-----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, N2XOLBQQm3mRfws1FVxvHgJE6xFGAMWv3I5v7kO58H+FfcVQM3IZMq0G41pph2IB dtIUavh8xVQ9c2PSLKzlFQ== 0000912057-00-005482.txt : 20000214 0000912057-00-005482.hdr.sgml : 20000214 ACCESSION NUMBER: 0000912057-00-005482 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000211 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: 424B3 SEC ACT: SEC FILE NUMBER: 333-70365 FILM NUMBER: 533937 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 424B3 1 424B3 PROSPECTUS [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 62, plus accrued interest. In addition, before September 30, 2001, we may redeem up to 35% of the notes at a redemption price of 112% of their principal amount, plus interest, using proceeds from certain sales of our stock; PROVIDED that at least 65% of the principal amount of notes ever issued under the indenture remains outstanding immediately after such redemption. We will also have the right to redeem, and you will have the right to require us to purchase, the notes upon the occurrence of certain change of control events, at the price set forth on page 63. The notes rank junior to our senior indebtedness and secured debt, including the debt owed under our bank credit facility. The notes rank equally with any future unsecured, senior subordinated debt. The notes are unconditionally guaranteed on a senior subordinated basis by all of our existing wholly-owned domestic subsidiaries, and rank junior to such guarantors' senior and secured debt and equally with their future unsecured, senior subordinated debt. The notes will effectively rank junior to all liabilities of our subsidiaries that are not guarantors. As of September 30, 1999, on a pro forma basis, DeCrane Aircraft and its guarantor subsidiaries would have had outstanding approximately $216.3 million of senior indebtedness, and the non-guarantor subsidiaries would have had approximately $2.3 million of outstanding liabilities, including trade payables. INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 12. This prospectus is to be used by Donaldson, Lufkin & Jenrette Securities Corporation in connection with offers and sales in market-making transactions at negotiated prices related to prevailing market prices. We do not intend to list the notes on any securities exchange. DLJ Securities Corporation has advised us that it intends to make a market in the notes; however, it is not obligated to do so and may stop at any time. We will not receive the proceeds of the sale of the notes but will bear the expenses of registration. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DONALDSON, LUFKIN & JENRETTE The date of this prospectus is February 10, 2000 SUMMARY THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY UNDERSTAND THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THEIR RELATED NOTES. THE DEBT SECURITIES REGISTERED BY THIS PROSPECTUS ARE OBLIGATIONS ISSUED BY DECRANE AIRCRAFT HOLDINGS, INC. DECRANE AIRCRAFT IS A HOLDING COMPANY WHICH CONDUCTS ITS BUSINESS PRIMARILY THROUGH ITS SUBSIDIARIES, AS ILLUSTRATED BELOW. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, AND EXCEPT WHEN USED IN THE SECTION "DESCRIPTION OF NOTES," "DECRANE AIRCRAFT" AND "WE," "US," "OUR" AND SIMILAR TERMS REFER TO THE COMBINED BUSINESS OF DECRANE AIRCRAFT HOLDINGS, INC. (AND ITS PREDECESSOR) AND ALL OF ITS SUBSIDIARIES, COLLECTIVELY. DECRANE AIRCRAFT'S PARENT COMPANY, DECRANE HOLDINGS CO., IS ALSO A HOLDING COMPANY AND DOES NOT HAVE ANY MATERIAL OPERATIONS OR ASSETS OTHER THAN ITS OWNERSHIP OF THE CAPITAL STOCK OF DECRANE AIRCRAFT. EXCEPT WHERE WE INDICATE OTHERWISE, THIS PROSPECTUS PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS, GIVING EFFECT TO ALL OF THE TRANSACTIONS REFERRED TO IN "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA," INCLUDING THE ACQUISITION OF DECRANE AIRCRAFT BY DLJ MERCHANT BANK PARTNERS II, L.P. AND ITS AFFILIATES AND OUR ACQUISITIONS OF AVTECH CORPORATION, DETTMERS INDUSTRIES, INC., PATS, INC., PPI HOLDINGS, INC., CUSTOM WOODWORK & PLASTICS, INC., PCI NEWCO, INC., INTERNATIONAL CUSTOM INTERIORS, INC. AND THE INFINITY PARTNERS, LTD. [GRAPHIC] 1 OUR COMPANY OVERVIEW Since our founding in 1989, through acquisitions and internal growth, we have become one of the premier suppliers to the general aviation market. We offer a complete line of interior cabin furniture, galleys, seating, and entertainment systems for corporate aircraft. In addition, we manufacture aviation electronic components, referred to as avionics, and provide systems integration services. We sell our products in the corporate, commercial (including regional), retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, commonly referred to as OEM's, major components suppliers, aircraft repair and modification centers and commercial airlines. For the twelve months ended September 30, 1999, we generated pro forma revenues and EBITDA (as defined) of $294.9 million and $67.1 million, respectively. During 1998 and 1999, we completed and integrated eight acquisitions, increasing our diversification within the aircraft industry and reducing our reliance on the commercial aircraft market. We have built a leading position in a number of niche markets in the aircraft industry. The substantial majority of our revenue is generated by businesses in which we have a leading market share. In order to take advantage of the complementary nature of our various product offerings, to rationalize and consolidate the operations of each of our separate companies and to provide even higher levels of customer service, in 1999 we reorganized our related businesses into three separate operating groups: Cabin Management, Specialty Avionics and Systems Integration. THE CABIN MANAGEMENT GROUP. We are the leading independent provider of cabin management products for the corporate aircraft market, serving major manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon. We provide a full line of interior cabin components, including seats, furniture, cabinetry, galleys, in-flight entertainment systems, sidewalls and headliners, which are either sold separately or as a pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers customized, pre-engineered, pre-fit interior cabinetry and galley kits to corporate jet OEM's and independent completion centers. We also have developed and are currently marketing our "cabin-in-a-box" product, which is comprised of a customized, pre-engineered, pre-fit cabin interior system, including furniture, galleys, seats, audio-visual entertainment systems, lighting, sidewalls, headliners and electrical control units. Our cabin-in-a-box product will enable our customers to rely on us as the single source for cabin-related products. We estimate that this product could decrease cycle times by 15% to 20%, offering significant cost reduction opportunities to our customers, and could increase the dollar content per plane for us. The Cabin Management Group contributed approximately 40% of our pro forma revenue for the twelve months ended September 30, 1999. THE SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures electronic components, electronic display devices and interconnect components and assemblies. Among the products offered by this group are flight deck communications and audio power control equipment, harness assemblies and connectors, power and signal contact products and liquid crystal display devices, commonly referred to as LCD's. Customers of this group include Airbus, Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics Group contributed approximately 39% of our pro forma revenue for the twelve months ended September 30, 1999. THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers of this group include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and Rockwell Collins. The Systems Integration Group contributed approximately 21% of our pro forma revenue for the twelve months ended September 30, 1999. INDUSTRY OVERVIEW