by Administrative Agent in the following order of priority: (a) to the payment of the costs and expenses of any collection or other realization under the Guaranties, including reasonable fees and expenses of Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, all in accordance with the terms of this Agreement and such Guaranty; (b) thereafter, to the extent of any excess such payments, to the payment of all other Guarantied Obligations (as defined in such Guaranty) then due and payable for the ratable benefit of the holders thereof; (c) thereafter, to the extent of any excess such payments, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and (d) thereafter, to the extent of any excess such payments, to the payment to Parent or to the applicable Subsidiary Guarantor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 2.5 USE OF PROCEEDS. A. TERM LOANS. The proceeds of the Term Loans (other than the Additional Tranche B Term Loans and the Tranche C Term Loans), together with other funds available to Company, shall be applied by Company to pay the Acquisition Financing Requirements. To the extent Company advances to DAH proceeds of the Term Loans on the Closing Date to repay the Existing DAH Debt, such advances shall be evidenced by the Intercompany Note Relating to Tranche A Term Loans and Working Capital Loans and /or the Intercompany Note Relating to Tranche B Term Loans, as the case may be, which notes shall be pledged by Company to Administrative Agent pursuant to the Finance Co. Pledge Agreement. To the extent the proceeds of the Original Tranche B Term Loans are not utilized on the Closing Date, the excess proceeds shall be deposited by Company into the Investment Accounts for the benefit of the Lenders and invested in Cash Equivalents specified in the Investment Account Agreement, as directed by Company, until the Merger Date. The proceeds of the Additional Tranche B Term Loans shall be applied by Company to finance directly or indirectly the costs of the PATS Acquisition. The proceeds of the Tranche C Term Loans shall be applied by Company to finance directly or indirectly the costs of the PPI Acquisition. B. WORKING CAPITAL LOANS; SWING LINE LOANS. The proceeds of the Working Capital Loans and any Swing Line Loans may be applied by Company for working capital and general and other corporate purposes, including the making of advances to DAH as described below. Up to $10,600,000 of Working Capital Loans made on the Closing Date and/or the Merger Date may be used to pay the Acquisition Financing Requirements. The Working Capital Loans may be advanced by Company to DAH during the period from and including the Closing Date to and including the Merger Date for working capital and general and other corporate purposes. To the extent Company 60 advances to DAH proceeds of the Working Capital Loans during such period, such advances shall be evidenced by the Intercompany Note Relating to Tranche A Term Loans and Working Capital Loans which note shall be pledged by Company to Administrative Agent pursuant to the Finance Co. Pledge Agreement. C. ACQUISITION LOANS. The proceeds of the Acquisition Loans shall be applied by Company to finance directly or indirectly the costs of Permitted Acquisitions. D. MARGIN REGULATIONS. No borrowing and no portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that is in violation of Regulation U or Regulation X of the Board of Governors of the Federal Reserve System in effect on the date or dates of such borrowing and such use of proceeds. 2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 11:00 A.M. (London time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that deposits in U.S. Dollars for the relevant Interest Period are not available to Administrative Agent in the London interbank market or by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company or, at the sole option of Company, the proposed Loans requested to be made in such Notice of Borrowing or Notice of Conversion, Continuation, as the case may be, shall instead be made as, or converted to or continued as, Base Rate Loans. C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans has become unlawful as a result of the introduction of, or any change in or in the interpretation of, any law, treaty, governmental rule, regulation, guideline or order (whether or not having the force of law even though the failure to comply therewith would not be unlawful), in each case after the date hereof, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative 61 Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender (which such Affected Lender shall do promptly upon obtaining actual knowledge that the circumstance giving rise to such suspension no longer exist), (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan (with interest thereon being payable on the same date or dates on which interest is payable in respect of the corresponding Loans of Lenders that are not Affected Lenders), (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination (with interest thereon being payable on the same date or dates on which interest is payable in respect of the corresponding Loans of Lenders that are not Affected Lenders). Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement. D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds but excluding any loss of margin for any period after any failure to borrow, continue or convert any Eurodollar Loans, or any prepayment of Eurodollar Loans described below) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including any prepayment pursuant to subsection 2.4B(i)) or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, or (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company. E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender; provided that Company shall not be liable for any additional amounts pursuant to subsection 2.7 as a result thereof nor shall any such action, by itself, cause such Lender to become an Affected Lender. 62 F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; PROVIDED, HOWEVER, that each Lender may fund each of its Eurodollar Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, Company may not elect to have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Loan. 2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY. A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation of order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof (in the case of each Lender listed on the signature pages hereof and in the case of any other Lender if such change shall have affected a class of Lenders generally) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of any other Lender if such change shall not have affected a class of Lenders generally), or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (ii) imposes any other condition (other than with respect to a tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Eurodollar Rate Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall pay to such Lender, within 15 days after receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall promptly deliver to Company (with a copy to Administrative Agent) a written 63 statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. B. WITHHOLDING OF TAXES. (i) PAYMENTS TO BE FREE AND CLEAR. All sums payable by Company under this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction on account of, any Tax . (ii) GROSSING-UP OF PAYMENTS. If Company is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Loan Documents: (a) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made for its own account; (b) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (c) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, or within 30 days after the due date of payment of any Tax which it is required by clause (a) above to pay (whichever is later), Company shall deliver to Administrative Agent evidence available to the Company reasonably satisfactory to Administrative Agent of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; PROVIDED that no such additional amount shall be required to be paid to any Lender or Agent under clause (b) above except to the extent that any change after the date hereof (in the case of each Lender and Agent listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender or Agent. (iii) If any Taxes are directly asserted against either of the Agents or any Lender with respect to any payment received by such Agents or such Lender under the Agreement, such Agents or such Lender may pay such Taxes and the Company will promptly pay to such Person such additional amount (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person shall equal the amount of such Taxes paid by such Person; PROVIDED, HOWEVER, that the Company shall not be obligated to make payment to the Lenders or the Agents (as the case may be) pursuant to this sentence in respect of penalties or interest attributable to any Taxes, if written demand therefor has not been made by such Lenders or the Agents within 60 days from the date on which such Lenders or the Agents knew of the imposition of Taxes by the relevant taxing authority or for any additional imposition which may arise from the failure of the Lenders or Agents to apply 64 payments in accordance with the applicable tax law after the Company has made the payments required hereunder; PROVIDED, FURTHER, HOWEVER, that the Company shall not be required to pay any such additional amounts except to the extent that any change after the date hereof (in the case of each Lender and Agent listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for the deduction, withholding or payment of Taxes shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender or Agent. After a Lender or an Agent (as the case may be) learns of the imposition of Taxes, such Lender or Agent will act in good faith to notify the Company of their obligations hereunder as soon as reasonably possible. (iv) EVIDENCE OF EXEMPTION FROM U.S. WITHHOLDING TAX. (a) Each Lender and Agent that is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States, or any state or other political subdivision thereof, (iii) an estate that is subject to U.S. federal income taxation regardless of the source of its income or (iv) a trust, if any only if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and (B) one or more U.S. persons has the authority to control all substantial decisions of the trust (for purposes of this subsection 2.7B(iv), any such Person referred to in clauses (i) through (iv) being a "NON-US LENDER OR AGENT") shall deliver to Administrative Agent (which shall promptly deliver an original copy to Company) on or prior to the Closing Date (in the case of each Lender and Agent listed on the signature pages hereof) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two or more (as Company or Administrative Agent reasonably request) original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two or more (as Company or Administrative Agent reasonably request) original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iv)(a) hereby agrees, from time to time after the initial delivery by 65 such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall on or before the date that any such form, certification or other evidence becomes obsolete or inaccurate (1) deliver to Administrative Agent (which shall promptly deliver an original copy to Company) two or more (as Company or Administrative Agent may reasonably request) new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two or more (as Company or Administrative Agent may reasonably request) new original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. Each Lender and each Agent agrees, to the extent reasonable and without material cost to it, to provide to Company and Administrative Agent such other applicable forms or certificates that would reduce or eliminate any Tax. (c) Company shall not be required to pay any additional amount to any Non-US Lender or Agent under subsection 2.7B(ii) or 2.7B(iii)if such Lender or Agent shall have failed to satisfy the requirements of clause (a) or (b)(1) of this subsection 2.7B(iv); PROVIDED that if such Lender shall have satisfied the requirements of subsection 2.7B(iv)(a) on the Closing Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iv)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to subsection 2.7B(ii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iv)(a). (v) If Company determines in good faith that a reasonable basis exists for contesting the imposition of a Tax with respect to a Lender or either of the Agents, if requested by Company, the relevant Lender or Agent, as the case may be, shall reasonably cooperate with Company in challenging such Tax at Company's expense; PROVIDED, HOWEVER, that nothing in this subsection 2.7B(v) shall require any Lender to submit to Company or any other Person any tax returns or any part thereof, or to prepare or file any tax returns other than as such Lender in its sole discretion shall determine. (vi) If a Lender or an Agent shall receive a refund (including any offset or credits) from a taxing authority (as a result of any error in the imposition of Taxes by such taxing authority) of any Taxes paid by Company pursuant to subsection 2.7B(ii) and 2.7B(iii) above, such Lender or the Agent (as the case may be) shall promptly pay Company the amount so received, with interest, if any, from the taxing authority with respect to such refund, net of any tax liability incurred by such Lender or Agent that is attributable to the receipt of such refund and such interest; PROVIDED that such Lender or Agent, as the case may be, shall be entitled to use reasonable methods to calculate the allocation of any such refund 66 payable to Company so long as such method does not result in a materially reduced amount being paid to Company as compared to similarly situated borrowers. (vii) Each Lender and each Agent agrees, to the extent reasonable and without material cost to it, to cooperate with the Company to minimize any amounts payable by the Company under this Section 2.7B; PROVIDED, HOWEVER, that nothing in this Section 2.7B shall require any Lender to take any action which, in the sole discretion of such Lender, is inconsistent with its internal policy and legal and regulatory restrictions. C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof (in the case of each Lender listed on the signature pages hereof and in the case of any other Lender if such change shall have affected a class of Lenders generally) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of any other Lender if such change shall not have affected a class of Lenders generally) of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change after such date therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency issued after such date, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within 15 days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error; provided that such Lender may not impose materially greater costs on Company than on similarly situated borrowers by the virtue of the methodology applied to calculate such additional amounts. D. PERIOD OF RECOVERY. Company shall not be obligated to compensate any Lender for any costs or additional amounts with respect to which such Lender may request compensation pursuant to this subsection 2.7 or subsection 3.6 to the extent such costs have accrued, or have been incurred, prior to 180 days prior to the date on which such Lender demands compensation therefor hereunder. 2.8 OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE; REPLACEMENT OF LENDER. A. MITIGATION. Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit 67 of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; PROVIDED that such Lender or Issuing Lender will not be obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. B. REPLACEMENT OF LENDER. If Company receives a notice of amounts due pursuant to subsection 2.7A, subsection 2.7B or subsection 2.7C or subsection 3.6 from a Lender or a Lender becomes an Affected Lender, a Non-Funding Lender or a Non-Consenting Lender (any such Lender, a "Subject Lender"), so long as (i) Company has obtained a commitment from another Lender or an Eligible Assignee to purchase at par the Subject Lender's Loans and assume the Subject Lender's Commitments and all other obligations of the Subject Lender hereunder, and (ii) such Lender is not an Issuing Lender with respect to any Letters of Credit outstanding (unless all such Letters of Credit are terminated or arrangements acceptable to such Issuing Lender (such as a "back-to-back" letter of credit) are made, it being understood that a Standby Letter of Credit issued hereunder shall constitute such an arrangement acceptable to such Issuing Lender) upon written notice to the Subject Lender and Administrative Agent, Company may require the Subject Lender to assign all of its Loans and Commitments to such other Lender or Eligible Assignee pursuant to the provisions of subsection 10.1B; PROVIDED that, prior to or concurrently with such replacement (i) Company has paid to the Lender giving such notice all amounts under subsections 2.6D, 2.7 (if applicable) and 3.6 (if applicable) through such date of replacement, (ii) Company or the applicable assignee has paid to Administrative Agent the processing fee required to be paid by subsection 10.1B(i) and (iii) all of the requirements for such assignment contained in subsection 10.1B, including, without limitation, the consent of Agents (if required) and the receipt by Administrative Agent of an executed Assignment Agreement and other supporting documents, have been fulfilled. SECTION 3. LETTERS OF CREDIT 3.1 ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS THEREIN. A. LETTERS OF CREDIT. In addition to Company requesting that Working Capital Lenders make Working Capital Loans pursuant to subsection 2.1A(iii) and that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(iv), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Closing Date to but excluding the Working Capital Loan Commitment Termination Date, that Issuing Lender issue Letters of Credit for the account of Company or any of its Subsidiaries (provided that Company shall be deemed to be the account party hereunder and shall be fully liable under this Section 3 with respect to all Letters of Credit issued for the account of its Subsidiaries) for the purposes specified in the definitions of Standby Letters of Credit and Trade Letters of Credit. Subject to the terms and 68 conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, Issuing Lender shall, subject to subsection 3.1B(ii), issue such Letters of Credit in accordance with the provisions of this subsection 3.1; PROVIDED that Company shall not request that Issuing Lender issue (and Issuing Lender shall not issue): (i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Working Capital Loan Commitments would exceed the Working Capital Loan Commitments then in effect; (ii) any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed $5,000,000; (iii) any Standby Letter of Credit having an expiration date later than the earlier of (a) the Working Capital Loan Commitment Termination Date and (b) the date that is one year from the date of issuance of such Standby Letter of Credit; PROVIDED that the immediately preceding clause (b) shall not prevent Company from requesting and any Issuing Lender from agreeing that a Standby Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless such Issuing Lender elects not to extend for any such additional period (such Issuing Lender hereby agreeing that it shall only elect not to extend such Standby Letter of Credit if, but only if, it has knowledge that an Event of Default has occurred and is continuing); or (iv) any Letter of Credit denominated in a currency other than Dollars. B. MECHANICS OF ISSUANCE. (i) NOTICE OF ISSUANCE. Whenever Company desires the issuance of a Letter of Credit, it shall deliver to Administrative Agent a Notice of Issuance of Letter of Credit substantially in the form of EXHIBIT III annexed hereto no later than 11:00 A.M. (Chicago time) at least three Business Days, or such shorter period as may be agreed to by the Issuing Lender in any particular instance, in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) the face amount of the Letter of Credit, (c) the expiration date of the Letter of Credit, (d) the name and address of the beneficiary, and (e) either the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the Issuing Lender to make payment under the Letter of Credit; PROVIDED that the Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit or any such documents; and PROVIDED, FURTHER that no Letter of Credit shall require payment against a conforming draft to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the Issuing Lender to which such draft is required to be presented is located) that such draft is presented if such presentation is made after 10:00 A.M. in the time zone of such office of the Issuing Lender) on such business day. Company shall notify the applicable Issuing Lender (and Administrative Agent, if Administrative Agent is not such Issuing Lender) prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit as being true and correct on the proposed date of issuance is not true and correct as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to 69 the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit as being true and correct on the proposed date of issuance. (ii) If Administrative Agent in its capacity as Issuing Lender determines that the issuance of such Letter of Credit would violate applicable law or Administrative Agent's internal policies relating to Letters of Credit, Administrative Agent shall not be obligated to issue such Letter of Credit, and Company may request any other Working Capital Lender to issue the Letter of Credit. If such Working Capital Lender agrees to issue such Letter of Credit, such Working Capital Lender shall be the Issuing Lender of such Letter of Credit. (iii) ISSUANCE OF LETTER OF CREDIT. Upon satisfaction or waiver (in accordance with subsection 10.6) of the conditions set forth in subsection 4.5, the applicable Issuing Lender shall issue the requested Letter of Credit in accordance with the such Issuing Lender's standard operating procedures. (iv) NOTIFICATION TO WORKING CAPITAL LENDERS. Upon the issuance of any Letter of Credit the applicable Issuing Lender shall promptly notify Administrative Agent of such issuance, which notice shall be accompanied by a copy of such Letter of Credit. Promptly after receipt of such notice (or, if Administrative Agent is the Issuing Lender, upon issuance of such Letter of Credit), Administrative Agent shall notify each Working Capital Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1B(vi). (v) REPORTS TO WORKING CAPITAL LENDERS. Within 15 days after the end of each calendar quarter ending after the Closing Date, so long as any Letter of Credit shall have been outstanding during such calendar quarter, each Issuing Lender shall deliver to Administrative Agent a report setting forth for such calendar quarter the daily aggregate amount available to be drawn under the Letters of Credit issued by such Issuing Lender that were outstanding during such calendar quarter. Administrative Agent will promptly send copies of such reports to the Working Capital Lenders. (vi) WORKING CAPITAL LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Working Capital Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Issuing Lender a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Working Capital Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. 