AND TRENDS We believe the following characteristics of our markets have contributed to our growth and profitability and should provide further opportunities for our success: - INCREASED DEMAND FOR NEW AIRCRAFT. - CORPORATE AIRCRAFT. The growing popularity of fractional aircraft ownership in the United States, the expansion of this program to Europe and the Far East and the increased demand for more expedient travel have significantly expanded demand for corporate aircraft. The Teal Group Corporation, an industry-recognized aerospace research group, projects delivery of 5,067 2 corporate aircraft between 1999 and 2008, representing an increase of approximately 52% over the 3,326 corporate aircraft that were delivered between 1989 and 1998. - COMMERCIAL AIRCRAFT. The 1999 CURRENT MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that between 1999 and 2008, the commercial aircraft industry will require 8,900 new commercial aircraft, and between 2009 and 2018, it will require an additional 11,250 aircraft. - REGIONAL AIRCRAFT. As part of the total projected increase for the commercial aircraft fleet, Boeing projects a compounded annual growth rate of 9.4% for the regional aircraft fleet from 1999 to 2008 due to new longer-range, state-of-the-art regional aircraft and the integration of regional carrier services with major carriers to support the "point-to-point" routing concept. - INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become increasingly dependent on new technology, passengers are demanding more advanced in-flight services. These services include in-flight passenger telecommunications systems and entertainment systems, such as video, video-on-demand and other interactive systems. In corporate aircraft for example, Honeywell's AIS-1000 OneView-TM-Airborne Information System delivers more than 40 channels of live television programming and Internet and e-mail access to the aircraft via direct broadcast satellite service providers. - SIGNIFICANT BARRIERS TO ENTRY. We believe that manufacturers' reluctance to include new companies as additional approved vendors on their engineering drawings, increasingly stringent Federal Aviation Administration requirements for aircraft manufacturing and modification, including extensive and lengthy qualification and certification programs, and the initial capital investment and tooling requirements necessary for the manufacture of aircraft components and systems all create significant barriers to entry in a number of our markets. - REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines have come under increasing pressure to reduce operating and capital costs associated with providing services. As a result, many OEM's are initiating proactive programs to reduce cycle times, decrease inventory and reduce costs. Boeing, for example, has announced that it intends to reduce its number of suppliers by 19%, from 31,000 to 25,000, by the end of 2000 and by 42% over the long term. Manufacturers can realize efficiencies by purchasing a higher number of assemblies from a smaller number of suppliers, each of whom has multiple related product capability. - NEW SAFETY MANDATES. Historically, the FAA has taken a very proactive role in promulgating new safety standards, such as collision avoidance systems, wind shear detection systems, group proximity detection systems and smoke detection and fire suppression systems. These safety mandates should provide significant retrofit opportunities for the commercial fleet, which today exceeds 12,000 aircraft. COMPETITIVE STRENGTHS We have used our strong market positions to compete more effectively, to capitalize on industry consolidation trends and to cross-sell products to our existing customer base. We believe that we are well-positioned to take advantage of the foregoing trends and expected growth in the aircraft industry as a result of the following competitive strengths: - LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of components within a number of the niche markets we serve. Our strategy has been to combine complementary businesses in markets in which we have a leading position. We believe our combination of component manufacturing and integration and installation capabilities provides us with competitive advantages. The combination of product lines we offer provides opportunities for our customers to deal with a reduced number of vendors and suppliers, to reduce the number of component parts through the purchase of sub-assemblies and to reduce cycle times, all of which help reduce costs and simplify the production process. - STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of our performance, we have enjoyed long-term relationships with leaders in our primary markets, including Boeing and Boeing Business Jet, Bombardier, Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins. We believe we have been able to develop and solidify these relationships by combining 3 production and engineering capabilities, providing engineering support services and enhancing our customers' in-house production processes. - DIVERSIFIED REVENUE BASE. We sell our products in the corporate, commercial, retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, aircraft repair and modification centers, and airlines. Each of these markets has different demand drivers and operates on different production cycles. Accordingly, our involvement in these multiple markets reduces our exposure to cyclical product demand in any one segment of the aircraft industry. Demand for new products in the commercial aircraft market, for example, is driven largely by the age of the existing commercial fleet, the growth in revenue passenger miles and industry load factors, whereas demand in the corporate aircraft market is driven largely by the growth in fractional ownership, competition from commercial airlines and the growth in the global economy. Our aftermarket sales are dependent in part upon the growing number of aircraft in the existing fleet while technology advances and safety updates help drive demand in the retrofit market. - COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we have completed seventeen acquisitions of businesses and assets. We believe that our acquisitions complement each other and create a core of interrelated products and services, which increases our cross-selling opportunities to existing and new customers. The complementary nature of our business lines should allow us to help our customers reduce their production costs. - LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations through cost reduction programs, technological development and, where appropriate, the use of vertical integration. Four of our facilities have received a quality award from Boeing, and nine of our facilities are currently certified according to the International Standards Organization specifications ISO-9001 or ISO-9002. - REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and power-plant mechanics who are authorized to perform specified aircraft modification functions provide us with a significant competitive advantage. As of December 31, 1999, our operations include one of only 31 currently active FAA Designated Alteration Stations worldwide, and we hold nine FAA domestic repair station certificates as well as numerous Parts Manufacturer Approval authorizations from the FAA. These certifications make us one of a few companies with the in-house capability to design, engineer, produce, install and certify a part, which together help reduce cycle times. GROWTH STRATEGY Our principal strategy is to establish and expand leading positions in high-margin, niche markets. We also seek to maintain a balance of revenues among the equipment manufacturer market, the retrofit market and the aftermarket. We believe that this strategy positions us for future success by: - BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with virtually every major OEM and with fractional ownership programs, such as Executive Jet. We plan to continue cross-selling our portfolio of products to our existing customer base in order to increase our dollar content per plane. For example, we originally entered the corporate aircraft market by offering cabin management systems and entertainment systems. We then expanded our product offering to include seating and in 1999, through four separate acquisitions, we added cabinetry and galley products, which we sell to OEM's. Finally, we developed pre-fabricated interior kits, cabinet-in-a-box and cabin-in-a-box, to facilitate cross-selling and further encourage OEM's to outsource their cabin engineering requirements to us. We believe these products should reduce cycle times and costs for manufacturers and increase our dollar content per plane. We currently provide cabinet-in-a-box kits to several of our customers and are in discussions with a number of corporate jet manufacturers regarding our cabin-in-a-box product. - STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen our position in niche markets by providing engineering and customer service support to our existing customer base through the integration of our engineering services with the OEM's engineering capabilities. We also plan to continue to examine new market niches and consolidate the fragmented sectors in our markets to further service our customers. We target for acquisition aircraft component manufacturers and systems integration and installation providers that meet the following criteria: - are complementary to our existing businesses; 4 - have a leading market share in their own niches; - leverage our existing strengths; - add new expertise; and/or - increase cross-selling opportunities. In analyzing a potential acquisition's value, we focus on economies of scale, product line extensions, new customer relationships, increased manufacturing capacity and opportunities for increased cost reductions. - CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of areas of synergies across and within our three business segments by making operational efficiency improvements in human resources, support, procurement and cross-selling. For example, we recently formed the Systems Integration Group to leverage the engineering capabilities of our Hollingsead subsidiary with the manufacturing and systems integration and installation capabilities of our PATS subsidiary. In addition, as part of the Systems Integration Group's strategy, we are consolidating facilities, reducing headcount and replacing relatively expensive manufacturing at Hollingsead with more economical outsourced products. This will allow Hollingsead to focus on its core engineering and systems integration competencies. We are also standardizing processes and centralizing procurement at our four recently acquired cabin furniture companies, and we continue to evaluate our operations to streamline or increase efficiencies. - EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features increases demand for many of our products and provides attractive cross-selling opportunities. For example, our newly introduced e-CABIN, an "office in the sky," provides leading-edge business and entertainment services for the corporate jet cabin and its passengers. Our e-CABIN provides each passenger with on-demand audio and video entertainment, including live television and Internet and e-mail access via Honeywell's OneView system. We will continue considering strategic partnerships with leading technology companies to keep our product offerings on the cutting edge, as we have done with Honeywell and its OneView system. RECENT DEVELOPMENTS Continuing our acquisition strategy, subsequent to September 30, 1999 we acquired: - PCI NewCo, Inc., a Kansas-based manufacturer of composite material and components for middle-and high-end corporate aircraft, on October 6, 1999; - International Custom Interiors, Inc., a Florida-based provider of upholstery services and manufacturer of furniture for middle- and high-end corporate aircraft, on October 8, 1999; and - The Infinity Partners, Ltd., a Texas-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on December 17, 1999. The historical consolidated financial data included in this prospectus does not reflect these acquisitions because they were acquired subsequent to September 30, 1999. However, all information in this prospectus presented on a pro forma basis gives effect to these acquisitions as described in "Unaudited Pro Forma Consolidated Financial Data." See "Recent Developments--Acquisitions Subsequent to September 30, 1999." In addition, in December 1999, we announced a plan to reorganize and restructure the operations of two of our subsidiaries. In conjunction with this restructuring, we expect to record a nonrecurring pre-tax charge of approximately $9.5 million in the fourth quarter of 1999, resulting in a net loss for the quarter and year ending December 31, 1999. The historical and pro forma consolidated financial data included in this prospectus does not reflect this restructuring charge. See "Recent Developments--Reorganization and Restructuring Charge." ------------------------ 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 62 and 63. Change of Control.................... You can require that we repurchase your notes, if the change of control events which are described herein occur, at 101% of the principal amount plus accrued interest. See "Risk Factors--Repurchase upon Change of Control" and "Description of Notes--Repurchase of the Option of Holders Upon Change of Control." Ranking.............................. The notes rank junior to all of our senior indebtedness and secured debt, including the debt owed under our bank credit facility. The notes rank equally with any of our future unsecured, senior subordinated debt. The terms of the indenture do not fully prohibit us or our subsidiaries from incurring substantial additional indebtedness in the future. In addition to senior debt which we might incur, we may issue an unlimited amount of additional senior subordinated notes under the indenture, so long as the total amount of debt is permitted by our financial covenants. The notes also will effectively rank junior to all liabilities of our subsidiaries that are not guarantors. See "Description of Notes--Note Guarantees." As of September 30, 1999, on a pro forma basis, DeCrane Aircraft and its subsidiary guarantors would have had approximately $216.3 million of senior indebtedness outstanding, and the non-guarantor subsidiaries would have had approximately $2.3 million of liabilities outstanding, including trade payables. Guarantors........................... The notes are fully and unconditionally guaranteed jointly and severally by all of our existing wholly-owned domestic subsidiaries. The notes are senior subordinated obligations of the guarantors, and rank junior to their senior and secured debt and equally with their future unsecured, senior subordinated debt. Covenants............................ The indenture which governs the notes includes covenants that, among other things, limit our ability, and that of our subsidiaries defined as "Restricted Subsidiaries," to: - incur debt, - issue preferred stock, - repurchase capital stock or subordinated debt, - enter into transactions with affiliates, - enter into sale and leaseback transactions, - create liens or allow them to exist, - pay dividends or other distributions,
6 - make investments, - sell assets, and - enter into mergers or consolidations. See "Description of Notes--Covenants." The Warrants; the Units.............. The old notes were originally sold as "units," paired with warrants for the common stock of DeCrane Aircraft's parent company, DeCrane Holdings. The warrants may be traded separately from the notes and are subject to a separate "shelf" registration statement. This prospectus does not cover the warrants or the shares of common stock of DeCrane Holdings to be issued pursuant to the warrants.