3.2 LETTER OF CREDIT FEES. Company agrees to pay the following amounts with respect to Letters of Credit issued hereunder: (i) (a) a fronting fee, payable directly to the applicable Issuing Lender for its own account, equal to 0.125% per annum of the daily amount available to be drawn under such Letter of Credit and (b) a letter of credit fee, payable to Administrative Agent for the account of Working Capital Lenders (based upon their respective Pro Rata Shares), equal to (x) (1) in the case of Standby Letters of Credit, the applicable Eurodollar Rate Margin set forth in subsection 2.2A hereof for Working Capital Loans which are Eurodollar Rate Loans and (2) in the case of Trade Letters of Credit, 1.25%, in each case MULTIPLIED BY (y) the daily amount available from time to time to be drawn under such Letter of Credit, each such 70 fronting fee or letter of credit fee to be payable in arrears on and to (but excluding) each Quarterly Date and computed on the basis of a 360-day year for the actual number of days elapsed; and (ii) with respect to the issuance, amendment or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clause (i) above), documentary and processing charges payable directly to the applicable Issuing Lender for its own account in accordance with such Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be or as otherwise agreed upon between Company and such Issuing Lender. For purposes of calculating any fees payable under clause (i) of this subsection 3.2, the daily amount available to be drawn under any Letter of Credit shall be determined as of the close of business on any date of determination. Promptly upon receipt by Administrative Agent of any amount described in clause (i)(b) of this subsection 3.2, Administrative Agent shall distribute to each Working Capital Lender its Pro Rata Share of such amount. 3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT. A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit. B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In the event an Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, such Issuing Lender shall immediately notify Company and Administrative Agent of the date payment thereunder shall be made (the "Reimbursement Date"), and Company shall reimburse such Issuing Lender on the Reimbursement Date in an amount in Dollars and in same day funds equal to the amount of such honored drawing; PROVIDED that, anything contained in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent and such Issuing Lender prior to 11:00 A.M. (Chicago time) on the Reimbursement Date that Company intends to reimburse such Issuing Lender for the amount of such honored drawing with funds other than the proceeds of Working Capital Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Working Capital Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars equal to the amount of such honored drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.4, Working Capital Lenders shall, on the Reimbursement Date, make Working Capital Loans that are Base Rate Loans in the amount of such honored drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse such Issuing Lender for the amount of such honored drawing; and PROVIDED, FURTHER that if for any reason proceeds of Working Capital Loans are not received by such Issuing Lender on the Reimbursement Date in an amount equal to the amount of such honored drawing, Company shall reimburse such Issuing Lender, on demand, but no earlier than one Business Day following the Reimbursement Date, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Working Capital Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Working Capital Lender from its obligation to make Working Capital Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have 71 against any Working Capital Lender resulting from the failure of such Lender to make such Working Capital Loans under this subsection 3.3B. C. PAYMENT BY WORKING CAPITAL LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS OF CREDIT. (i) PAYMENT BY WORKING CAPITAL LENDERS. In the event that Company shall fail for any reason to reimburse any Issuing Lender as provided in subsection 3.3B in an amount equal to the amount of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall promptly notify each other Working Capital Lender of the unreimbursed amount of such honored drawing and of such other Working Capital Lender's respective participation therein based on such Working Capital Lender's Pro Rata Share. Each Working Capital Lender shall make available to such Issuing Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of such Issuing Lender specified in such notice, not later than 11:00 A.M. (Chicago time) on the first business day (under the laws of the jurisdiction in which such office of such Issuing Lender is located) after the date notified by such Issuing Lender. In the event that any Working Capital Lender fails to make available to such Issuing Lender on such business day the amount of such Working Capital Lender's participation in such Letter of Credit as provided in this subsection 3.3C, such Issuing Lender shall be entitled to recover such amount on demand from such Working Capital Lender together with interest thereon at the Federal Funds Effective Rate for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Working Capital Lender to recover from any Issuing Lender any amounts made available by such Working Capital Lender to such Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Lender in respect of which payment was made by such Working Capital Lender constituted gross negligence or willful misconduct on the part of such Issuing Lender. (ii) DISTRIBUTION TO WORKING CAPITAL LENDERS OF REIMBURSEMENTS RECEIVED FROM COMPANY. In the event any Issuing Lender shall have been reimbursed by other Working Capital Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall distribute to each other Working Capital Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Working Capital Lender's Pro Rata Share of all payments subsequently received by such Issuing Lender from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Working Capital Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Working Capital Lender may request. D. INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT. (i) PAYMENT OF INTEREST BY COMPANY. Company agrees to pay to each Issuing Lender, with respect to drawings honored under any Letters of Credit issued by it, interest on the amount paid by such Issuing Lender in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Working Capital Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date such drawing is honored to but excluding the Business Day following the Reimbursement Date, the rate 72 then in effect under this Agreement with respect to Working Capital Loans that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Working Capital Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. (ii) DISTRIBUTION OF INTEREST PAYMENTS BY ISSUING LENDER. Promptly upon receipt by any Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing honored under a Letter of Credit issued by it, (a) such Issuing Lender shall distribute to each other Working Capital Lender, out of the interest received by such Issuing Lender in respect of the period from the date such drawing is honored to but excluding the date on which such Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Working Capital Loans pursuant to subsection 3.3B), the amount that such other Working Capital Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been honored under such Letter of Credit, and (b) in the event such Issuing Lender shall have been reimbursed by other Working Capital Lenders pursuant to subsection 3.3C(i) for all or any portion of such honored drawing, such Issuing Lender shall distribute to each other Working Capital Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Working Capital Lender's Pro Rata Share of any interest received by such Issuing Lender in respect of that portion of such honored drawing so reimbursed by other Working Capital Lenders for the period from the date on which such Issuing Lender was so reimbursed by other Working Capital Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by Company. Any such distribution shall be made to a Working Capital Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Working Capital Lender may request. 3.4 OBLIGATIONS ABSOLUTE. The obligation of Company to reimburse each Issuing Lender for drawings honored under the Letters of Credit issued by it and the obligations of Working Capital Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall, to the fullest extent permitted under applicable law, be paid strictly in accordance with the terms of this Agreement under all circumstances, including any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company or any Working Capital Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); (iii) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; 73 (iv) payment by the applicable Issuing Lender under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (vi) any breach of this Agreement or any other Loan Document by any party thereto; (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (viii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing; PROVIDED, in each case, that payment by the applicable Issuing Lender under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of such Issuing Lender under the circumstances in question. 3.5 INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES. A. INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless each Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel) which such Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of such Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by such Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of such Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "GOVERNMENTAL ACTS"). B. NATURE OF ISSUING LENDERS' DUTIES. As between Company and any Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, such Issuing Lender shall not be responsible for (except to the extent of its gross negligence or willful misconduct): (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the 74 misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of such Issuing Lender, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of such Issuing Lender's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability arising solely out of the gross negligence or willful misconduct of such Issuing Lender or, subject to subsection 3.4, the failure of such Issuing Lender to make payment upon the proper presentation to it of documents strictly complying with the terms of any Letter of Credit. 3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Issuing Lender or Working Capital Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof (in the case of each Lender listed on the signature pages hereof and in the case of any other Lender if such change shall have affected a class of Lenders generally) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of any other Lender if such change shall not have affected a class of Lenders generally), or compliance by any Issuing Lender or Working Capital Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement in respect of any Letters of Credit issued by any Issuing Lender or participations therein purchased by any Working Capital Lender; or (ii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Issuing Lender or Working Capital Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; and the result of any of the foregoing is to increase the cost to such Issuing Lender or Working Capital Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by such Issuing Lender or Working Capital Lender (or its applicable lending or letter of credit office) with respect thereto; then, in any case, Company shall pay to such Issuing Lender or Working Capital Lender, within 15 days after receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Issuing Lender or Working Capital Lender for any such increased cost or reduction in amounts received or 75 receivable hereunder. Such Issuing Lender or Working Capital Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Issuing Lender or Working Capital Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT The obligations of Lenders to make Loans and the issuance of Letters of Credit hereunder are subject to the satisfaction of the following conditions: 4.1 CONDITIONS TO INITIAL LOANS. The obligations of Lenders to make the initial Loans made on the Closing Date were, in addition to the conditions precedent specified in subsection 4.4, subject to prior or concurrent satisfaction of the following conditions: A. LOAN PARTY DOCUMENTS. On or before the Closing Date, Company shall, and shall cause Parent and Acquisition Co. to, deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person does a material amount of business and is qualified as a foreign corporation to do business and, to the extent applicable and generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; (ii) Copies of the Bylaws of such Person, certified as of the Closing Date by an Authorized Officer of such Person or such Person's corporate secretary or assistant secretary; (iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Loan Documents and the Related Agreements to which it is a party, and the consummation of the transactions contemplated by the foregoing, certified as of the Closing Date by an Authorized Officer of such Person or such Person's corporate secretary or assistant secretary as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates with respect to each Authorized Officer of such Person executing any Loan Document or authorized to execute any notice, request or other document that may be delivered pursuant thereto; (v) Executed originals of the Credit Agreement, any Notes requested by any Lender at least one Business Day prior to the Closing Date, the Parent Guaranty, the Parent Pledge Agreement, the Finance Co. Pledge Agreement, the Acquisition Co. Guaranty, the Collateral Account Agreement and the Investment Account Agreement; and (vi) Such other documents as Agents may reasonably request. 76 B. PARENT CAPITALIZATION. Parent shall have received gross proceeds of not less than $65,000,000 from the sales of its common stock to DLJMB and its Subsidiaries and not less than $34,000,000 in gross proceeds from the sale of the Parent P-I-K Securities and Parent shall have contributed all such proceeds to Finance Co. as common equity. C. SUBORDINATED DEBT; CAPITAL CONTRIBUTIONS. Finance Co. shall have received gross proceeds of not less than $100,000,000 from the sale of the Senior Subordinated Bridge Notes or the Senior Subordinated Notes. Finance Co. shall have contributed a portion of the proceeds received from Parent from the issuance and the sale of its common stock and the Parent PIK Securities, and the proceeds from the issuance and sale of the Senior Subordinated Bridge Notes or the Senior Subordinated Notes, as the case may be, together with the proceeds of the Term Loans made on the Closing Date, to Acquisition Co. and shall have made a loan to DAH with the balance of such proceeds, other than proceeds of Tranche B Term Loans deposited into the Investment Accounts, if any, and proceeds applied to pay transaction costs on the Closing Date, such loan to be evidenced by the Intercompany Notes which shall be pledged by Company to Administrative Agent pursuant to the Finance Co. Pledge Agreement), to be applied by DAH to repay in full the Existing DAH Debt (together with accrued interest and fees thereon and expenses incurred in connection therewith). To the extent the proceeds of the Tranche B Term Loans are not so utilized on the Closing Date, the excess proceeds shall be deposited by Company into the Investment Accounts pursuant to the Investment Account Agreement and invested in Cash Equivalents specified in the Investment Account Agreement as directed by Company until the Merger Date. D. TENDER OFFER MATTERS. (i) TENDER OFFER MATERIALS. Agents shall have received copies of all Tender Offer Materials and other documents in connection therewith filed with the Securities and Exchange Commission and the Tender Offer Materials shall be reasonably satisfactory in form and substance to Agents and Requisite Lenders (it being understood that the Tender Offer Materials as in effect on August 28, 1998 are so satisfactory). (ii) MERGER AGREEMENT IN FULL FORCE AND EFFECT. Agents shall have received copies of the Merger Agreement and the Merger Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any material respect (including, without limitation, any increase in the price to be paid for the DAH Common Stock to an amount in excess of $23.00 per share after the date hereof), in each case without the consent of Agents and Requisite Lenders, such consent not to be unreasonably withheld. (iii) CONSUMMATION OF TENDER OFFER; MINIMUM SHARES. Contemporaneously with the application of the proceeds of the initial Loans to be made on the Closing Date, the Tender Offer shall have been consummated in all material respects in accordance with the Tender Offer Materials and no condition to the Tender Offer shall have been waived without the consent of Agents. Not less than the Minimum Shares shall have been tendered and accepted for payment in the Tender Offer; the depository shall have delivered a certificate as to the number of shares of DAH Common Stock being held by it that have been validly tendered and not withdrawn as of the Closing Date and Company shall have delivered an Officer's Certificate as to the total number of shares of DAH Common Stock outstanding on a fully diluted basis as of the Closing Date. 77 (iv) USE OF OTHER FUNDS. Acquisition Co. shall have deposited with the depository not less than the purchase price for the DAH Common Stock to be purchased in the Tender Offer in immediately available funds contemporaneously with the application of the Term Loans to be made on the Closing Date. (v) OFFICER'S CERTIFICATES. Agents shall have an Officer's Certificate from Company to the effect that, to the best knowledge of Company, the representations and warranties of Acquisition Co. and DAH in the Merger Agreement are true, correct and complete in all material respects on and as of the date thereof. Agents shall have received Officer's Certificates from Company to the effect that (a) the Merger Agreement is in full force and effect and no provision thereof has been modified or waived in any respect without the consent of Agents and Requisite Lenders and (b) to the best knowledge of Company, each of the parties to the Merger Agreement has complied with all agreements and conditions contained in the Merger Agreement and any agreements or documents referred to therein required to be performed or complied with by each of them on or before the Closing Date and none of such Persons are in default in their performance or compliance with any of the terms or provisions thereof. (vi) NO MATERIAL LITIGATION. Except as set forth on Schedule 5.6 there shall be no material litigation pending which challenges the Tender Offer or the Merger in any respect. (vii) REPAYMENT OF EXISTING DAH DEBT. Contemporaneously with the application of the proceeds of the Loans to be made on the Closing Date, (a) Company shall have made an advance to DAH in an amount sufficient to, and DAH and its Subsidiaries shall have used the proceeds of such advance to, repay in full all Existing DAH Debt and Transaction Costs payable by DAH, (b) DAH and its Subsidiaries shall have terminated any commitments to lend or make other extensions of credit under the Existing DAH Debt and (c) DAH and its Subsidiaries shall have taken all action necessary to terminate or release all Liens securing the Existing DAH Debt in connection therewith, in each case on terms satisfactory to the Agents, or arrangements satisfactory to the Agents for the