7 SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The summary unaudited pro forma financial data were derived from our historical financial data and give pro forma effect to the transactions described in our pro forma financial data and related notes included elsewhere in this prospectus as if they occurred on January 1, 1998. The pro forma adjustments are based upon available information and assumptions management believes are reasonable under the circumstances. The pro forma financial data do not purport to represent what our actual results of operations or actual financial position would have been if such transactions had actually occurred on such date or to project our future results of operations or financial position. The information in this table should be read in conjunction with "Recent Developments," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this prospectus.
NINE MONTHS ENDED TWELVE MONTHS YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, --------------------- SEPTEMBER 30, 1998(1) 1998(1) 1999(1) 1999(1) ------------ --------- --------- ------------- (DOLLARS IN THOUSANDS) PRO FORMA STATEMENT OF OPERATIONS DATA: Revenues.................................................. $ 268,470 $ 196,903 $ 223,326 $ 294,893 Gross profit(2)........................................... 83,595 58,337 75,431 100,689 Operating income(3)....................................... 30,706 18,542 32,980 45,144 Provision (benefit) for income taxes...................... 387 (1,513) 5,304 7,204 Income (loss) before extraordinary item................... (5,379) (6,943) 3,138 4,702 OTHER PRO FORMA FINANCIAL DATA: Cash flows from operating acitivities..................... $ $2,667 $ (3,624) $ 18,508 $ 24,799 Cash flows from investing activities...................... (237,409) (235,275) (9,100) (11,234) Cash flows from financing activities...................... 237,118 237,944 (14,440) (15,266) EBITDA(4)................................................. 57,491 39,905 49,465 67,051 EBITDA margin(5).......................................... 21.4% 20.3% 22.1% 22.7% Adjusted EBITDA(6)........................................ $ 60,684 $ 42,490 $ 49,465 $ 67,659 Adjusted EBITDA margin(7)................................. 22.6% 21.6% 22.1% 22.9% Depreciation and amortization(8).......................... $ 20,284 $ 15,066 $ 15,655 $ 20,873 Capital expenditures: Paid in cash............................................ 7,212 5,028 5,511 7,695 Financed with capital lease obligations................. 224 176 1,467 1,515 Cash interest expense..................................... 33,239 25,175 23,452 31,516 Adjusted EBITDA to cash interest expense(9)............... 1.8x 1.7x 2.1x 2.1x Ratio of earnings to fixed charges(10).................... -- -- 1.3x 1.3x OTHER OPERATING DATA: Bookings(11).............................................. $ 266,952 $ 195,385 $ 230,299 $ 301,866 Backlog at end of period(12).............................. 143,851 149,586 150,824 150,824
AS OF SEPTEMBER 30, 1999 (13) ------------- (DOLLARS IN THOUSANDS) PRO FORMA BALANCE SHEET DATA: Cash and cash equivalents................................... $ 4,530 Working capital............................................. 63,356 Total assets................................................ 492,848 Total debt (14)............................................. 316,804 Stockholder's equity........................................ 110,033
See accompanying Notes to Summary Unaudited Pro Forma Consolidated Financial Data. 8 NOTES TO SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (1) Reflects DLJ's acquisition of us and our acquisition of the following companies (on the dates indicated) as if each had occurred as of January 1, 1998:
- -Avtech (June 26, 1998); -PPI (April 23, 1999); -International Custom Interiors (October 8, 1999); and - -Dettmers (June 30, 1998); -Custom Woodwork (August 5, 1999); -Infinity (December 17, 1999). - -PATS (January 22, 1999); -PCI NewCo (October 6, 1999);
(2) Net of $6.2 million of non-cash acquisition related charges to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition and our PPI, Custom Woodwork and PCI NewCo acquisitions for the year ended December 31, 1998 and the nine months ended September 30, 1998. (3) Excludes an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (4) EBITDA equals operating income plus depreciation, amortization, parent company management fees, non-cash acquisition related charges described in Note 2 above and other acquisition related costs. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of our operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. The funds depicted by EBITDA are not available for our discretionary use due to funding requirements for working capital, capital expenditures, debt service, income taxes and other commitments and contingencies. We believe that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method, and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (5) EBITDA margin is computed by dividing EBITDA by revenues. (6) Adjusted EBITDA equals EBITDA plus the following nonrecurring charges:
NINE MONTHS YEAR ENDED TWELVE MONTHS ENDED SEPTEMBER 30, ENDED DECEMBER 31, ------------------- SEPTEMBER 30, 1998 1998 1999 1999 ------------ -------- -------- -------------- (DOLLARS IN THOUSANDS) EBITDA as described in Note 4 above.................... $57,491 $39,905 $49,465 $67,051 ------- ------- ------- ------- Adjustments for nonrecurring charges Workforce reductions................................. 2,430 1,822 -- 608 Engineering costs.................................... 350 350 -- -- Reduction of corporate expenses...................... 310 310 -- -- Non-cash stock option compensation expense........... 73 73 -- -- Expiration of employment contract of a former stockholder of a previously acquired company....... 30 30 -- -- ------- ------- ------- ------- Total adjustments.................................. 3,193 2,585 -- 608 ------- ------- ------- ------- Adjusted EBITDA........................................ $60,684 $42,490 $49,465 $67,659 ======= ======= ======= =======
(7) Adjusted EBITDA margin is computed by dividing Adjusted EBITDA by revenues. (8) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts that are classified as a component of interest expense. (9) Adjusted EBITDA to cash interest expense is computed by dividing Adjusted EBITDA by cash interest expense. (10) For purposes of calculating the ratio of earnings to fixed charges, earnings represent net income before income taxes, minority interests in the income of majority-owned subsidiaries, cumulative effect of an accounting change, extraordinary items and fixed charges. Fixed charges consist of: - interest, whether expensed or capitalized; - amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and - one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense. There were deficiencies of earnings to fixed charges of $4.9 million for the year ended December 31, 1998 and $8.4 million for the nine months ended September 30, 1998. (11) Bookings represent the total invoice value of purchase orders received during the period. (12) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled. (13 Reflects our PCI NewCo, International Custom Interiors and Infinity acquisitions as if each had occurred as of September 30, 1999. Excludes the effect of an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (14) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 9 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The following tables present a summary of our historical consolidated financial data. The data as of and for each of the two years in the period ended December 31, 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998 were derived from our audited financial statements. The data as of September 30, 1998 and 1999 and for the one month ended September 30, 1998 and the nine months ended September 30, 1999 were derived from our unaudited historical financial statements for such periods, which, in the opinion of management, reflect normal and recurring adjustments necessary to present fairly the financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The information in this table should be read in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. All dollar amounts are in thousands.