making of such advance, the repayment of such Existing DAH Debt, the termination of such commitments and the release of such Liens shall have been made. There shall be no existing Indebtedness of Company or its Subsidiaries outstanding after consummation of the Closing Date transactions other than Indebtedness permitted under subsection 7.1. (viii) COMPLIANCE WITH LAWS. The making of the Loans requested on the Closing Date shall not violate Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. E. RELATED AGREEMENTS. The Agents shall have received copies of the Related Agreements in effect on the Closing Date. No provision of the Senior Subordinated Bridge Note Agreement or the Senior Subordinated Note Indenture, as the case may be, shall have been amended, modified or waived, from the most recent version thereof provided to the Agents prior to their execution hereof, in any respect determined by Agents to be material without the consent of Agents and Requisite Lenders, except in accordance with subsection 7.15. F. SECURITY INTERESTS IN SHARES OF FINANCE CO. AND ACQUISITION CO. Agents shall have received evidence satisfactory to each of them that Parent and Company shall have taken or caused to be taken all such actions, executed and delivered or caused to be made all such filings and agreements, documents and instruments, and made or caused to be made all such filings and recordings that may be necessary or, in the opinion of Agents, desirable in order to create in favor of 78 Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority security interest in all outstanding shares of the Finance Co. and Acquisition Co. pursuant to the Parent Pledge Agreement and the Finance Co. Pledge Agreement, respectively. Such actions shall include the following: (i) SCHEDULES TO COLLATERAL DOCUMENTS. Delivery to Administrative Agent of accurate and complete schedules to all of the applicable Collateral Documents; and (ii) STOCK CERTIFICATES AND INSTRUMENTS. Delivery to Administrative Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Agents) representing all capital stock pledged pursuant to the Parent Pledge Agreement and the Finance Co. Pledge Agreement and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Agents) evidencing any Collateral. G. NO MATERIAL ADVERSE CHANGE. No material adverse change in the financial condition, operations, assets, business, properties or prospects of DAH and its Subsidiaries (excluding Avtech and its Subsidiaries), taken as a whole, since December 31, 1997, and of Avtech and its Subsidiaries, taken as a whole, since September 30, 1997, shall have occurred. There shall exist no pending or threatened material litigation, proceedings or investigations which could reasonably be expected to have a Material Adverse Effect. H. LIEN SEARCHES. Delivery to Administrative Agent of the results of a recent search of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of DAH and any of its Domestic Subsidiaries, together with copies of all such filings disclosed by such search. I. OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders shall have received (i) originally executed copies of one or more favorable written opinions of Davis Polk & Wardwell, special New York counsel for Loan Parties, and of Spolin & Silverman, counsel for Loan Parties, dated as of the Closing Date in the form of EXHIBIT X-1 and X-2 annexed hereto and as to such other matters as Agents acting on behalf of Lenders may reasonably request. J. OPINIONS OF SYNDICATION AGENT'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Syndication Agent, dated as of the Closing Date, substantially in the form of EXHIBIT XI annexed hereto and as to such other matters as Syndication Agent acting on behalf of Lenders may reasonably request. K. SOLVENCY CERTIFICATE. Company shall have delivered to Arranger and Agents a Solvency Certificate dated the Closing Date. L. REPRESENTATIONS AND WARRANTIES. Company shall have delivered to Agents an Officer's Certificate, in form and substance reasonably satisfactory to Agents, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date). 79 M. NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with all transactions contemplated by the Loan Documents and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on all transactions contemplated by the Loan Documents. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending. N. FINANCIAL STATEMENTS. Lenders shall have received (i) unaudited financial statements of DAH and its Subsidiaries for the Fiscal Quarter ended June 30, 1998, (ii) pro forma consolidated balance sheets of DAH and its Subsidiaries as of June 30, 1998, giving pro forma effect to the Closing Date transactions and the Merger and (iii) projected financial statements (including balance sheets and statements of operations and cash flows) of DAH and its Subsidiaries through and including December 31, 2005. O. FEES. Company shall have paid to Agents, Lenders and Arranger the fees payable on the Closing Date. P. COMPLETION OF PROCEEDINGS. All documents executed or submitted pursuant hereto by or on behalf of Company or any of its Subsidiaries or any other Loan Parties shall be reasonably satisfactory in form and substance to Agents and their counsel; Agents and their counsel shall have received all information, approvals, opinions, documents or instruments that Agents or their counsel shall have reasonably requested. Each Lender hereby agrees that by its execution and delivery of its signature page hereto and by the funding of its Loans to be made on the Closing Date, such Lender approves of and consents to each of the matters set forth in this subsection 4.1 which must be approved by, or satisfactory to, Requisite Lenders, provided that, in the case of any agreement or document which must be approved by, or which must be satisfactory to, Requisite Lenders, a copy of such agreement or document shall have been delivered to such Lender on or prior to the Closing Date. 4.2 CONDITIONS TO LOANS MADE ON MERGER DATE. The obligations of Lenders to make the Loans made on the Merger Date were, in addition to the conditions precedent specified in subsection 4.4 (to the extent applicable in the case of such Loans), subject to the prior or concurrent satisfaction of the following conditions: A. DAH DOCUMENTS. On or before the Merger Date, Company shall, or shall cause DAH and its Domestic Subsidiaries to, as the case may be, deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender) the following, each, unless otherwise noted, dated the Merger Date: (i) Certified copies of the Certificate or Articles of Incorporation of each of DAH and its Domestic Subsidiaries, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which DAH or any of its Domestic Subsidiaries does a material amount of business and is qualified as a foreign corporation to do business and, to the extent applicable and generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or 80 similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Merger Date; (ii) Copies of the Bylaws of each of DAH and its Domestic Subsidiaries, certified as of the Merger Date by an Authorized Officer of such Person or such Person's corporate secretary or an assistant secretary; (iii) Resolutions of the Board of Directors of DAH and its Domestic Subsidiaries approving and authorizing the execution, delivery and performance of the Loan Documents to which it is a party and the consummation of the transactions contemplated by the foregoing, each certified as of the Merger Date by an Authorized Officer of such Person or the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates of the officers of DAH and its Domestic Subsidiaries executing the Loan Documents to which it is a party or authorized to execute any notice, request or other document that may be delivered pursuant thereto; (v) Originals of the DAH Pledge Agreement, the Security Agreement, the Subsidiary Guaranty and the Subsidiary Pledge Agreements, executed by Company and each of its Domestic Subsidiaries; and (vi) Such other documents as Agent may reasonably request at least one Business Day prior to the Merger Date. B. SATISFACTION OF CONDITIONS IN SUBSECTION 4.1. LENDERS SHALL HAVE MADE THE INITIAL LOANS ON THE CLOSING DATE. C. CONSUMMATION OF MERGER. (i) All conditions to the Merger set forth in the Merger Agreement as in effect on the Merger Date shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of Agents and Requisite Lenders; (ii) the Merger shall have become effective in accordance with the terms of the Merger Agreement and the Delaware General Corporation Law; (iii) Administrative Agent shall have received satisfactory evidence of the filing of the documents with the Secretary of State of the State of Delaware effecting the Merger on the Merger Date; (iv) the aggregate cash consideration for the shares of DAH Common Stock to be acquired in any manner whatsoever in connection with the Tender Offer and the Merger shall not exceed $182,100,000; (v) Transaction Costs incurred as of the Merger Date (including any such amounts incurred on or before the Closing Date) shall not exceed $16,300,000; (vi) Administrative Agent shall have received satisfactory evidence that the Second Merger will occur immediately after the Merger on the Merger Date; and 81 (vii) Administrative Agent shall have received an Officers' Certificate of Company to the effect set forth in clauses (i)-(vi) above. D. SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. To the extent not otherwise satisfied pursuant to subsection 4.1F, Administrative Agent shall have received evidence satisfactory to each of them that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii), (iv) and (v) below) that may be necessary or, in the opinion of Agents, desirable in order to create in favor of Administrative Agent, for the benefit of Lenders, a valid and (upon such filing and recording) perfected First Priority security interest in the entire personal and mixed property Collateral. Such actions shall include the following: (i) SCHEDULES TO COLLATERAL DOCUMENTS. Delivery to Administrative Agent of accurate and complete schedules to all of the applicable Collateral Documents; (ii) STOCK CERTIFICATES AND INSTRUMENTS. Delivery to Administrative Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Agents) representing all capital stock pledged pursuant to the DAH Pledge Agreement and the Subsidiary Pledge Agreements and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Agents) evidencing any Collateral; (iii) UCC FINANCING STATEMENTS AND FIXTURE FILINGS. Delivery to Administrative Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by Company or any Subsidiary Guarantor, as applicable, with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the opinion of Administrative Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents; and (iv) OPINIONS OF LOCAL COUNSEL. Delivery to Agents of an opinion of counsel (which counsel shall be reasonably satisfactory to Agents) under the laws of the states of California, Washington, Arkansas and Pennsylvania with respect to the creation and perfection of the security interests in favor of Administrative Agent in such Collateral, in each case in form and substance reasonably satisfactory to Agents dated as of the Merger Date and setting forth substantially the matters in the form of opinion annexed hereto as EXHIBIT XXV. E. OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders and their respective counsel shall have received (i) originally executed copies of a written opinion of Davis Polk & Wardwell, special New York counsel for Loan Parties, and Spolin & Silverman, counsel for Loan Parties, in form and substance reasonably satisfactory to Agents and Lenders, dated as of the Merger Date and setting forth substantially the matters in the opinions designated in EXHIBITS XXIV-1 and XXIV-2 annexed hereto. F. COMPANY SHALL HAVE PAID TO AGENTS, LENDERS AND ARRANGER THE FEES PAYABLE ON THE MERGER DATE. 82 4.3 CONDITIONS TO ACQUISITION LOANS. The obligation of Acquisition Lenders to make Acquisition Loans on each Funding Date are subject to the following further condition precedent that Company delivers a Permitted Acquisition Compliance Certificate and is otherwise in compliance subsection 7.7(vi). 4.4 CONDITIONS TO LOANS MADE ON EACH FUNDING DATE. The obligations of Lenders to make Loans on each Funding Date (other than, as to subsection B below, any Tranche A Term Loans made on the Merger Date) are subject to the following further conditions precedent: A. Administrative Agent shall have received, in accordance with the provisions of subsection 2.1B, an executed Notice of Borrowing signed by an Authorized Officer of Company. B. AS OF THAT FUNDING DATE: (i) The representations and warranties contained herein and in the other Loan Documents (other than, at any Funding Date other than the Closing Date, any such representations and warranties in subsection 5.2, to the extent they relate to the Related Agreements) shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; and (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default. 4.5 CONDITIONS TO LETTERS OF CREDIT. The issuance of any Letter of Credit hereunder (whether or not the applicable Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: A. On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Loans shall have been made. B. On or before the date of issuance of such Letter of Credit, Administrative Agent shall have received, in accordance with the provisions of subsection 3.1B(i), a Notice of Issuance of Letter of Credit signed by an Authorized Officer of Company, together with all other information specified in subsection 3.1B(i) and such other documents or information as the applicable Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. C. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.4B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date. 4.6 CONDITIONS TO THE ADDITIONAL TRANCHE B TERM LOANS. The conditions to the obligations of the Tranche B Term Loan Lenders to make Additional Tranche B Term Loans are set forth in the First Amendment. 83 4.7 CONDITIONS TO THE TRANCHE C TERM LOANS. The conditions to the obligations of the Tranche C Term Loan Lenders to make Tranche C Term Loans are set forth in the Amendment Agreement. SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders and the Agents to enter into this Agreement and to make the Loans, to induce Issuing Lenders to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender and the Agents, on the Closing Date, on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements are true, correct and complete: 5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND SUBSIDIARIES. A. ORGANIZATION AND POWERS. Each Loan Party is a corporation or partnership duly organized, validly existing and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation or organization as specified in Schedule 5.1 annexed hereto except to the extent that the failure to be in good standing has not had and will not have a Material Adverse Effect. Each Loan Party has all requisite corporate or partnership power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents and the Related Agreements to which it is a party and to carry out the transactions contemplated thereby. B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect. C. SUBSIDIARIES. All of the Subsidiaries of Company as of the Closing Date, after giving effect to the consummation of the Tender Offer and pro forma effect to the consummation of the Merger and the Second Merger, are identified in SCHEDULE 5.1 annexed hereto, as said SCHEDULE 5.1 may be supplemented from time to time pursuant to the provisions of subsection 6.1(xii). Each of the Subsidiaries of Company identified in SCHEDULE 5.1 is a corporation (or, in the case of Tri-Star Technologies, a general partnership) duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority has not had and will not have a Material Adverse Effect. Schedule 5.1 correctly sets forth the ownership interest of Company and each of its Subsidiaries as of the Closing Date, after giving effect to the consummation of the Tender Offer and pro forma effect to the consummation of the Merger and the Second Merger, in each of the Subsidiaries of Company identified therein. 5.2 AUTHORIZATION OF BORROWING, ETC. A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents and the Related Agreements have been duly authorized by all necessary actions on the part of each Loan Party that is a party thereto. 84 B. NO CONFLICT. The execution, delivery and performance by Loan Parties of the Loan Documents and the Related Agreements and the consummation of the transactions contemplated by the Loan Documents and the Related Agreements do not and will not (i) violate any provision of (x) any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries where such violations in the aggregate have had or could reasonably be expected to have a Material Adverse Effect, (y) the Certificate or the Articles of Incorporation or Bylaws of Company or any of Company's Subsidiaries or (z) any order, judgment or decree of any court or other agency of government binding on Company or any of Company's Subsidiaries where such violations in the aggregate have had or could reasonably be expected to have a Material Adverse Effect, (ii) conflict with, result in a breach of or constitute a default under any Contractual Obligation of Company or any of its Subsidiaries where such conflict, breach or default in the aggregate have had or could reasonably be expected to have a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of Company's Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of or consent of any Person under any Contractual Obligation of Company or any of Company's Subsidiaries, except for such approvals or consents which will be obtained on or before the Merger Date or such approvals or consents the failure of which to obtain has not had and could not reasonably be expected to have a Material Adverse Effect. C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Loan Parties of the Loan Documents and the Related Agreements and the consummation of the transactions contemplated by the Loan Documents and the Related Agreements do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body other than any such registrations, consents, approvals, notices or other actions (x) that have been made, obtained or taken on or prior to the date on which such registrations, consents, approvals, notices or other actions are required to be made, obtained or taken, as the case may be, and are in full force and effect or (y) the failure of which to make, obtain or take has not had and could not reasonably be expected to have a Material Adverse Effect. D. BINDING OBLIGATION. Each of the Loan Documents and the Related Agreements has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 5.3 FINANCIAL CONDITION. Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheets of DAH and its Subsidiaries as at December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows of DAH and its Subsidiaries for the Fiscal Years ended December 31, 1997, 1996 and 1995, (ii) the unaudited consolidated balance sheet of DAH and its Subsidiaries as of June 30, 1998 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of DAH and its Subsidiaries for the six months then ended and (iii) the audited consolidated balance sheets of Avtech Corporation and its Subsidiaries as at September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows of Avtech Corporation and its Subsidiaries for the fiscal years ended 85 September 30, 1997, 1996, and 1995, and (iv) the unaudited consolidated balance sheet of Avtech Corporation and its Subsidiaries as of June 25, 1998 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Avtech Corporation and its Subsidiaries for the period since October 1, 1997 then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to no footnote disclosure and changes resulting from normal year-end adjustments. 5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS. Since December 31, 1997, no event or change has occurred which constitutes, either in any case or in the aggregate, a Material Adverse Effect. Neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment except as permitted by subsection 7.5. 5.5 TITLE TO PROPERTIES; LIENS; REAL PROPERTY. A. TITLE TO PROPERTIES; LIENS. Except to the extent that failure to do so has not had and could not reasonably be expected to have a Material Adverse Effect, Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. B. REAL PROPERTY. As of the Closing Date, SCHEDULE 5.5 annexed hereto contains a true, accurate and complete list of (i) all real property owned by Company or any Domestic Subsidiary and (ii) all material leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Property Asset of any Loan Party, regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. 5.6 LITIGATION; ADVERSE FACTS. Except as set forth in SCHEDULE 5.6 annexed hereto, there are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including any Environmental Claims) that are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect or could reasonably be expected to prevent or unduly delay the Merger or the consummation of the Tender Offer. Neither Company nor any of its Subsidiaries is in violation of any applicable laws (including Environmental Laws) which violations, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 5.7 PAYMENT OF TAXES. Except to the extent permitted by subsection 6.3, all tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all 86 taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable, except any such taxes or charges which are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been established. 5.8 GOVERNMENTAL REGULATION. Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940. 5.9 SECURITIES ACTIVITIES. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. 5.10 EMPLOYEE BENEFIT PLANS. A. Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in substantial compliance with all applicable material provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan except to the extent that any such noncompliance or nonperformance could not reasonably be expected to have a Material Adverse Effect. Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified except as could not reasonably be expected to have a Material Adverse Effect. B. No ERISA Event has occurred or is reasonably expected to occur that could reasonably be expected to result in a Material Adverse Effect. C. Except to the extent required under Section 4980B of the Internal Revenue Code, no Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employee of Company, any of its Subsidiaries or any of their respective ERISA Affiliates, except as could not reasonably be expected to result in a Material Adverse Effect. D. As of the most recent valuation date for any Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities) could not reasonably be expected to have a Material Adverse Effect E. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA could not reasonably be expected to have a Material Adverse Effect. 87 5.11 ENVIRONMENTAL PROTECTION. Except as set forth in SCHEDULE 5.11 annexed hereto and except as to matters that, in the aggregate, would not reasonably be expected to have a Material Adverse Effect: (i) neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to (a) any current Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity; (ii) neither Company nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9604) or any comparable state law; (iii) there are and, to Company's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities at the Facilities or otherwise relating to the operation of the Company or any of its Subsidiaries which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries; (iv) neither Company's nor its Subsidiaries' operations involve the transportation, storage or disposal of Hazardous Materials so as to require a permit for such operations under RCRA Part B (42 U.S.C. Section 6925 and 40 C.F.R. 270.1 et seq.) or involve transporting hazardous materials generated by a third party for disposal; and (v) compliance with all current requirements pursuant to or under Environmental Laws will not, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect. 5.12 EMPLOYEE MATTERS. There is no strike or work stoppage in existence or threatened affecting Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 5.13 SOLVENCY. On the Closing Date and on the Merger Date, after giving effect to the consummation of the Tender Offer and the Mergers, respectively, each Loan Party is Solvent. 5.14 MATTERS RELATING TO COLLATERAL. A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and delivery of the Collateral Documents by Loan Parties, together with actions taken pursuant to subsections 4.1F, 4.2F, 4.2G, 6.8 and 6.9 are effective or, in the case of subsections 4.2F and 4.2G as of the Merger Date, will be effective, or in the case of subsections 6.8 and 6.9 at the time of the taking of such actions, will be effective, once taken, to create in favor of Administrative Agent for the benefit of Lenders, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on the Collateral covered thereby. B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Administrative 88 Agent pursuant to any of the Collateral Documents or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.14A and except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities. C. ABSENCE OF THIRD-PARTY FILINGS. On and after the Closing Date, except (a) such as may have been filed in favor of Administrative Agent or with respect to Liens permitted by this Agreement or (b) precautionary filings in respect of operating leases, (i) no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the IP Collateral is on file in the PTO, in each case other than filings in respect of which Administrative Agent shall have received appropriate termination statements or releases. D. MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation U or X of the Board of Governors of the Federal Reserve System. E. INFORMATION REGARDING COLLATERAL. All information supplied to Administrative Agent by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to all Collateral) is accurate and complete in all material respects. 5.15 DISCLOSURE. A. LOAN DOCUMENTS. No representation or warranty of any Loan Party contained in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not materially misleading in light of the circumstances in which the same were made. Any term or provision of this Section to the contrary notwithstanding, insofar as any of the representations and warranties described above includes assumptions, estimates, projections or opinions, no representation or warranty is made herein with respect thereto; PROVIDED, HOWEVER, that to the extent any such assumptions, estimates, projections or opinions are based on factual matters, Company has reviewed such factual matters and nothing has come to its attention in the context of such review which would lead it to believe that such factual matters were not or are not true and correct in all material respects or that such factual matters omit to state any material fact necessary to make such assumptions, estimates, projections or opinions not misleading in any material respect. B. TENDER OFFER MATERIALS. The Tender Offer Materials, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact (known to Company or any of its Subsidiaries, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. 5.16 YEAR 2000 COMPLIANCE. Company has (i) initiated a review and assessment of its and its Subsidiaries' business and operations (including those affected by suppliers and vendors) that Company believes 89 could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by Company or Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan substantially in accordance with that timetable. Company believes that its own computer applications that are material to its or its Subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant") except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Agents and Lenders: (i) QUARTERLY FINANCIALS: as soon as available and in any event within 60 days after the end of each Fiscal Quarter, the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income and stockholders equity of Company and its Subsidiaries for such Fiscal Quarter and statements of income, stockholders equity and cash flows for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year (it being understood that the foregoing requirement may be satisfied by delivery of the Company's report to the Securities and Exchange Commission on Form 10-Q, if any), together with, if any pro forma financial information has been used in connection with determining compliance with this Agreement, a reconciliation of such pro forma financial information with the financial information contained in such financial statements, all in reasonable detail and certified by the president, chief executive officer, treasurer, or chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; (ii) YEAR-END FINANCIALS: as soon as available and in any event within 105 days after the end of each Fiscal Year, (a) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year (it being understood that the foregoing requirement may be satisfied by delivery of the Company's report to the Securities and Exchange Commission on Form 10-K, if any) together with, if any pro forma financial information has been used in connection 90 with determining compliance with this Agreement, a reconciliation of such pro forma financial information with the financial information contained in such financial statements, all in reasonable detail and reported on by one of the Big Five accounting firms or other independent certified public accountants of recognized national standing selected by Company and satisfactory to Agents, which report shall state (without Impermissible Qualification) that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iii) OFFICER'S AND COMPLIANCE CERTIFICATES: together with each delivery of financial statements pursuant to subdivisions (i) and (ii) above, (a) an Officer's Certificate of Company stating that the signers have reviewed the relevant terms of this Agreement and that no condition or event that constitutes an Event of Default or Potential Event of Default exists, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto and (b) a Compliance Certificate executed by the president, chief executive officer, treasurer, or chief financial officer of Company; (iv) MARGIN DETERMINATION CERTIFICATE: together with each delivery of financial statements pursuant to subdivisions (i) and (ii) above, a Margin Determination Certificate demonstrating in reasonable detail, and calculating in accordance with subsections 1.2(b) and 1.2(c), the Consolidated Leverage Ratio on the last day of the accounting period covered by such financial statements; (v) ACCOUNTANTS' CERTIFICATION: together with each delivery of consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (ii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of subsections 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7 and 7.8 of this Agreement as they relate to accounting matters, and (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; PROVIDED that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination; (vi) SEC FILINGS AND PRESS RELEASES: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Parent or the Company to its security holders (other than DLJMB or Parent, respectively), and (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Parent or any of its Subsidiaries with any national securities exchange or with the Securities and Exchange Commission; (vii) EVENTS OF DEFAULT, ETC.: promptly and in any event within seven (7) Business Days after the president, chief executive officer, treasurer, assistant treasurer, controller, chief financial officer or any other Authorized Officer of Company obtains knowledge of 91 any condition or event that constitutes an Event of Default or Potential Event of Default, an Officer's Certificate specifying the nature and period of existence of such Event of Default or Potential Event of Default and what action Company has taken, is taking and proposes to take with respect thereto; (viii) LITIGATION OR OTHER PROCEEDINGS: (a) promptly upon the president, chief executive officer, treasurer, assistant treasurer, controller, chief financial officer or any other Authorized Officer of Company obtaining knowledge of (X) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case: (1) has a reasonable possibility of giving rise to a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof and promptly after request by Agents such other information as may be reasonably requested by Agents to enable Agents and their respective counsel to evaluate any of such Proceedings; (ix) ERISA EVENTS: promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event that could reasonably be expected to result in a Material Adverse Effect, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (x) ERISA NOTICES: with reasonable promptness, copies of all notices received by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event that could reasonably be expected to result in a Material Adverse Effect; (xi) FINANCIAL PLANS: as soon as practicable and in any event no later than 30 days after the beginning of each Fiscal Year, a consolidated budget for such Fiscal Year, in the form prepared by Company consistent with its past practices (the "FINANCIAL PLAN"); (xii) NEW SUBSIDIARIES: promptly upon any Person becoming a Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in SCHEDULE 5.1 with respect to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement SCHEDULE 5.1 for all purposes of this Agreement); (xiii) UCC SEARCH REPORT: As promptly as practicable after the date of delivery to Administrative Agent of any UCC financing statement executed by any Loan Party pursuant 92 to subsection 4.2D(iii) or 6.8A, copies of completed UCC searches evidencing the proper filing, recording and indexing of all such UCC financing statement and listing all other effective financing statements that name such Loan Party as debtor, together with copies of all such other financing statements not previously delivered to Administrative Agent by or on behalf of Company or such Loan Party; (xiv) OTHER INFORMATION: with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 6.2 LEGAL EXISTENCE, ETC. Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its legal existence and all rights and franchises material to its business except where failure to keep in full force and effect such rights and franchises could not reasonably be expected to have a Material Adverse Effect; PROVIDED, HOWEVER that neither Company nor any of its Subsidiaries shall be required to preserve the existence of any Subsidiary if Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company and its Subsidiaries, and that the loss thereof is not disadvantageous in any material respect to Company or Lenders. 6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION. Company will, and will cause each of its Subsidiaries to, pay all material taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all material claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; PROVIDED that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. 6.4 MAINTENANCE OF PROPERTIES; INSURANCE; APPLICATION OF NET INSURANCE/CONDEMNATION PROCEEDS. A. MAINTENANCE OF PROPERTIES. Except to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect, Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including all Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof unless Company determines in good faith that the continued maintenance of any of its Properties is no longer economically desirable. B. INSURANCE. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with 93 such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (i) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (ii) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Agents in their commercially reasonable judgment. Each such policy of insurance shall (a) name Administrative Agent for the benefit of Lenders as an additional insured thereunder as its interests may appear and (b) in the case of each casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Agents, that names Administrative Agent for the benefit of Lenders as the loss payee thereunder for any covered loss in excess of $250,000 and provides for at least 30 days prior written notice to Agents of any modification or cancellation of such policy. C. EVIDENCE OF INSURANCE. Upon request of Administrative Agent, Company shall deliver to Administrative Agent a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4B is in full force and effect and that Administrative Agent on behalf of Lenders has been named as additional insured and/or loss payee thereunder to the extent required under subsection 6.4B. 6.5 INSPECTION RIGHTS. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and, after notice to the Company and provision of an opportunity to participate in such discussions, independent public accountants, all upon reasonable notice and at such reasonable times and intervals during normal business hours and as often as may reasonably be requested, but, unless an Event of Default shall have occurred and be continuing not more frequently than once in each Fiscal Year. Subject to subsection 10.2, the cost and expenses of each such visit shall be borne by the applicable Lender. 6.6 COMPLIANCE WITH LAWS, ETC. A. GENERAL. Company shall comply, and shall cause each of its Subsidiaries to comply, in all material respects, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. B. ENVIRONMENTAL COVENANT. The Company will and will cause each of its Subsidiaries to: (i) Use and operate all of its Facilities and properties in compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other Governmental Authorizations relating to environmental matters in effect and remain in compliance therewith, and handle all Hazardous Materials in compliance with all applicable Environmental Laws, in each case except where the failure to comply with the terms of this clause would not reasonably be expected to have a Material Adverse Effect; 94 (ii) Promptly notify the Agents and provide copies of all written claims, complaints, notices or inquiries relating to the condition of its Facilities or relating to compliance with Environmental Laws which relate to environmental matters which would have, or would reasonably be expected to have, a Material Adverse Effect, and promptly cure and have dismissed with prejudice any material actions and proceedings relating to compliance with Environmental Laws, except to the extent being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside on its books; and (iii) Provide such information and certificates which the Agents may reasonably request from time to time to evidence compliance with this SECTION 6.7. 6.7 EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS BY CERTAIN SUBSIDIARIES AND FUTURE SUBSIDIARIES; IP COLLATERAL. A. EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS. In the event that any Person becomes a Subsidiary of Company after the Merger Date (other than a Foreign Subsidiary and other than a Domestic Subsidiary that is a Non-Wholly-Owned Subsidiary), Company will promptly notify Administrative Agent of that fact and cause such Subsidiary to execute and deliver to Administrative Agent a Subsidiary Pledge Agreement, a counterpart of the Subsidiary Guaranty and an acknowledgement to the Security Agreement and to take all such further actions and execute all such further documents and instruments (including actions, documents and instruments comparable to those described in subsection 4.2D) as may be necessary or, in the opinion of Agents, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on all of the personal and mixed property assets of such Subsidiary described in the applicable forms of Collateral Documents; PROVIDED that no such Subsidiary shall be required to pledge pursuant to a Subsidiary Pledge Agreement more than 65% of the total combined voting power of all classes of securities of any Foreign Subsidiary held by such Subsidiary entitled to vote. B. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company shall deliver to Administrative Agent, together with such Loan Documents, (i) certified copies of such Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws certified by its secretary or an assistant secretary as of a recent date prior to their delivery to Administrative Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Loan Documents, and (iv) a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Agents and their respective counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of such Loan Documents against such Subsidiary, (d) such other matters (including matters relating to the creation and perfection of Liens in any Collateral pursuant to such Loan Documents) as Agents may reasonably request, all of the foregoing to be satisfactory in form and substance to Agents and their respective counsel. 95 C. IP COLLATERAL. If any Subsidiary (other than a Foreign Subsidiary and Domestic Subsidiaries that are Non-Wholly-Owned Subsidiaries) becomes an owner of any Intellectual Property after the Merger Date, Company shall cause such Subsidiary to promptly execute and deliver to Administrative Agent an acknowledgement to the Security Agreement and all cover sheets and executed grants of trademark security interest, grants of patent security interest and grants of copyright security interest and such other documents or instruments required to be filed with the PTO and the CO as Administrative Agent shall deem appropriate and take such further action and execute such further documents and instruments as may be necessary, or in the opinion of Administrative Agent, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on such Intellectual Property. 