YEAR ENDED DECEMBER 31,(1) NINE MONTHS ENDED SEPTEMBER 30,(1) ---------------------------------------------------- --------------------------------------------- 1998 1998 ------------------------------ --------------------------------- EIGHT MONTHS FOUR MONTHS EIGHT MONTHS ONE MONTH ENDED ENDED ENDED ENDED AUGUST 31, DECEMBER 31, AUGUST 31, SEPTEMBER 30, 1996 1997 1998 1998 1998 1998 1999 -------- -------- ------------- -------------- ---------------- -------------- --------- (PREDECESSOR)(2) (SUCCESSOR)(2) (PREDECESSOR)(2) (SUCCESSOR)(2) STATEMENT OF OPERATIONS DATA: Revenues................... $ 65,099 $108,903 $ 90,077 $60,356 $ 90,077 $16,012 $ 177,836 Gross profit(3)............ 15,707 28,656 29,976 17,617 29,976 4,932 59,755 Operating income(4)........ 4,251 11,995 9,278 4,195 9,278 960 22,742 Interest expense........... 4,248 3,154 2,350 6,852 2,350 1,765 19,884 Provision for income taxes (benefit)(5)............. 712 3,344 2,892 (2,668) 2,892 (506) 2,669 Income (loss) before extraordinary item....... (817) 5,254 3,189 (324) 3,189 (480) 500 Extraordinary loss from debt refinancing(6)...... -- (2,078) -- (2,229) -- (296) -- Net income (loss).......... (817) 3,176 3,189 (2,553) 3,189 (776) 500 OTHER FINANCIAL DATA: Cash flows from: Operating activities..... $ 2,958 $ 4,641 $ 3,014 $ 1,008 $ 3,014 $(1,506) $ 10,222 Investing activities..... (24,016) (27,809) (87,378) (1,813) (87,378) (307) (121,431) Financing activities..... 21,051 22,957 89,871 (1,597) 89,871 358 110,929 EBITDA(7).................. 7,602 16,915 13,743 13,476 13,743 3,310 38,821 EBITDA margin(8)........... 11.7% 15.5% 15.3% 22.3% 15.3% 20.7% 21.8% Depreciation and amortization(9).......... $ 3,351 $ 4,920 $ 4,358 $ 4,604 $ 4,358 $ 1,166 $ 4,219 Capital expenditures: Paid in cash (10)........ 5,821 3,842 1,745 1,813 1,745 307 4,752 Financed with capital lease obligations...... 414 182 116 48 116 -- 1,323 Ratio of earnings to fixed charges(11).............. 1.0x 3.3x 3.0x -- 3.0x -- 1.2x OTHER OPERATING DATA: Bookings(12)............... $ 81,914 $112,082 $ 94,439 $54,021 $ 94,439 $16,890 $ 226,468 Backlog at end of period(13)............... 44,433 49,005 84,184 75,388 84,184 84,607 139,758
AS OF SEPTEMBER 30, 1999(14) BALANCE SHEET DATA: -------------- (SUCCESSOR) Cash and cash equivalents................................... $ 3,139 Working capital............................................. 59,056 Total assets................................................ 458,763 Total debt(15).............................................. 285,177 Stockholders' equity........................................ 110,033
See accompanying Notes to Summary Historical Consolidated Financial Data. 10 NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (1) Reflects the results of operations and financial position of companies acquired for all periods subsequent to their respective acquisition dates as follows: - the remaining 25% minority interest in Cory Components beginning on February 20, 1996; - Aerospace Display Systems beginning on September 18, 1996; - Elsinore Engineering beginning on December 5, 1996; - Audio International beginning on November 14, 1997; - Avtech beginning on June 26, 1998; - Dettmers beginning on June 30, 1998; - PATS beginning on January 22, 1999; - PPI beginning on April 23, 1999; and - Custom Woodwork beginning on August 5, 1999. Excludes the results of operations and financial position of PCI NewCo, International Custom Interiors and Infinity because they were acquired subsequent to September 30, 1999. (2) Reflects our results of operations and financial position prior to (predecessor) and subsequent to (successor) our acquisition by DLJ. (3) Net of non-cash charges to reflect cost of sales based on the fair value of inventory acquired as follows: - $4.4 million for the four months ended December 31, 1998 and $1.2 million for the one month ended September 30, 1998 in connection with the DLJ acquisition; and - $1.6 million for the nine months ended September 30, 1999 in connection with our PPI and Custom Woodworks acquisitions. (4) Net of $3.6 million of non-capitalizable transaction costs associated with the DLJ acquisition in August 1998. Excludes an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (5) For the four months ended December 31, 1998, includes a $2.6 million benefit from the reduction of the deferred tax valuation allowance. (6) Represents: - the write-offs, net of an income tax benefit, of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by DeCrane Aircraft with the net proceeds from its initial public offering in April 1997; and - the write-offs, net of an income tax benefit, of deferred financing costs as a result of the repayment of our then existing indebtedness in connection with the DLJ acquisition and the refinancing of the bridge notes during the four months ended December 31, 1998. (7) EBITDA equals operating income plus depreciation, amortization, parent company management fees, non-cash acquisition related charges described in Note 3 above and other acquisition related costs. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of our operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. The funds depicted by EBITDA are not available for our discretionary use due to funding requirements for working capital, capital expenditures, debt service, income taxes and other commitments and contingencies. We believe that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method, and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (8) EBITDA margin is computed by dividing EBITDA by revenues. (9) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts that are classified as a component of interest expense. (10) Includes $4.4 million for the year ended December 31, 1996 related to our acquisition of a manufacturing facility. (11) For purposes of calculating the ratio of earnings to fixed charges, earnings represent net income before income taxes, minority interests in the income of majority-owned subsidiaries, cumulative effect of an accounting change, extraordinary items and fixed charges. Fixed charges consist of: - interest, whether expensed or capitalized; - amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and - one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense. There were deficiencies of earnings to cover fixed charges for the years ended December 31, 1994 and 1995, the four months ended December 31, 1998 and the one month ended September 30, 1998 of $1.8 million, $2.3 million, $2.9 million and $1.0 million, respectively. (12) Bookings represent the total invoice value of purchase orders received during the period. (13) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled. (14) Excludes the effect of an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (15) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 11 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION AS PART OF YOUR EVALUATION OF OUR COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE OFFERED SECURITIES. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this prospectus discuss future expectations, beliefs or strategies, projections or other "forward-looking" information. These statements are subject to known and unknown risks. Many factors could cause actual company results, performance or achievements, or industry results, to be materially different from the projections expressed or implied by this prospectus. Some of those risks are specifically described below, but we are also vulnerable to a variety of elements that affect many businesses, such as: - fuel prices and general economic conditions that affect demand for aircraft and air travel, which in turn affect demand for our products and services; - changes in prevailing interest rates and the availability of financing to fund our plans for continued growth; - inflation, and other general changes in costs of goods and services; - liability and other claims asserted against us; - the ability to attract and retain qualified personnel; - labor disturbances; and - changes in operating strategy, or our acquisition and capital expenditure plans. We cannot predict any of the foregoing with certainty, so our forward-looking statements are not necessarily accurate predictions. Also, we are not obligated to update any of these statements, to reflect actual results or report later developments. You should not rely on our forward-looking statements as if they were certainties. SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL LEVELS OF DEBT COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES. We incurred significant debt as part of our acquisition by DLJ in August 1998 and in connection with companies we have acquired. As of September 30, 1999, on a pro forma basis, we would have had total consolidated indebtedness of approximately $316.8 million, and we would have had available $50.0 million of additional revolving borrowings under the DeCrane Aircraft bank credit facility. In order to borrow those funds, we will have to satisfy funding conditions of the kind usually imposed in similar agreements. The bank credit facility and the indenture under which DeCrane Aircraft's senior subordinated notes are issued each also permit us to incur significant amounts of additional debt and to secure that debt with some of our assets. The amount of debt we carry could have important consequences: - It may limit the cash flow available for general corporate purposes and acquisitions. Interest payments on our debt for the twelve months ended September 30, 1999 would have been $31.5 million on a pro forma basis. We had deficiencies of earnings to cover fixed charges for the years ended December 31, 1994 and 1995, the four months ended December 31, 1998 and the one month ended September 30, 1998 of $1.8 million, $2.3 million, $2.9 million and $1.0 million, respectively. - It may limit our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions. - It may limit our flexibility in reacting to competitive and other changes in the industry and economic conditions generally. - It may expose us to increased interest expenses, when interest rates fluctuate, because some of our borrowing may be, and in recent years most of it has been, at variable "floating" rates. - It may limit our ability to respond to changes in our markets or exploit business opportunities. 12 RESTRICTIVE COVENANTS--OUR OPERATIONS AND THOSE OF OUR SUBSIDIARIES ARE RESTRICTED BY THE TERMS OF THE NOTES AND OUR BANK CREDIT FACILITY. The indenture under which the notes were issued and our bank credit facility limit our flexibility in operating our businesses, including our ability and the ability of our subsidiaries to: - incur debt; - issue preferred stock; - repurchase capital stock or subordinated debt; - enter into transactions with affiliates; - enter into sale and leaseback transactions; - create liens or allow them to exist; - pay dividends or other distributions; - make investments; - sell assets; and - enter into mergers and consolidations. In addition, our bank credit facility requires that we satisfy several tests of financial condition. Our ability to do so can be affected by events beyond our control, and we cannot assure you that we will meet those tests. Our failure to do so could result in a default under our bank credit facility or the notes. ADDITIONAL BORROWINGS--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD INTENSIFY THE RISKS DESCRIBED ABOVE. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our debt do not fully prohibit us or our subsidiaries from doing so. In addition to senior debt which we might incur, we may issue an unlimited amount of additional senior subordinated notes under the existing indenture, so long as the total amount of debt is permitted by our financial covenants. See "Description of Notes--Incurrence of Indebtedness and Issuance of Preferred Stock." If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify. SUBORDINATION--YOUR RIGHTS UNDER THE NOTES ARE SUBORDINATED TO SUBSTANTIALLY ALL OUR EXISTING DEBT. The notes and the subsidiary guarantees are general unsecured obligations of DeCrane Aircraft and its subsidiaries which have provided note guarantees. The notes and the subsidiary guarantees rank lower in right of payment than most of the debt of those companies, including the amounts owed under the bank credit facility. The senior creditors have rights that might reduce the payments made to you as a holder of the notes. Among other things: - As of September 30, 1999, on a pro forma basis, DeCrane Aircraft and the guarantor subsidiaries would have had outstanding about $216.3 million of senior debt. We would be required to pay the applicable holders of this senior debt in full before paying the holders of the notes if DeCrane Aircraft or one of the guarantor subsidiaries, as applicable, suffers a bankruptcy filing, insolvency, liquidation or similar event, or if such senior debt is accelerated. - We are blocked from paying holders of the notes whenever there is a payment default on specified senior debt, and principal and premium payments may also be blocked for up to 179 days while there is a non-payment default on such senior debt. See "Description of Notes--Subordination" for the terms of this subordination. - The bank credit facility is secured by our key assets, excluding assets of our foreign subsidiaries. If we default under our senior debt agreements, the lenders could choose to declare all outstanding amounts immediately due and payable, and seek foreclosure of the assets we granted to them as collateral. We cannot assure you that, if our bank credit facility were accelerated, our assets would be sufficient to repay all of our debt, including the notes, in full. 13 HOLDING COMPANY--OUR ABILITY TO REPAY THE NOTES AND OUR OTHER DEBT DEPENDS ON CASH FLOW FROM OUR SUBSIDIARIES; OUR NON-GUARANTOR SUBSIDIARIES' LIABILITIES WILL BE EFFECTIVELY SENIOR TO THE NOTES. We conduct all of our operations through subsidiaries. We have no material operations or assets other than the capital stock of our operating subsidiaries. Consequently, we depend on distributions or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations. We cannot assure you that the operating results of our subsidiaries will be sufficient to enable us to make payments on the notes. Our non-guarantor subsidiaries are not obligated to make funds available to us for payment