6.8 FUTURE LEASED PROPERTY AND FUTURE ACQUISITIONS OF REAL PROPERTY: FUTURE ACQUISITION OF OTHER PROPERTY. A. In connection with any Leasehold Property, Company shall, and shall cause each of its Subsidiaries (other than Foreign Subsidiaries and Domestic Subsidiaries that are Non-Wholly Owned Subsidiaries) to use its (and their) commercially reasonable efforts (which shall not require the expenditure of cash (other than the payment of the respective attorneys fees of Company and the lessor) or the making of any material concessions under the relevant lease) to deliver to Administrative Agent a waiver for the benefit of Administrative Agent in form and substance reasonably satisfactory to Administrative Agent executed by the lessor of any real property that is to be leased by Company or such Subsidiary for a term in excess of one year in any state which by statute grants such lessor a "landlord's" (or similar) Lien which is superior to Administrative Agent's and which grants to Administrative Agent a license to enter the leased property and remove any and all personal property, if the value of such personal property of Company or its Subsidiaries to be held at such leased property exceeds (or it is anticipated that the value of such personal property will, at any point in time during the term of such leasehold term, exceed) $2,000,000. B. In the event that Company or any of its Subsidiaries (other than Foreign Subsidiaries or Domestic Subsidiaries that are Non-Wholly-Owned Subsidiaries) shall acquire any real property having a value as determined in good faith by Administrative Agent in excess of $2,000,000 (or in the case of leased property, in the event that Company is able to deliver the waivers and consents described in subsection 6.8C in connection with the leases described therein), Company or the applicable Subsidiary shall, promptly after such acquisition or consent, execute a Mortgage and provide Administrative Agent with (i) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings of such Mortgage as may be necessary or, in the reasonable opinion of Administrative Agent, desirable effectively to create a valid, perfected, First Priority Lien, subject to the Liens permitted by subsection 7.2, against the property purported to be covered thereby, (ii) mortgagee's title insurance policy or policies in favor of Administrative Agent and the Lenders in amounts and in form and substance and issued by insurers, reasonably satisfactory to the Agents, with respect to the property purported to be covered by such Mortgage, insuring that title to such property is indefeasible and that the interests created by the Mortgage constitute valid first Liens thereon free and clear of all defects and encumbrances other than as permitted by Section 7.2 or as approved by the Agents, and such policies shall also include, to the extent available, a revolving credit endorsement and such other endorsements as the Agents shall reasonably request and shall be accompanied by evidence of the payment in full of all premiums thereon, and (iii) such other approvals, opinions, or documents as the Agents may reasonably request. C. As soon as reasonably practical after the consummation of the Merger, Company or its applicable Subsidiary shall, in respect of each of the leased properties listed on Schedule 6.8, and in 96 the event Company or any of its Subsidiaries (other than Foreign Subsidiaries or Domestic Subsidiaries that are Non-Wholly-Owned Subsidiaries) shall become a lessee under any lease of real property covering 10,000 square feet of building space and having an unexpired lease term (including options to extend such lease term) of three years or longer, Company or the applicable Subsidiary shall, use its commercially reasonable efforts (which shall not require the expenditure of cash (other than the payment of the respective attorneys fees of Company and the lessor) or the making of any material concessions under the relevant lease) to cause the lessor to agree (during the negotiation of such lease if such lease is entered into after the Merger Date), for the benefit of Administrative Agent (i) to the matters set forth in subsection 6.8A, (ii) that without any further consent of such lessor or any further action on the part of the Loan Party holding the lessee's interest in such property, such lessee's interest in such property may be encumbered pursuant to a Mortgage and may be assigned to the purchaser at a foreclosure sale or in a transfer in lieu of such a sale (and to a subsequent third party assignee if any Agent, any Lender, or an Affiliate of either so acquires such lessee's interest in such property), and (iii) that such lessor shall not terminate such lease as a result of a default by such Loan Party thereunder without first giving Agents notice of such default and at least 60 days (or, if such default cannot reasonably be cured by Agents within such period, such longer period as may reasonably be required) to cure such default. 6.9 MERGER. Company shall cause Acquisition Co. and DAH to comply with all material covenants set forth in the Merger Agreement applicable prior to the consummation of the Merger. Company shall cause the Merger to be consummated in accordance with the terms and conditions of the Merger Agreement and the Tender Offer Materials and shall cause each of the conditions set forth in subsection 4.2 to be fulfilled as soon as practicable and, in any event, no later than 150 calendar days after the Closing Date. In the event that the DAH Common Stock to be purchased concurrently with receipt of the proceeds of the Loans on the Closing Date shall represent, in the aggregate, not less than 90% of the outstanding shares of DAH Common Stock so as to permit Company to cause the Merger to occur in accordance with the terms of the Merger Agreement and Section 253 of the Delaware General Corporation Law, Company shall promptly cause the Merger to occur. 6.10 SECOND MERGER. Company shall cause the Second Merger to be consummated on the Merger Date immediately after the Merger. 6.11 YEAR 2000 COMPLIANCE. Company will promptly notify Administrative Agent in the event Company discovers or determines that any computer application (including those of its suppliers and vendors) that is material to its or its Subsidiaries' business and operations will not be Year 2000 compliant as of January 1, 2000, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. 6.12 PTO AND CO COVER SHEETS, ETC. Company will deliver to Agents no later than 7 days after the Merger Date instruments or documents, in appropriate form for filing with the PTO and/or the CO, sufficient to create and perfect a security interest in all IP Collateral owned as of the Merger Date by Company and its Subsidiaries (other than Foreign Subsidiaries and Domestic Subsidiaries that are Non-Wholly-Owned Subsidiaries). 97 6.13 MORTGAGES. A. With respect to the Merger Date Leasehold Mortgaged Properties, as soon as practicable after Company or the applicable Subsidiary is able to obtain the agreement of the applicable lessor referred to in subsection 6.8C, and with respect to the Merger Date Fee Mortgaged Properties, as soon as practicable after the Merger Date but in no event later than 7 days after the Merger Date, Company shall deliver to Agents counterparts of the Mortgages covering such Merger Date Leasehold Mortgaged Properties or Merger Date Fee Mortgaged Properties, as the case may be, each dated as of the date of such delivery, duly executed by Company or the applicable Subsidiary in appropriate form for recording, together with such other documents and instruments in appropriate form for filing of such Mortgage as may be necessary or, in the reasonable opinion of Administrative Agent, desirable effectively to create a valid, perfected, First Priority Lien, subject to Liens permitted by Section 7.2, against the properties purported to be covered thereby. B. As soon as practicable after delivery of each Mortgage pursuant to subsection 6.13A, Company shall deliver to Agents (i) mortgagee's title insurance policies in favor of the Agents and the Lenders in amounts and in form and substance and issued by insurers, reasonably satisfactory to the Agents, with respect to the property purported to be covered by such Mortgage, insuring that title to such property is indefeasible and that the interests created by such Mortgage constitute valid First Priority Liens thereon free and clear of all defects and encumbrances other than as permitted by Section 7.2 or as approved by the Agents, and such policies shall also include, to the extent available, a revolving credit endorsement and such other endorsements as Administrative Agent shall reasonably request and shall be accompanied by evidence of the payment in full of all premiums thereon and (ii) and such other approvals, opinions or documents as the Agents may reasonably request. SECTION 7. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7. 7.1 INDEBTEDNESS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or otherwise become or remain liable with respect to, any Indebtedness, except: (i) Company may become and remain liable with respect to the Obligations; (ii) Company and its Subsidiaries may become and remain liable with respect to any obligations constituting Indebtedness and actually arising pursuant to Contingent Obligations permitted pursuant to Section 7.4; (iii) Company and its Subsidiaries may become and remain liable with respect to Indebtedness in respect of Capital Leases and other purchase money Indebtedness incurred to finance the acquisition or improvement of fixed assets, in an aggregate amount not exceeding $7,500,000; 98 (iv) Intercompany Indebtedness (i) of Company or any Domestic Subsidiary of Company owing to Company or any Subsidiary of Company, and (ii) of any Foreign Subsidiary of Company owing to (x) any other Foreign Subsidiary or (y) Company or any Domestic Subsidiary of Company; PROVIDED that in respect of any such Indebtedness (other than any such Indebtedness incurred to finance a Permitted Acquisition) described in this CLAUSE (ii)(y), the aggregate principal amount of such Indebtedness, when taken together with the aggregate amount at such time of all outstanding Investments in Foreign Subsidiaries made pursuant to subsection 7.3(xiii), shall not exceed at any time outstanding $10,000,000; PROVIDED that (a) if requested by Administrative Agent, all intercompany Indebtedness shall be evidenced by promissory notes which shall be delivered to Administrative Agent as Collateral hereunder, (b) all intercompany Indebtedness owed by Company or by a Subsidiary Guarantor to any Subsidiary of Company that is not a Subsidiary Guarantor shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of an intercompany subordination agreement in the form of Exhibit XXX attached hereto; (v) Company and its Subsidiaries, as applicable, may remain liable with respect to Indebtedness described in SCHEDULE 7.1 annexed hereto and refinancings and replacements thereof in a principal amount not exceeding the principal amount of the indebtedness so refinanced or replaced and with an average life to maturity of not less than the then average life to maturity of the Indebtedness so refinanced or replaced; (vi) Company may become and remain liable with respect to up to $100,000,000 in aggregate principal amount of Indebtedness evidenced by the Senior Subordinated Bridge Notes (as well as any payment-in-kind Senior Subordinated Bridge Notes issued in lieu of cash interest thereon) and Indebtedness evidenced by the Senior Subordinated Notes, so long as, if Company issued the Senior Subordinated Bridge Notes on the Closing Date, all of the net proceeds of the Senior Subordinated Notes are used to refinance in whole or in part an equal principal amount of the Senior Subordinated Bridge Notes then outstanding; (vii) Indebtedness of Tri-Star Electronics Europe SA incurred pursuant to a working capital facility not to exceed U.S.$2,000,000 (or the equivalent thereof in Swiss Francs) at any time outstanding (except if such excess is caused solely by changes in exchange rates and is eliminated within five Business Days of its occurrence) and other Indebtedness of Foreign Subsidiaries in an aggregate outstanding principal amount which does not exceed $10,000,000 at any time outstanding; (viii) Assumed Indebtedness of Company and its Subsidiaries in an aggregate principal amount at any time outstanding not to exceed $5,000,000; and (ix) Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $10,000,000 at any time outstanding. 7.2 LIENS AND RELATED MATTERS. A. PROHIBITION ON LIENS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except: 99 (i) Permitted Encumbrances; (ii) Liens granted pursuant to the Collateral Documents, including Liens securing payment of any Hedging Obligations owed to any Person that, at the time such Hedging Obligation was contracted for, was a Lender or an Affiliate of any Lender; (iii) Liens described in Schedule 7.2 annexed hereto and Liens securing extensions, renewals or replacements of the Indebtedness or other obligations which such identified Liens secure; PROVIDED that no such extension, renewal or replacement shall increase the obligations secured by such Lien or extend such Lien to additional assets; (iv) Liens securing Indebtedness permitted pursuant to subsection 7.1(iii); provided that the principal amount of such Indebtedness does not exceed at the time of acquisition or leasing of the related asset the fair market value of the asset so acquired or leased and that such Lien is limited solely to the asset so acquired or leased in connection with the incurrence of such Indebtedness; (v) Liens on the assets of any Foreign Subsidiary securing the repayment of the Indebtedness permitted pursuant to subsection 7.1(iv)(ii), 7.1(vii) or 7.1(ix); (vi) Liens in the nature of trustees' Liens granted pursuant to any indenture governing any Indebtedness permitted by Section 7.1, in each case in favor of the trustee under such indenture and securing only obligations to pay compensation to such trustee, to reimburse its expenses and to indemnify it under the terms thereof; (vii) Liens of sellers of goods to Company and any of its Subsidiaries arising solely under Article 2 of the UCC or similar provisions of applicable law in the ordinary course of business, covering only the goods sold and securing only the unpaid purchase price for such goods and related expenses; (viii) Liens securing Assumed Indebtedness of Company and its Subsidiaries permitted pursuant to Section 7.1(viii), provided, however, that (i) any such Liens attach only to the property of the Subsidiary acquired, or the property acquired, in connection with such Assumed Indebtedness and shall not attach to any assets of Company or any of its Subsidiaries theretofore existing and (ii) the Assumed Indebtedness and other secured Indebtedness of Company and its Subsidiaries secured by any such Lien shall not exceed 100% of the fair market value of the assets being acquired in connection with such Assumed Indebtedness; (ix) Liens securing reimbursement obligations in respect of trade letters of credit, which Liens are limited to the goods purchased with, or whose purchase was supported by, such letters of credit; and (x) Other Liens securing Indebtedness and other obligations in an aggregate amount not to exceed $7,500,000 at any time outstanding. Nothing in this subsection 7.2 shall prohibit the sale, assignment, transfer, conveyance or other disposition of any Margin Stock owned by Company or any of its Subsidiaries at its fair value (as determined in good faith by its Board of Directors) so long as proceeds are held as Cash or Cash Equivalents or the creation, incurrence, assumption or existence of any Lien on or with respect to any Margin Stock. 100 B. NO FURTHER NEGATIVE PLEDGES. Except (x) with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale and (y) customary limitations in respect of the Company and its Subsidiaries contained in any agreement with respect to Indebtedness incurred in reliance on subsections 7.1(ii), (iv), (vi), (vii) or (viii), and (z) restrictions or limitations contained in any partnership agreement or joint venture agreement to which Company or any of its Subsidiaries are a party on the ability to create or assume Liens on any assets of the relevant partnership or joint venture, neither Company nor any of its Subsidiaries shall enter into any agreement (other than an agreement prohibiting only the creation of Liens securing Subordinated Indebtedness) prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. C. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO COMPANY OR OTHER SUBSIDIARIES. Except (x) as provided herein, (y) customary limitations and prohibitions in any agreement with respect to Indebtedness incurred in reliance on Section 7.1(iv)(ii)(x), (vii), or (viii) and (z) any such encumbrance or restriction contained in any partnership or joint venture agreement to which Company or any of its Subsidiaries is a party, Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, or (iii) make loans or advances to Company or any other Subsidiary of Company. 7.3 INVESTMENTS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, except: (i) Company and its Subsidiaries may make and own Investments in Cash Equivalents (as determined on the date of acquisition thereof); (ii) (a) Company and its Subsidiaries may continue to own the Investments owned by them as of the Closing Date in any Subsidiaries of Company; (b) Company and its Domestic Subsidiaries may make additional Investments in Company or Subsidiary Guarantors (including without limitation any such Investments necessary in order to consummate the Tender Offer in accordance with the Tender Offer Materials, the Merger in accordance with the Merger Agreement and the Second Merger) subject to compliance with subsections 6.7 and 6.8; (c) any Foreign Subsidiary may make additional Investments in any other Foreign Subsidiary; and (d) Acquisition Co. may purchase the DAH Common Stock pursuant to the Tender Offer in accordance with the Tender Offer Materials; (iii) Company and its Subsidiaries may make intercompany loans to the extent permitted under subsection 7.1(iv) and incur Contingent Obligations permitted by subsection 7.4; (iv) Company and its Subsidiaries may make Investments in Wholly-Owned Subsidiaries that are Domestic Subsidiaries in an aggregate amount not exceeding $22,000,000 in order to consummate an acquisition substantially on the terms described to the Syndication Agent prior to the date hereof. 101 (v) Company and its Subsidiaries may continue to own the Investments owned by them as of the Closing Date and described in Schedule 7.3 annexed hereto and extensions or renewals thereof, provided that no such extension or renewal shall be made in reliance on this clause (v) if it would (x) increase the amount of such Investment at the time of such renewal or extension or (y) result in a Potential Event of Default or an Event of Default hereunder; (vi) Company and its Subsidiaries may make and own Investments received in connection with Asset Sales permitted pursuant to subsection 7.7(xii); (vii) Investments constituting Consolidated Capital Expenditures (and any capital expenditures excluded from the definition of Consolidated Capital Expenditures pursuant to clause (y) thereof); (viii) Investments made by Company or any of its Subsidiaries in Permitted Acquisitions in accordance with subsection 7.7(vii); (ix) Investments arising under or in connection with Interest Rate Agreements and Currency Agreements entered into in the ordinary course of business and not for speculative purposes; (x) Company and its Subsidiaries may make and own Investments received in connection with the bankruptcy or reorganization or suppliers and customers and in settlement of delinquent obligations of and other disputes with customers and suppliers arising in the ordinary course of business; (xi) Company and its Subsidiaries may make and own Investments in the form of loans (x) to officers, directors and employees of the Company and its Subsidiaries for the sole purpose of purchasing common stock of Parent (or purchases of such loans made by others) in an aggregate principal amount at any time outstanding not to exceed $5,000,000, so long as immediately before and after giving effect thereto, no Potential Event of Default or Event of Default has occurred and is continuing and (y) to Global Technology Partners in an aggregate principal amount not to exceed $1,000,000 for the sole purpose of purchasing common stock of Parent; (xii) Company and its Subsidiaries may make and own Investments solely from the proceeds of capital contributions by Parent to the Company or sales of equity Securities by the Company to Parent, in each case only to the extent proceeds from such capital contribution or sale (x) are not required to be applied to repay the Term Loans or to reduce the Acquisition Loan Commitments pursuant to subsection 2.4(B)(iii)(c), (y) arise from the issuance by Parent of its equity Securities, and (z) are received after the Closing Date for the purpose of making an Investment identified in a notice delivered to the Agents on or prior to the date such capital contribution or sale or repayment is made, so long as immediately before and after giving effect to any such Investment, no Potential Event of Default or Event of Default has occurred and is continuing; and (xiii) Company and its Subsidiaries may make and own other Investments in an aggregate amount not to exceed at any time $10,000,000. 102 7.4 CONTINGENT OBLIGATIONS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: (i) Company and its Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Obligations; (ii) Company may become and remain liable with respect to Contingent Obligations in respect of Letters of Credit and Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of other letters of credit in an aggregate amount at any time not to exceed $2,000,000 for Company and its Domestic Subsidiaries and $2,000,000 for Company's Foreign Subsidiaries; (iii) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations under Interest Rate Agreements and Currency Agreements entered into in the ordinary course of business and not for speculative purposes; (iv) Company and its Domestic Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of Company or any of its Domestic Subsidiaries permitted by subsection 7.1; PROVIDED that any such Contingent Obligations in respect of the Subordinated Indebtedness permitted pursuant to subsection 7.1(vi) are subordinated to the payment of the Obligations to the same extent as such Subordinated Indebtedness; (v) Company and its Subsidiaries, as applicable, may remain liable with respect to Contingent Obligations described in Schedule 7.4 annexed hereto and extensions or renewals thereof, so long as such extension or renewal does not increase the amount of the Contingent Obligation being renewed or extended, as the case may be; (vi) Company and its Subsidiaries may become and remain liable with respect to other Contingent Obligations; PROVIDED that the maximum aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all such Contingent Obligations shall at no time exceed $2,000,000. 