on the notes, and state law also may limit the amount of the dividends that any of our subsidiaries are permitted to pay to us. In addition, our non-guarantor subsidiaries' liabilities will be effectively senior to the notes. Our rights and the rights of our creditors, including holders of the notes, to participate in the assets of any of our non-guarantor subsidiaries upon their liquidation or recapitalization will generally be subject to the prior claims of those subsidiaries' creditors. As of September 30, 1999, on a pro forma basis, our non-guarantor subsidiaries would have had $2.3 million of outstanding liabilities, including trade payables. POTENTIAL INABILITY TO SERVICE DEBT--WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT. OUR ABILITY TO GENERATE CASH DEPENDS ON CASH FLOWS FROM OUR SUBSIDIARIES AND MANY FACTORS BEYOND OUR CONTROL. Our ability to satisfy our debt obligations, including these notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our operating cash flow will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due or that future borrowings will be available to us for such purposes. If our cash flow is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets and/or reduce operating expenses in order to make all required debt service payments. Alternatively, we may have to refinance all or a portion of our debt on or before maturity. A reduction in our operating expenses might reduce important efforts, such as selling and marketing programs, management information system upgrades and new product development. In addition, we may not be able to refinance our debt on commerciably reasonable terms or at all. On a pro forma basis, we would have had income before extraordinary item of $4.7 million for the twelve months ended September 30, 1999. However, we expect to record a pre-tax charge of approximately $9.5 million in the fourth quarter of 1999, resulting in a net loss for the year ending December 31, 1999. See "Recent Developments--Reorganization and Restructuring Change." In the past, our acquisitions resulted in increased interest and amortization expenses. As a result we incurred historical net losses in each year from our inception through 1996, despite positive operating income. The first historical net profit we reported occurred in 1997, in part because of the repayment of a significant part of our outstanding debt with the net proceeds of our initial public offering. AIRCRAFT INDUSTRY RISKS--THE AIRCRAFT INDUSTRY IS CYCLICAL AND AFFECTED BY MANY FACTORS BEYOND OUR CONTROL, INCLUDING MILITARY SPENDING TRENDS AND REGIONAL ECONOMIC INSTABILITY IN ASIA. A downturn in the aircraft market could adversely affect our business. - The principal markets for corporate aircraft manufacturers are corporations, fractional ownership programs and wealthy individuals. The corporate aircraft market is cyclical and has been adversely affected by a number of factors, including the general state of the U.S. economy, corporate profits, interest rates and commercial airline fares. A downturn in any of these factors could depress the demand for corporate aircraft. - The principal markets for manufacturers of commercial aircraft are the commercial and regional airline industries, which are cyclical and have been adversely affected by a number of factors, including increased fuel and labor costs and intense price competition. Commercial aircraft production may increase and decrease in response to changes in customer demand caused by general economic conditions. For example, new commercial aircraft deliveries declined from a peak of approximately 767 aircraft in 1991 to approximately 367 aircraft in 1995, according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by Standard and Poor's Industry Surveys, and the Boeing Company also has announced reductions in 2000 and 2001 from its 1999 delivery levels. 14 - The Asian markets are important for manufacturers of commercial aircraft and components for those aircraft. Boeing has reported a large backlog of aircraft sales to customers in Asia, and some deliveries have been deferred or canceled. Boeing has characterized the economic situation in Asia as a risk to its deliveries over the next few years. It has previously announced scheduled production slowdowns in its 747, 767 and 777 aircraft lines, among others, during 2000 and 2001. That situation could, if it continues or worsens, result in additional significant cancellations or deferrals of deliveries for new aircraft. - The military aircraft industry is dependent upon the level of equipment expenditures by the armed forces of countries throughout the world, and especially those of the United States. In recent years, this industry has been adversely affected by a number of factors, including the reduction in military spending since the end of the Cold War. Further decreases in military spending could further depress demand for military aircraft. Any decrease in demand for new aircraft will likely result in a decrease in demand for our products and services, and, correspondingly, our revenues, thereby adversely affecting our financial condition. CONCENTRATION OF KEY CUSTOMERS--WE RECEIVE A SIGNIFICANT SHARE OF OUR REVENUES FROM A SMALL GROUP OF KEY CUSTOMERS, AND WE ARE VULNERABLE TO CHANGES IN THEIR ECONOMIC CONDITION AND PURCHASING PLANS. A significant decline in business from any one of our key customers could have a material adverse effect on our business. Our three largest customers for the twelve months ended September 30, 1999 were Boeing, Textron (which includes Cessna), and Bombardier. On a pro forma basis, Boeing accounted for approximately 18.3% of our consolidated revenues for that twelve month period, Textron for approximately 14.6% and Bombardier for approximately 11.4%. Some of our customers have the in-house capabilities to perform the services and provide many of the products we offer and, accordingly, could discontinue outsourcing their business to us. In addition to the percentage of revenues directly earned from Boeing, a significant part of our revenues are earned indirectly from Boeing through sales of components to Boeing's suppliers. Most of our contracts with Boeing allow Boeing to stop purchasing or terminate the contract at any time. In addition, under some circumstances, those contracts may allow Boeing to enforce alternative economic terms, which would make the contracts less commercially favorable to us. During October 1997, Boeing announced that parts shortages adversely affected its production and delivery rates. Boeing shut down its 737 and 747 production lines for approximately one month and did not resume normal production rates until late November 1997. In late 1998, among other things, Boeing announced reductions in its previously scheduled production for the 747, 767 and 777 programs in 2000 and 2001, as described in "--Aircraft Industry Risks" above. Boeing might suffer further production schedule reductions. COMPETITION--WE COMPETE WITH LARGER COMPANIES IN A FRAGMENTED INDUSTRY. We operate in a highly competitive industry. Some of our competitors include corporate aircraft manufacturers and independent completion and modification companies, major