7.5 RESTRICTED JUNIOR PAYMENTS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; PROVIDED that so long as no Potential Event of Default or Event of Default shall have occurred and be continuing or would occur as a result thereof (except in the case of Restricted Junior Payments permitted by subsections 7.5(i), (iii), (v) and (vi) below): (i) Company may (a) make payments of regularly scheduled interest in respect of the Senior Subordinated Bridge Notes and the Senior Subordinated Notes, in each case in accordance with the terms of and to the extent required by (and subject to the subordination provisions contained therein) the Senior Subordinated Bridge Note Agreement or the Senior Subordinated Indenture, (b) refinance the Senior Subordinated Bridge Notes with the proceeds of the Senior Subordinated Notes and (c) to make payments to the holders of the Senior Subordinated Bridge Notes or of the Senior Subordinated Notes in the form of equity Securities that the 103 subordination provisions applicable thereto permit such holders to accept prior to the repayment in full of the Obligations; (ii) so long as (A) after giving effect to the making of such Restricted Junior Payment, Company shall be in PRO FORMA compliance with the covenant set forth in Section 7.6B for the most recent full Fiscal Quarter immediately preceding the date of the making of such Restricted Payment for which the relevant financial statements have been delivered pursuant to subsections 6.1(i) or (ii) and (B) an Authorized Officer of Company shall have delivered a certificate to Administrative Agent in form and substance reasonably satisfactory to Administrative Agent (including a calculation of Company's PRO FORMA compliance with the covenant set forth in Section 7.6B in reasonable detail) certifying as to the accuracy of clause (ii)(A) above, Company may make dividend payments to Parent the proceeds of which will be used by Parent to repurchase, redeem or otherwise acquire or retire for value any equity Securities of Parent, or any warrant, option or other right to acquire any such equity Securities, in each case held by any member of management or an employee of Parent, Company or any of its Subsidiaries pursuant to any employment agreement, management equity subscription agreement, restricted stock plan, stock option agreement or other similar arrangements so long as the total amount of such repurchases, redemptions, acquisitions, retirements and payments shall not exceed (I) $3,000,000 in any calendar year (with unused amounts in any calendar year being carried forward to succeeding calendar years subject to a maximum (without giving effect to the following clause (II)) of $8,000,000 in any calendar year) PLUS (II) the aggregate cash proceeds received by Company during such calendar year from any reissuance of equity Securities of Parent and warrants, options and other rights to acquire equity Securities of Parent, by Parent or Company to members of management and employees of Company and its Subsidiaries (to the extent such proceeds are not otherwise required to be applied pursuant to subsection 2.4B(iii) and have not been used to make Investments pursuant to subsection 7.3(xii) or Consolidated Capital Expenditures pursuant to subsection 7.8(ii)); (iii) Company may make dividend payments to Parent to the extent necessary to permit Parent to (x) pay corporate and other general administrative expenses (including fees in respect to advisors services) in an aggregate amount which does not exceed $1,000,000 in any Fiscal Year and (y) to make payments in respect of taxes imposed on Company and its Subsidiaries; (iv) on and after the fifth anniversary of the Closing Date, Company may make dividend payments to Parent to enable Parent to pay cash interest or dividends on the Parent P-I-K Securities in accordance with the terms of such Parent P-I-K Securities; PROVIDED that after giving effect to such payment, Company would be in compliance with subsection 7.6; (v) the Company shall be permitted to make payments in respect of statutory appraisal rights (and any settlement thereof) exercised by holders of outstanding DAH Common Stock in connection with the Merger; and (vi) Company may make any Restricted Junior Payment necessary in order to consummate the Tender Offer in accordance with the Tender Offer Materials, the Merger in accordance with the Merger Agreement and the Second Merger. 7.6 FINANCIAL COVENANTS. A. MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the Consolidated Fixed Charge Coverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending December 31, 1998, occurring during any period set forth below to be less than the correlative ratio indicated: 104
MINIMUM FIXED CHARGE COVERAGE PERIOD RATIO ----------------------------------------- ---------------------- 4th Fiscal Quarter, 1998 through 4th 1.10 x Fiscal Quarter, 2001 1st Fiscal Quarter, 2002 and 1.20 x thereafter
B. MAXIMUM LEVERAGE RATIO. Company shall not permit the Consolidated Leverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending December 31, 1998, occurring during any period set forth below to exceed the correlative ratio indicated:
MAXIMUM CONSOLIDATED PERIOD LEVERAGE RATIO ----------------------------------------- ---------------------- 4th Fiscal Quarter, 1998 6.00 x 1st Fiscal Quarter, 1999 5.90 x 2nd Fiscal Quarter, 1999 5.75 x 3rd Fiscal Quarter, 1999 5.60 x 4th Fiscal Quarter, 1999 5.50 x 1st Fiscal Quarter, 2000 5.40 x 2nd Fiscal Quarter, 2000 5.25 x 3rd Fiscal Quarter, 2000 5.10 x 4th Fiscal Quarter, 2000 through 3rd Fiscal Quarter, 2001 5.00 x 4th Fiscal Quarter, 2001 through 3rd Fiscal Quarter, 2002 4.50 x 4th Fiscal Quarter, 2002 through 3rd Fiscal Quarter, 2003 4.00 x 4th Fiscal Quarter, 2003 through 3rd Fiscal Quarter, 2004 3.50 x 4th Fiscal Quarter, 2004 and thereafter 3.00 x
C. MINIMUM CONSOLIDATED EBITDA. Company shall not permit Consolidated EBITDA for the consecutive four-Fiscal-Quarter period ending on the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending December 31, 1998, occurring during any period set forth below to be less than the correlative amount (the "MINIMUM EBITDA AMOUNT") indicated: 105
MINIMUM EBITDA QUARTER ENDED AMOUNT ----------------------------------------- ---------------------- 4th Fiscal Quarter, 1998 $ 30,000,000 1st Fiscal Quarter, 1999 31,000,000 2nd Fiscal Quarter, 1999 46,951,200 3rd Fiscal Quarter, 1999 47,951,200 4th Fiscal Quarter, 1999 48,951,200 1st Fiscal Quarter, 2000 49,951,200 2nd Fiscal Quarter, 2000 50,951,200 3rd Fiscal Quarter, 2000 51,951,200 4th Fiscal Quarter, 2000 through 3rd Fiscal Quarter 2001 52,951,200 4th Fiscal Quarter, 2001 through 3rd Fiscal Quarter 2002 56,951,200 4th Fiscal Quarter, 2002 through 3rd Fiscal Quarter 2003 60,951,200 4th Fiscal Quarter, 2003 and thereafter 64,951,200
; PROVIDED that (x) the Minimum EBITDA Amount for the consecutive four-Fiscal-Quarter period ending at the last day of any Fiscal Quarter during any period set forth above (except for the 4th Fiscal Quarter, 1998 and the 1st Fiscal Quarter, 1999) shall be increased by an amount equal to 80% of the Acquired Business EBITDA of each Acquired Business whose Acquired Business Date falls during the period from and including the day following the Amended and Restated Credit Agreement Closing Date to and including the last day of such Fiscal Quarter; and (y) to the extent the amount of Consolidated EBITDA for the immediately preceding consecutive four-Fiscal-Quarter period exceeds the amount of EBITDA required to be maintained for such consecutive four-Fiscal-Quarter period pursuant to this subsection, an amount equal to 50% of such excess amount may be carried forward to (but only to) the then current Fiscal Quarter (any such amount to be certified to Administrative Agent in the Compliance Certificate delivered for the last Fiscal Quarter of such consecutive four-Fiscal-Quarter period). For purposes of this subsection 7.6C, the following terms have the following meanings: "ACQUIRED BUSINESS" means any business acquired (whether through the purchase of assets or shares of capital stock) by Company or any of its Subsidiaries after the Amended and Restated Credit Agreement Closing Date. "ACQUIRED BUSINESS DATE" means, with respect to any Acquired Business, the date of consummation of the acquisition thereof by Company or any of its Subsidiaries. "ACQUIRED BUSINESS EBITDA" means, with respect to any Acquired Business, (x) the consolidated net income of such Acquired Business for the consecutive four-Fiscal-Quarter period ended on or most recently prior to its Acquired Business Date and with 106 respect to which financial statements are available on the Acquired Business Date PLUS (y) to the extent deducted in determining such consolidated net income for such period, the sum of (i) consolidated interest expense, (ii) income taxes, (iii) depreciation, (iv) amortization, (v) any extraordinary or non-recurring losses, and (vi) any non-cash items MINUS (z) to the extent included in such consolidated net income, extraordinary gains. D. MINIMUM INTEREST COVERAGE RATIO. Company shall not permit the Consolidated Interest Coverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending December 31, 1998, occurring during any period set forth below to be less than the correlative ratio indicated:
MINIMUM INTEREST PERIOD COVERAGE RATIO ----------------------------------------- ---------------------- 4th Fiscal Quarter, 1998 1.65 x 1st Fiscal Quarter, 1999 1.65 x 2nd Fiscal Quarter, 1999 1.70 x 3rd Fiscal Quarter, 1999 1.75 x 4th Fiscal Quarter, 1999 1.80 x 1st Fiscal Quarter, 2000 1.85 x 2nd Fiscal Quarter, 2000 1.90 x 3rd Fiscal Quarter, 2000 1.95 x 4th Fiscal Quarter, 2000 through 3rd Fiscal Quarter, 2001 2.00 x 4th Fiscal Quarter, 2001 through 3rd Fiscal Quarter, 2002 2.25 x 4th Fiscal Quarter, 2002 through 3rd Fiscal Quarter, 2003 2.50 x 4th Fiscal Quarter, 2003 through 3rd Fiscal Quarter, 2004 2.75 x 4th Fiscal Quarter, 2004 and thereafter 3.00 x
7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. Company shall not, and shall not permit any of Company's Subsidiaries to, enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: (i) (a) any Domestic Subsidiary of Company may be merged with or into Company or any Subsidiary Guarantor, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any Subsidiary Guarantor; PROVIDED that, in the case of such a merger, Company or such Subsidiary Guarantor shall be the continuing or surviving corporation and (b) any Foreign Subsidiary may be merged with or into another Foreign Subsidiary or, so long as the surviving corporation of such merger is Company or a Domestic Subsidiary, with or into the 107 Company or any Domestic Subsidiary, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of in one transaction or a series of transactions, to Company, a Subsidiary Guarantor or another Foreign Subsidiary, PROVIDED, that notwithstanding the above, a Subsidiary may only liquidate or dissolve into, or merge with and into, another Subsidiary if, after giving effect to such combination or merger, Company continues to own (directly or indirectly), and Administrative Agent continues to have pledged to it pursuant to the DAH Pledge Agreement or Subsidiary Pledge Agreement, a percentage of the issued and outstanding equity Securities (on a fully diluted basis) of the Subsidiary surviving such combinations or merger that is equal to or in excess of the percentage of the issued and outstanding shares of equity Securities (on a fully diluted basis) of the Subsidiary that does not survive such combinations or merger that was (immediately prior to the combination or merger) owned by the Company or pledged to Administrative Agent; (ii) Company and its Subsidiaries may make Consolidated Capital Expenditures permitted under subsection 7.8; (iii) Company and its Subsidiaries may dispose of obsolete, worn out or surplus property in the ordinary course of business; (iv) Company and its Subsidiaries may consummate any transfer, conveyance or other disposal that constitutes (a) an Investment permitted under subsection 7.3, (b) a Lien permitted under subsection 7.2, (c) a Restricted Junior Payment permitted under subsection 7.5 or (d) a sale and leaseback transaction permitted by subsection 7.10; (v) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; (vi) Finance Co., Acquisition Co. and DAH may consummate the Merger and the Second Merger; (vii) (x) Company and its Subsidiaries may make Permitted Acquisitions; PROVIDED that such Permitted Acquisitions result in the Company or the relevant Subsidiary acquiring a majority controlling interest in the Person (or its assets and businesses) acquired, or increasing any such controlling interest maintained by it in such Person or result in the Person acquired becoming an Acquired Controlled Person with respect to Company and its Subsidiaries; and (y) no later than five Business Days prior to the consummation thereof, Company delivers to Agents a Permitted Acquisition Compliance Certificate demonstrating compliance with the requirements of the definition of "Permitted Acquisition" and copies of all acquisition agreements executed and delivered in connection therewith to the extent available and requested by Administrative Agent; and PROVIDED FURTHER that reasonably promptly following the consummation of such Permitted Acquisition, Company shall have complied with the provisions of subsections 6.8 and 6.9 with respect thereto to the extent applicable; (viii) Prior to the consummation of the Merger, Company or any of its Subsidiaries may convey, sell, transfer or otherwise dispose of any Margin Stock, whether now owned or hereafter acquired; PROVIDED that such disposition is for fair value and the proceeds are held in Cash or Cash Equivalents; 108 (ix) Company and its Subsidiaries may sell or otherwise dispose of assets as a result of any taking of assets described in clause (ii) of the definition of "Net Insurance/Condemnation Proceeds", so long as the Net Insurance/Condemnation Proceeds resulting therefrom are applied or reinvested as required by subsection 2.4B(iii)(b); (x) Company and its Subsidiaries may sell or discount overdue accounts receivable in the ordinary course of business, but only in connection with the compromise or collection thereof; (xi) Company and its Subsidiaries may make Asset Sales to Non-Wholly-Owned Subsidiaries that are not Subsidiary Guarantors of assets having a fair market value of not in excess of $10,000,000 in the aggregate for all such Asset Sales made after the Closing Date; provided that (x) the consideration for such assets shall be in an amount at least equal to the fair market value thereof, and (y) any Investment in such Non-Wholly-Owned Subsidiaries resulting from such Asset Sale shall be permitted by subsection 7.3(xiii) or as a Permitted Acquisition pursuant to subsection 7.3 (viii); and (xii) Company and its Subsidiaries may make Asset Sales not permitted by the foregoing clauses of assets having a fair market value of not in excess of $5,000,000 in any Fiscal Year or of $10,000,000 in the aggregate for all such Asset Sales made after the Closing Date; PROVIDED that (x) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (y) at least 75% of the consideration received therefor is in the form of cash; and (z) the proceeds of such Asset Sale are applied or reinvested as required by subsection 2.4B(iii)(a). 7.8 CONSOLIDATED CAPITAL EXPENDITURES. (i) Company will not, and will not permit any of its Subsidiaries to, make or commit to make Consolidated Capital Expenditures in any Fiscal Year, except Consolidated Capital Expenditures which do not aggregate in excess of $8,000,000 in such Fiscal Year PLUS an additional aggregate amount equal to $10,000,000 in the aggregate for all such Consolidated Capital Expenditures made after the Closing Date; PROVIDED that (a) if the aggregate amount of Consolidated Capital Expenditures actually made in any such Fiscal Year shall be less than the limit with respect thereto set forth above (before giving effect to any increase therein pursuant to this proviso) (the "BASE AMOUNT"), then the amount of such shortfall (up to an amount equal to 50% of the Base Amount for such Fiscal Year, without giving effect to this proviso) may be added to the amount of such Consolidated Capital Expenditures permitted for the immediately succeeding Fiscal Year and any such amount carried forward to a succeeding Fiscal Year shall be deemed to be used prior to Company and its Subsidiaries using the amount of capital expenditures permitted by this section in such succeeding Fiscal Year, without giving effect to such carryforward and (b) for any Fiscal Year (or portion thereof) following any acquisition of a business (whether through the purchase of assets or of shares of capital stock) permitted under Article 7, the Base Amount for such Fiscal Year (or portion) shall be increased, for each such acquisition, by an amount equal to the product of (A) the lesser of (x) $5,000,000 and (y) 4% of revenues of the business acquired in such acquisition for the period of four Fiscal Quarters most recently ended on or prior to the date of such Business Acquisition multiplied by (B) (x) in the case of any partial Fiscal Year, a fraction, the numerator of which is the number of days remaining in such Fiscal Year after the date of such Business Acquisition and the denominator of which is 365 (or 366 in a leap year), and (y) in the case of any full Fiscal Year, 1. 109 (ii) The parties acknowledge and agree that the permitted Consolidated Capital Expenditure level set forth in clause (i) above shall be exclusive of the amount of Consolidated Capital Expenditures actually made with the proceeds of a cash capital contribution to Company (including the proceeds of issuance of equity securities) made, by Parent from the issuance by Parent of its equity Securities after the Closing Date and specifically identified in a certificate delivered by an Authorized Officer of Company to Administrative Agent on or about the time such capital contribution is made; PROVIDED that, to the extent any such cash capital contributions constitute Net Securities Proceeds after the Merger Date, only that portion of such Net Securities Proceeds which is not required to be applied as a prepayment pursuant to Section 2.4B(iii)(c) may be used for Consolidated Capital Expenditures pursuant to this clause (ii). 7.9 FISCAL YEAR. Company shall not change its Fiscal Year-end from December 31 of each calendar year. 7.10 SALES AND LEASE-BACKS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease; PROVIDED that Company and its Subsidiaries may become and remain liable as lessee, guarantor or other surety with respect to any such lease if the property which is subject to such lease was acquired by Company or any of its Subsidiaries within 180 days of such sale or transfer of such property by the Company or any of its Subsidiaries. 7.11 SALE OR DISCOUNT OF RECEIVABLES. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable; provided that Company and its Subsidiaries may sell or discount overdue accounts receivable in the ordinary course business, but only in connection with the compromise or collection thereof. 7.12 TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 10% or more of the voting Securities of Parent or Company or with any Affiliate of Parent or Company on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; PROVIDED that the foregoing restriction shall not apply to (i) any transaction between Company and any of its Wholly-Owned Subsidiaries or between any of its Wholly-Owned Subsidiaries; (ii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries; (iii) any Restricted 110 Junior Payment permitted under subsection 7.5; (iv) the entry into and performance of obligations under arrangements with DLJ and its Affiliates for underwriting, investment banking and advisory services on usual and customary terms (including payments of the fee in respect of advisory services contemplated in subsection 7.5(iii)); (v) the payment of reasonable and customary fees and reimbursement of expenses payable to directors of Parent; (vi) employment arrangements with respect to the procurement of services of directors, officers and employees in the ordinary course of business and the payment of reasonable fees in connection therewith; (vii) the issuance of equity Securities to Global Technology Partners, L.L.C. described in subsection 7.3; (viii) the execution, delivery and performance of the Merger Agreement and the consummation of the Tender Offer and the other transactions contemplated by the Tender Offer Materials; and (ix) the execution, delivery and performance of the agreements listed on Schedule 7.12. 7.13 ISSUANCE OF SUBSIDIARY EQUITY. Company shall not permit any of its Subsidiaries directly or indirectly to issue any shares of its capital stock or other equity Securities except to Company, another Subsidiary of Company, to qualify directors if required by applicable law or in proportion to its existing equity Securities of any class. Company shall not permit DAH on and after the Closing Date to issue any options, warrants or other rights to purchase or acquire any equity interest in DAH if after giving effect thereto, Company would own less than the Minimum Shares. 7.14 CONDUCT OF BUSINESS. From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company and its Subsidiaries on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders. 7.15 AMENDMENTS OR WAIVERS OF MERGER AGREEMENT; AMENDMENTS OF DOCUMENTS RELATING TO SUBORDINATED INDEBTEDNESS. A. Neither Company nor any of its Subsidiaries will agree to any material amendment to, or waive any of its material rights under, the Merger Agreement, or terminate or agree to terminate the Merger Agreement without in each case obtaining the prior written consent of Requisite Lenders to such amendment, waiver or termination. B. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions thereof (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder to the detriment of Lenders or to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to Lenders. 111 C. Company shall not, and shall not permit any of its Subsidiaries to, designate any Indebtedness as "Designated Senior Debt" (as defined in any of the Senior Subordinated Bridge Note Agreement or the Senior Subordinated Note Indenture) without the prior written consent of Requisite Lenders. SECTION 8. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 8.1 FAILURE TO MAKE PAYMENTS WHEN DUE. Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within five days after the date due; or 8.2 DEFAULT IN OTHER AGREEMENTS. (i) Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations in either an individual or an aggregate principal amount of $5,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Company or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Contingent Obligations in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be; or 8.3 BREACH OF CERTAIN COVENANTS. Failure of Company to perform or comply with any term or condition contained in subsection 2.5, 6.2 (solely with respect to the continued existence of Company) or 6.1(vii) or Section 7 of this Agreement; or 8.4 BREACH OF WARRANTY. Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS. Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived 112 within 30 days after receipt by Company and such Loan Party of notice from Administrative Agent at the direction of the Requisite Lenders of such default; or 8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Company or any of its Subsidiaries (other than any Immaterial Subsidiary) in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Subsidiaries (other than any Immaterial Subsidiary) under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Subsidiaries (other than any Immaterial Subsidiary), or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Subsidiaries (other than any Immaterial Subsidiary) for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any of its Subsidiaries (other than any Immaterial Subsidiary), and any such event described in clauses (i) or (ii) shall continue for 60 days unless dismissed, bonded or discharged; or 8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) Company or any of its Subsidiaries (other than any Immaterial Subsidiary) shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Subsidiaries (other than any Immaterial Subsidiary) shall make any assignment for the benefit of creditors; or (ii) Company or any of its Subsidiaries (other than any Immaterial Subsidiary) shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Company or any of its Subsidiaries (other than any Immaterial Subsidiary) (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or 8.8 JUDGMENTS AND ATTACHMENTS. Any money judgment, writ or warrant of attachment involving either in any individual case or in the aggregate at any time an amount in excess of $5,000,000 (in either case not adequately covered by insurance as to which a responsible insurance company is not denying its liability with respect thereto) shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days; or 113 8.9 DISSOLUTION. Any order, judgment or decree shall be entered against Company or any of its Subsidiaries (other than any Immaterial Subsidiary) decreeing the dissolution or split up of Company or that Subsidiary (except as permitted under Sections 6.2 and 7.7 and such order shall remain undischarged or unstayed for a period in excess of 60 days; or 8.10 EMPLOYEE BENEFIT PLANS. There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $5,000,000 during the term of this Agreement; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds $5,000,000; or 8.11 CHANGE IN CONTROL. Any Change in Control shall occur; or 8.12 INVALIDITY OF GUARANTIES; FAILURE OF SECURITY; REPUDIATION OF OBLIGATIONS. At any time after the execution and delivery thereof, (i) any Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void, (ii) any Collateral Document shall cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected First Priority Lien in any Collateral purported to be covered thereby, in each case for any reason other than the failure of any Agent or any Lender to take any action within its control or except to the extent that any such event is covered by a lender's title insurance policy and the relevant insurer promptly after the occurrence thereof shall have acknowledged in writing that the same is covered by such title insurance policy, or (iii) any Loan Party shall contest the validity or enforceability of any Loan Document in writing; or 8.13 MERGERS. The Mergers shall be unwound, reversed or otherwise rescinded in whole or in part for any reason or, prior to the Merger Date, the Merger Agreement shall be terminated or the Merger shall not occur on or prior to the 150th day after the Closing Date; THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7 (with respect to Company or any Subsidiary Guarantor and, prior to the Merger, DAH), each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly 114 waived by Company, and the obligation of each Lender to make any Loan, the obligation of any Issuing Lender to issue any Letter of Credit and the right of any Issuing Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of each Lender to make any Loan, the obligation of any Issuing Lender to issue any Letter of Credit and the right of any Issuing Lender to issue any Letter of Credit hereunder shall thereupon terminate; PROVIDED that the foregoing shall not affect in any way the obligations of Working Capital Lenders under subsection 3.3C(i) or the obligations of Working Capital Lenders to purchase participations in any unpaid Swing Line Loans as provided in subsection 2.1A(iv). Any amounts described in clause (b) above, when received by Administrative Agent, shall be held by Administrative Agent and applied as follows: If for any reason the aggregate amount delivered by Company as aforesaid is less than the amount described in clause (b) above (the "AGGREGATE AVAILABLE AMOUNT"), the aggregate amount so delivered shall be apportioned among all outstanding Letters of Credit in accordance with the ratio of the maximum amount available for drawing under each such Letter of Credit (as to such Letter of Credit, the "MAXIMUM AVAILABLE AMOUNT") to the Aggregate Available Amount. Upon any drawing under any outstanding Letters of Credit in respect of which Company has delivered to Administrative Agent any amounts described above, Administrative Agent shall apply such amounts to reimburse the Issuing Lender for the amount of such drawing. In the event of cancellation or expiration of any Letter of Credit in respect of which Company has delivered any amounts described above, or in the event of any reduction in the Maximum Available Amount under such Letter of Credit, Administrative Agent shall apply the amount then on deposit with it in respect of such Letter of Credit (LESS, in the case of such a reduction, the Maximum Available Amount under such Letter of Credit immediately after such reduction) first, to the extent of any excess, to the cash collateralization of any outstanding Letters of Credit in respect of which Company has failed to pay all or a portion of the amounts described above (such cash collateralization to be apportioned among all such Letters of Credit in the manner described above), second, to the extent of any further excess, to the payment of any other outstanding Obligations in such order as Administrative Agent shall elect, and third, to the extent of any further excess, to the payment to whomsoever shall be lawfully entitled to receive such funds. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude 115 Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the Loan Documents, even if the conditions set forth in this paragraph are met. SECTION 9. THE AGENTS 9.1 APPOINTMENT. A. APPOINTMENT OF AGENTS. First Chicago is hereby appointed Administrative Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Administrative Agent to act as its contractual representative in accordance with the terms of this Agreement and the other Loan Documents. DLJ is hereby appointed Syndication Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Syndication Agent to act as its contractual representative in accordance with the terms of this Agreement and the other Loan Documents. Each of Syndication Agent and Administrative Agent agrees to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The provisions of this Section 9 are solely for the benefit of each of Syndication Agent and Administrative Agent, and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the no Agent shall have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Agents are merely acting as the contractual representatives of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In their respective capacities as the Lenders' contractual representatives, the Agents (i) do not hereby assume any fiduciary duties to any of the Lenders, (ii) are "representatives" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) are acting as independent contractors, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Agents on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. B. APPOINTMENT OF SUPPLEMENTAL COLLATERAL AGENTS. It is the purpose of this Agreement and the other Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Loan Documents, and in particular in case of the enforcement of any of the Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "SUPPLEMENTAL COLLATERAL AGENT" and collectively as "SUPPLEMENTAL COLLATERAL AGENTS"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Administrative Agent 116 or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. 9.2 POWERS AND DUTIES; GENERAL IMMUNITY. A. POWERS. Each Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to such Agent by the terms thereof, together with such powers as are reasonably incidental thereto. No Agent shall have any implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by such Agent. B. GENERAL IMMUNITY. No Agent nor any of their respective directors, officers, agents or employees shall be liable to Company, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction has arisen from the gross negligence or willful misconduct of such Person. C. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. No Agent nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Section 4, except receipt of items required to be delivered solely to Administrative Agent or Syndication Agent, as the case may be; (d) the existence or possible existence of any Event of Default or Potential of Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of Company or any guarantor of any of the Obligations or of any of Company's or any such guarantor's respective Subsidiaries. No Agent shall have any duty to disclose to the Lenders information that is not required to be furnished by Company to such Agent at such time, but is voluntarily furnished by Company to such Agent (either in its capacity as Administrative Agent or Syndication Agent, as the case may be, or in its individual capacity). Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. D. ACTION ON INSTRUCTIONS OF LENDER. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance 117 with written instructions signed by the Requisite Lenders (or if required by the terms of subsection 10.6, all of the Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that each Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Requisite Lenders. Each Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders in proportion to their Pro Rata Share against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. E. EMPLOYMENT OF AGENTS AND COUNSEL. Each Agent may execute any of its duties as Administrative Agent or Syndication Agent, as the case may be, hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Each Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agents and the Lenders and all matters pertaining to each Agent's duties hereunder and under any other Loan Document. F. RELIANCE ON DOCUMENTS; COUNSEL. Each Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by any Agent, which counsel may be employees of any Agent. G. AGENTS' REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to reimburse and indemnify each Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by Company for which any Agent is entitled to reimbursement by Company under the Loan Documents, (ii) for any other expenses incurred by any Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by any Agent in connection with any dispute between the Agents, the Agents and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against any Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against any Agent in connection with any dispute between the Agents, the Agents and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents; PROVIDED that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of any Agent and (ii) any indemnification required pursuant to subsection 2.7 shall, notwithstanding the provisions of this subsection, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this subsection shall survive payment of the Obligations and termination of this Agreement. H. NOTICE OF DEFAULT. No Agent shall be deemed to have knowledge or notice of the occurrence of any Event of Default or Potential Event of Default hereunder unless such Agent has received written notice from a Lender or Company referring to this Agreement describing such 118 Event of Default or Potential Event of Default and stating that such notice is a "notice of default". In the event that any Agent receives such a notice, such Agent shall give prompt notice thereof to the Lenders. I. RIGHTS AS A LENDER. In the event any Agent is a Lender, such Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not such Agent, and the term "Lender" or "Lenders" shall, at any time when any Agent is a Lender, unless the context otherwise indicates, include such Agent in its individual capacity. Each Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with Company or any of its Subsidiaries in which Company or such Subsidiary is not restricted hereby from engaging with any other Person. J. LENDER CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon any Agent, the Arranger or any other Lender and based on financial statements prepared by Company and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon any Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. K. DELEGATION TO AFFILIATES. Company and the Lenders agree that any Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which such Agent is entitled under Sections 9 and 10. 9.3 SUCCESSOR AGENTS AND SWING LINE LENDER. A. SUCCESSOR AGENTS. The Syndication Agent may resign at any time upon one Business Day's prior notice thereof to Company and Administrative Agent, and the Administrative Agent may resign at any time by giving written notice thereof to the Syndication Agent, the Lenders and Company, such resignations to be effective upon the appointment of a successor Administrative Agent or Syndication Agent, as the case may be, or, if no successor Administrative Agent or Syndication Agent has been appointed, forty-five days after the retiring Administrative Agent or Syndication Agent gives notice of its intention to resign. Administrative Agent may be removed at any time with or without cause by written notice received by Administrative Agent from the Requisite Lenders, such removal to be effective on the date specified by the Requisite Lenders. Upon any such resignation or removal, the Requisite Lenders shall have the right to appoint, on behalf of Company and the Lenders, and, if no Event of Default has occurred and is continuing, subject to the consent of Company, a successor Administrative Agent or Syndication Agent, as the case may be. If no successor Administrative Agent or Syndication Agent shall have been so appointed by the Requisite Lenders within thirty days after the resigning Administrative Agent's or Syndication Agent's giving notice of its intention to resign, then the resigning Administrative Agent or Syndication Agent, as the case may be, may appoint, on behalf of Company and the Lenders, a successor Administrative Agent or Syndication Agent, as the case may be. Notwithstanding the previous sentence, Administrative Agent or Syndication Agent may at any time without the consent of Company or any Lender, appoint any of its Affiliates which is a commercial bank as the successor Administrative Agent or Syndication Agent hereunder. If Administrative Agent or Syndication 119 Agent has resigned or been removed and no successor Administrative Agent or Syndication Agent has been appointed, the Lenders may perform all the duties of Administrative Agent or Syndication Agent hereunder and Company shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent or Syndication Agent shall be deemed to be appointed hereunder until such successor Administrative Agent or Syndication Agent has accepted the appointment. Any such successor Administrative Agent or Syndication Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent or Syndication Agent hereunder by a successor Administrative Agent or Syndication Agent, such successor Administrative Agent or Syndication Agent shall thereupon succeed to and become vested with all the rights, power, privileges and duties of the resigning or removed Administrative Agent or Syndication Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent or Syndication Agent, the resigning or removed Administrative Agent or Syndication Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of the Administrative Agent or the Syndication Agent, as the case may be, the provisons of this Section 9 shall continue in effect for the benefit of such Administrative Agent or Syndication Agent in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent or Syndication Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this subsection, then the term "Corporate Base Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administration Agent. B. SUCCESSOR SWING LINE LENDER. Any resignation or removal of Administrative Agent pursuant to subsection 9.3A shall also constitute the resignation or removal of First Chicago or its successor as Swing Line Lender, and any successor Administrative Agent appointed pursuant to subsection 9.3A shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (i) the resigning or removed Swing Line Lender shall assign all of its rights and obligations with respect to the Swing Line Loans to the successor Swing Line Lender pursuant to an Assignment Agreement and such successor Swing Line Lender shall be entitled thereafter to all of the rights and immunities of the resigning or removed Swing Line Lender pursuant to subsection 2.1, (ii) the retiring or removed Administrative Agent and Swing Line Lender shall surrender the Swing Line Note held by it to Company for cancellation, and (iii) Company shall issue a new Swing Line Note to the successor Administrative Agent and Swing Line Lender substantially in the form of EXHIBIT VII annexed hereto, in the principal amount of the Swing Line Loan Commitment then in effect and with other appropriate insertions. 9.4 COLLATERAL DOCUMENTS AND GUARANTIES. A. EXECUTION OF COLLATERAL DOCUMENTS. The Lenders hereby empower and authorize Administrative Agent to execute and deliver to Company on their behalf the Collateral and all related financing statements and any financing statements, agreements, documents or instruments as shall be necessary or appropriate to effect the purposes of the Collateral Documents and to be the agent for and representative of Lenders under each Guaranty, and each Lender agrees to be bound by the terms of each Collateral Document and Guaranty. Anything contained in any of the Loan Documents to the contrary notwithstanding, Company, each Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce any Guaranty, it being understood and agreed that all rights and remedies under the Collateral Documents and the Guaranties may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms thereof, and (Y) in the event of a foreclosure by Administrative Agent on any of the Collateral pursuant to a public or 120 private sale, any Agent or any Lender may, to the fullest extent that the same may be permitted under applicable law, be the purchaser of any or all of such Collateral at any such sale and Administrative Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale. B. COLLATERAL RELEASES. The Lenders hereby empower and authorize Administrative Agent to execute and deliver to Company on their behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of Collateral which shall be permitted by the terms hereof or of any other Loan Document or which shall otherwise have been approved by the Requisite Lenders (or, if required by the terms of subsection 10.6, all of the Lenders) in writing. SECTION 10. MISCELLANEOUS 10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT. A. GENERAL. Subject to subsection 10.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Commitments or any Loan or Loans made by it or participations in Letters of Credit hereunder or any other interest herein or in any other Obligations owed to it; PROVIDED that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; PROVIDED, FURTHER that no such sale, assignment, transfer or participation of any participation in Letters of Credit hereunder may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Working Capital Loan Commitment and the Working Capital Loans of the Working Capital Lender effecting such sale, assignment, transfer or participation; and PROVIDED, FURTHER that, anything contained herein to the contrary notwithstanding, the Swing Line Loan Commitment and the Swing Line Loans of Swing Line Lender may not be sold, assigned or transferred as described in clause (i) above to any Person other than a successor Administrative Agent and Swing Line Lender to the extent contemplated by subsection 9.3. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its Commitments or the Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender. B. ASSIGNMENTS. (i) AMOUNTS AND TERMS OF ASSIGNMENTS. Each Commitment, Loan or participation in Letters of Credit hereunder, or other Obligation may (a) be assigned in any amount to another Lender, or to an Affiliate or Affiliated Fund of the assigning Lender or another Lender, with the giving of notice to Company and Administrative Agent, or (b) be assigned in an aggregate amount of not less than $3,000,000 (or such lesser amount as shall constitute the aggregate amount of the Commitments, Loans, and participations in Letters of Credit, and other Obligations of the assigning Lender or as may be consented to by Company and Agents) to any other Eligible Assignee with the consent of Company (which consent shall only be required if no Event of Default has occurred and is continuing) and, with respect to all Lenders other than Syndication Agent, Administrative Agent (which consent of 121 Company and Administrative Agent shall not be unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Commitments, Loans or participations in Letters of Credit, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance, an Assignment Agreement (which shall contain a representation by the Assignee to the effect that none of the consideration used to make the purchase of the Commitment, Loan or participation in Letters of Credit under the applicable Assignment Agreement are "plan assets" as defined under ERISA and that the rights and interests of the Assignee in and under the Loan Documents will not be "plan assets" under ERISA), together with a processing fee of $3,500 (or such other amount as may be agreed to by Administrative Agent) and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery and acceptance from and after the effective date specified in such Assignment Agreement, (y) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (z) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 10.9B) and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto; PROVIDED that, anything contained in any of the Loan Documents to the contrary notwithstanding, if such Lender is the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of an Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder). The Commitments hereunder shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender and, if any such assignment occurs after the issuance to the assigning Lender of Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon new Notes shall be issued to the assignee and to the assigning Lender, substantially in the form of EXHIBIT IV, EXHIBIT V, EXHIBIT VI, EXHIBIT VII or EXHIBIT VIII annexed hereto, as the case may be, with appropriate insertions, to reflect the new Commitments and/or outstanding Term Loans, as the case may be, of the assignee and the assigning Lender. (ii) ACCEPTANCE BY ADMINISTRATIVE AGENT. Upon its receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent and Company have consented to the assignment evidenced thereby (in each case to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment) and (b) give prompt notice thereof to Company. Administrative Agent shall maintain a copy of each 122 Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii). C. PARTICIPATIONS. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require the Lender that shall have granted such participation to it to take or omit to take any action hereunder except action directly affecting (i) the extension of the scheduled final maturity date of any Loan allocated to such participation or (ii) a reduction of the principal amount of or the rate of interest payable on any Loan allocated to such participation, and all amounts payable by Company hereunder (including amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 10.4 and 10.5, to the fullest extent permitted under applicable law, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; PROVIDED that (i) no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. E. INFORMATION. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. F. REPRESENTATIONS OF LENDERS. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (A) of the definition thereof; (ii) that it has experience and expertise in the making of loans such as the Loans; and (iii) that it will make its Loans for its own account in the ordinary course of its business and without a view to distribution of such Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. 10.2 EXPENSES. Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of the Agents with respect to the preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) the reasonable fees, expenses and disbursements of a single counsel to Agents and Arranger (including the costs of local or foreign counsel, to the extent required) in connection with the negotiation, preparation, execution and administration of the Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iii) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Administrative Agent on behalf of Lenders pursuant to any Collateral 123 Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Agents and of counsel providing any opinions that Syndication Agent, Administrative Agent or Requisite Lenders may request in respect of the Collateral Documents or the Liens created pursuant thereto; (iv) the custody or preservation of any of the Collateral; (v) all other actual and reasonable costs and expenses incurred by Arranger, Syndication Agent or Administrative Agent (including the reasonable fees, expenses and disbursements of any auditors, accountants or appraisers and any environmental or other consultants, advisors and agents employed or retained by Syndication Agent, Administrative Agent or their respective counsel) in connection with the syndication of the Commitments and the negotiation, preparation and execution of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (vi) after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys' fees and costs of settlement, incurred by Agents and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Loan Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranties or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings). 10.3 INDEMNITY. In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless Arranger, Agents and Lenders, and the officers, directors, trustees, employees, agents and affiliates of Arranger, Agents and Lenders (collectively called the "INDEMNITEES"), from and against any and all Indemnified Liabilities (as hereinafter defined); PROVIDED that Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction or to the extent that such Indemnified Liabilities are Environmental Liabilities that arise solely out of the actions of Administrative Agent or Lenders occurring after Administrative Agent or Lenders shall have foreclosed on, or otherwise dispossessed Company and its Subsidiaries of, the applicable Facility. As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Loan 124 Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranties) or (ii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 10.4 SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default referred to in Sections 8.6 or 8.7 or, with the consent of the Requisite Lenders, upon the occurrence of any other Event of Default, each Lender is, to the fullest extent permitted by applicable law, hereby authorized by Company at any time or from time to time, without notice to Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities then due of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not that Lender shall have made any demand hereunder. Company hereby further grants to each Agent and each Lender a security interest in all deposits and accounts maintained with such Agent or such Lender as security for the Obligations. 10.5 RATABLE SHARING. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to 125 such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees, to the fullest extent that it may do so under applicable law, that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 10.6 AMENDMENTS AND WAIVERS. No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, and no consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; PROVIDED that no such amendment, modification, termination, waiver or consent which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by Requisite Lenders shall be effective unless consented to by each Lender; (b) modify this subsection 10.6, change the definitions of "Requisite Lenders" or "Pro Rata Share", increase any Commitments (other than pursuant to the second paragraph of subsection 2.1A(iii)), reduce any fees described in subsection 2.3 (other than the fees to Agents referred to in subsection 2.3B), release any material Subsidiary Guarantor from its obligations under the Guaranty, Parent from its obligations under the Parent Guaranty, or all or substantially all of the collateral security (except in each case as otherwise specifically provided for in the Loan Documents), or extend the Working Capital Loan Commitment Termination Date or the Acquisition Loan Commitment Termination Date, shall be made without the consent of each Lender adversely affected thereby; (c) extend the due date for, or reduce the amount of, any scheduled repayment of principal of or interest on or fees payable in respect of any Loan or reduce the principal amount of or rate of interest on or fees payable in respect of any Loan or any reimbursement obligation in respect of any Letter of Credit (which shall in each case include the conversion of all or any part of the Obligations into equity of any Loan Party), shall be made without the consent of the Lender which has made such Loan or, in the case of a reimbursement obligation in respect of any Letter of Credit, the Issuer owed, and those Lenders participating in, such reimbursement obligation; (d) affect adversely the interests, rights or obligations of any Agent, any Issuer or the Swing Line Lender (in its capacity as Agent, Issuer or Swing Line Lender), unless consented to by such Agent, Issuer or Swing Line Lender, as the case may be; or (e) effect any amendment, modification or waiver that by its terms adversely affects the rights of Lenders participating in any tranche differently from those of Lenders participating in other tranches, without the consent of the holders of at least 51% of the aggregate amount of Loans or Commitments, as the case may be, outstanding under the tranche or tranches affected by such amendment, modification or waiver. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, 126 termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, on Company. 10.7 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 10.8 NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; PROVIDED that notices to Agents shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Agents, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent. 10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement. 10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 127 10.11 MARSHALLING; PAYMENTS SET ASIDE. None of Agents or Lenders shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or any of Agents or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.12 SEVERABILITY. In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14 HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.15 APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 10.16 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and 128 assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders. 10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND TO THE EXTENT PERMITTED UNDER APPLICABLE LAW VENUE OF SUCH COURTS; (II) TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 10.18 WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP 129 THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 10.19 CONFIDENTIALITY. Each Lender, Issuing Lender, Agent and Arranger shall hold all non-public information obtained in connection with this Agreement or obtained by it based on a review of the books and records of the Company or any of its Subsidiaries in accordance with such Lender's, Issuing Lender's, Agent's or Arranger's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates and professional advisors of such Lender or disclosures reasonably required by (a) any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loans or any participations therein or (b) by any direct or indirect contractual counterparties in swap agreements or such contractual counterparties' professional advisors provided that such contractual counterparty or professional advisor to such contractual counterparty agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder, or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; PROVIDED that, (x) unless specifically prohibited by applicable law or court order, each Lender, Issuing Lender, Agent and Arranger shall promptly notify Company of any request by any governmental agency or representative thereof (other than any request by the National Association of Insurance Commissioners or any request in connection with any examination of the financial condition of such Lender by any governmental agency) for disclosure of any such non-public information prior to disclosure of such information and (y) prior to any such disclosure pursuant to this Section 10.19 each Lender, each Issuing Lender, each Agent and the Arranger, as the case may be, shall require any such BONA FIDE transferee, participant and assignee to agree to be bound by this Section 10.19 and to require such Person to require any other Person to whom such Person discloses any such non-public information to be similarly bound by this Section 10.19; and PROVIDED, FURTHER that in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries except as may be required by an order of a court of competent jurisdiction and to the extent set forth therein. 10.20 COUNTERPARTS; EFFECTIVENESS. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, 130 but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Agents of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 131 EXHIBITS I. FORM OF NOTICE OF BORROWING II. FORM OF NOTICE OF CONVERSION/CONTINUATION III. FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV. FORM OF TRANCHE A TERM NOTE V. FORM OF TRANCHE B TERM NOTE VI. FORM OF WORKING CAPITAL NOTE VII. FORM OF SWING LINE NOTE VIII. FORM OF ACQUISITION NOTE IX. FORM OF COMPLIANCE CERTIFICATE X-1. FORM OF CLOSING DATE OPINION OF DAVIS POLK & WARDWELL X-2 FORM OF CLOSING DATE OPINION OF SPOLIN & SILVERMAN XI. FORM OF OPINION OF O'MELVENY & MYERS LLP XII. FORM OF ASSIGNMENT AGREEMENT XIII. FORM OF CERTIFICATE RE NON-BANK STATUS XIV. FORM OF FINANCE CO. PLEDGE AGREEMENT XV. FORM OF DAH PLEDGE AGREEMENT XVI. FORM OF SECURITY AGREEMENT XVII FORM OF ACQUISITION CO. GUARANTY XVIII. FORM OF SUBSIDIARY GUARANTY XIX. FORM OF SUBSIDIARY PLEDGE AGREEMENT XX. FORM OF PARENT PLEDGE AGREEMENT XXI. FORM OF PARENT GUARANTY XXII. FORM OF SOLVENCY CERTIFICATE XXIII. FORM OF COLLATERAL ACCOUNT AGREEMENT XXIV-1. FORM OF MERGER DATE OPINION OF DAVIS POLK & WARDWELL XXIV-2. FORM OF MERGER DATE OPINION OF SPOLIN & SILVERMAN XXV. FORM OF MERGER DATE OPINION OF COMPANY LOCAL COUNSEL XXVI. FORM OF PERMITTED ACQUISITION COMPLIANCE CERTIFICATE XXVII. FORM OF INVESTMENT ACCOUNT AGREEMENT XXVIII. FORM OF INTERCOMPANY NOTE RELATING TO TRANCHE A TERM LOANS AND WORKING CAPITAL LOANS XXIX. FORM OF INTERCOMPANY NOTE RELATING TO TRANCHE B TERM LOANS XXX. FORM OF INTERCOMPANY DEBT SUBORDINATION AGREEMENT XXXI. FORM OF TRANCHE C TERM NOTE SCHEDULES I LIST OF LENDERS PARTY TO AMENDED AND RESTATED CREDIT AGREEMENT 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 5.1 SUBSIDIARIES OF COMPANY 5.5 REAL PROPERTY 5.6 LITIGATION 5.11 ENVIRONMENTAL MATTERS 6.8 MERGER DATE MORTGAGED PROPERTIES 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.12 CERTAIN AGREEMENTS WITH AFFILIATES EX-23.1 4 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of Amendment No. 2 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 April 22, 1999 EX-23.2 5 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 April 21, 1999 EX-25 6 EX-25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 -------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) (DECRANE AIRCRAFT HOLDINGS, INC.) (Exact name of obligor as specified in its charter) DELAWARE 34-1645569 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CA 90254) (Address of principal executive offices) (Zip Code) (12% SENIOR SUBORDINATED NOTES DUE 2008) (Title of indenture securities) GENERAL ITEM 1. GENERAL INFORMATION FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A copy of the articles of association of the trustee as now in effect. 2. A copy of the certificate of authority of the trustee to commence business. If not contained in the articles of association. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A copy of the authorization of the trustee to exercise corporate trust powers. If such authorization is not contained in the documents specified in paragraph (1) or (2), above. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A copy of the existing by-laws of the trustee, or instruments corresponding thereto. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 5. A copy of each Indenture referred to in Item 4, if the obligor is in default. Not applicable. 6. The consents of United States institutional trustees required by Section 321(b) of the Act. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the Trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2 of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the (April 21, 1999). STATE STREET BANK AND TRUST COMPANY By: /s/ Steven Cimalore NAME: Steven Cimalore TITLE: Vice President 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by {DECRANE AIRCRAFT HOLDINGS, INC.} of its {12% SENIOR SUBORDINATED NOTES DUE 2008}, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ Steven Cimalore NAME: Steven Cimalore TITLE: Vice President Dated: April 21, 1999 3 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business March 31, 1998, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(n).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin . . . . . . . . . . . . . . . 1,144,309 Interest-bearing balances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,704 Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,062,052 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary. . . . . . . . . . . . . . . . . . . . . . . 8,073,970 Loans and lease financing receivables: Loans and leases, net of unearned income . . . . . . . . . . 6,433,627 Allowance for loan and lease losses. . . . . . . . . . . . . 88,820 Allocated transfer risk reserve. . . . . . . . . . . . . . . 0 Loans and leases, net of unearned income and allowances. . . . . . . . . . . . . 6,344,807 Assets held in trading accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117,547 Premises and fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,576 Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Investments in unconsolidated subsidiaries. . . . . . . . . . . . . . . . . . . . . . 44,985 Customers' liability to this bank on acceptances outstanding. . . . . . . . . . . . . 66,149 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,249 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,066,572 ----------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,552,020 ----------- ----------- LIABILITIES Deposit: In domestic offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,266,492 Noninterest-bearing . . . . . . . . . . . . . . . . . . 6,824,432 Interest-bearing. . . . . . . . . . . . . . . . . . . . 2,442,060 In foreign offices and Edge subsidiary . . . . . . . . . . . . . . . . . . . . . 14,385,048 Noninterest-bearing . . . . . . . . . . . . . . . . . . 75,909 Interest-bearing. . . . . . . . . . . . . . . . . . . . 14,309,139 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary. . . . . . . . . . . . . . . . . . . . . . . 9,949,994 Demand notes issued to the U.S. Treasury and Trading Liabilities. . . . . . . . . . . 171,783 Trading liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,078,189 Other borrowed money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,583 Subordinated notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Bank's liability on acceptances executed and outstanding . . . . . . . . . . . . . . 66,149 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,947 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,203,185 ----------- EQUITY CAPITAL Perpetual preferred stock and related surplus . . . . . . . . . . . . . . . . . . . . 0 Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,931 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,003 Undivided profits and capital reserves/Net unrealized holding gains (losses). . . . . 1,857,021 Net unrealized holding gains (losses) on available-for-sale securities. . . . . . . . 18,136 Cumulative foreign currency translation adjustments . . . . . . . . . . . . . . . . . (6,256) Total equity capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,348,835 ----------- Total liabilities and equity capital. . . . . . . . . . . . . . . . . . . . . . . . . 38,552,020 -----------
4 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 -----END PRIVACY-ENHANCED MESSAGE-----