airlines and other independent services organizations, including some of our customers, many of whom may have significantly greater financial, technological, manufacturing and marketing resources than we do. The niche markets within the aircraft industry that we serve are relatively fragmented, with several competitors offering the same products and services we provide. Due to the global nature of the aircraft industry, competition comes from both U.S. and foreign companies. See "Business--Competition" for a list of some of our competitors. GROWTH STRATEGY--OUR ACQUISITION OF OTHER COMPANIES MAY POSE CERTAIN RISKS. We consider and take advantage of selected opportunities to grow by acquiring other businesses whose operations or product lines complement our existing businesses. Our ability to implement this growth strategy will depend on finding suitable acquisition candidates at acceptable valuations and obtaining the required financing. Any acquisition we may make in the future could be subject to a number of risks, including: - our ability to integrate the operations and personnel of the acquired company; - our failure to identify liabilities of the acquired company for which we may be responsible as a successor owner or operator; - the loss of key personnel in the acquired company; and 15 - the impact on our financial position, results of operations and cash flows resulting from additional acquisition indebtedness. Our inability to adequately manage these or other risks could have an adverse effect on our business. REGULATION--THE FAA CLOSELY REGULATES MANY OF OUR OPERATIONS. IF WE FAIL TO COMPLY WITH ITS MANY STANDARDS, OR IF THOSE STANDARDS CHANGE, WE COULD LOSE INSTALLATION OR CERTIFICATION CAPABILITIES, WHICH ARE IMPORTANT TO OUR BUSINESS. The Federal Aviation Administration prescribes standards and licensing requirements for aircraft components, licenses private repair stations and issues Designated Alteration Station approvals, which give the holder the right to certify some aircraft design modifications on behalf of the FAA. Our ability to arrange for rapid government certification of the systems integration services we perform is important to our business. It depends on our continuing access to, or use of, these FAA certifications and approvals, and our employment of, or access to, FAA-certified individual engineering professionals. We cannot assure you that we will continue to have adequate access to those certifications, approvals and certified professionals. The FAA curtailed our subsidiary's use of a Designated Alteration Station certification for new projects for several months during 1997, until the facility was brought into compliance with the FAA's regulations governing FAA-certified repair stations as further described in "Business--Industry Regulation." The loss of a required license or certificate, or its unavailability, could adversely affect our operations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business. EXCESS LOSS RISKS--WE COULD SUSTAIN LOSSES IN EXCESS OF OUR INSURANCE FOR LIABILITY CLAIMS. Our business exposes us to possible claims for damages resulting from the manufacture, installation and use of our products. Many factors beyond our control could lead to such claims, such as the failure of an aircraft on which our products have been installed, the reliability and skill of the operators of such aircraft and the maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for this purpose, but we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to renew our coverage in the future at commercially reasonable rates. See "Business--Legal Proceedings." GOLD AND COPPER PRICES--A SIGNIFICANT INCREASE IN THE PRICE OF GOLD OR COPPER COULD REDUCE OUR GROSS PROFIT. A significant portion of the cost of the materials used in our contacts is comprised of the cost of gold, and to a lesser extent, the cost of copper. We cannot always recover raw material price increases by increasing our product selling prices. Accordingly, a significant increase in the price of gold or copper could adversely affect our results of operations. We have not purchased commodities contracts for gold or copper and do not anticipate doing so. ENVIRONMENTAL RISKS AND REGULATION--SOME OF OUR OPERATIONS AND FACILITIES GENERATE WASTE OR HAVE DONE SO IN THE PAST, WHICH MAY RESULT IN UNKNOWN FUTURE LIABILITIES FOR ENVIRONMENTAL REMEDIATION. Federal and state laws, particularly the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances and other parties who have some relationship to a site or a source of waste. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received requests for information or allegations of potential responsibility from the U.S. Environmental Protection Agency regarding our use of several of these sites. Given the potentially retroactive nature of environmental liability, it is possible that we will receive additional notices of potential liability relating to current or former activities. We may incur costs in the future for prior waste disposal by us or former owners of our subsidiaries or our facilities. Some of our operations are located on properties which are contaminated to varying degrees. In addition, some of our manufacturing processes create wastewater which requires chemical treatment, and one of our facilities has been cited for excessive quantity and strength of its wastewater. We may incur costs in the future to address existing or future contamination. If we incur significant costs in connection with these or other environmental issues, our business and financial condition could be adversely affected. 16 REPURCHASE UPON CHANGE OF CONTROL--WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FUND A CHANGE OF CONTROL OFFER IF IT IS REQUIRED BY THE INDENTURE. If we experience a change of control of the types described in "Description of Notes--Repurchase at the Option of Holders," you will have the right to require us to repurchase all or any part of your notes at an offer price in cash equal to 101% of their aggregate principal amount, plus accrued interest to the date of repurchase. We cannot assure you that we will have sufficient resources to satisfy our repurchase obligation to every note holder following a change of control. Our bank credit facility prohibits us from purchasing the notes, and makes change of control events a default. The terms of any other future senior debt may contain similar restrictions. If a change of control occurs while any senior debt prohibits us from purchasing the notes, we could seek the consent of the senior lenders to the purchase, or attempt to refinance the debt which prohibits it. However, we can not assure you that those attempts would be successful. If they are not, we would still be prohibited from repurchasing the notes. Our failure to do so would result in a default under the indenture, which could also result in a default in the senior debt, and therefore block any payments to you under the "blocking" covenants described in "--Subordination." CONTROL BY PRINCIPAL SHAREHOLDERS--WE ARE CONTROLLED BY PRINCIPAL SHAREHOLDERS WHO ARE AFFILIATED WITH OUR LENDERS AND MAY HAVE ECONOMIC INTERESTS WHICH DIFFER OR CONFLICT WITH YOURS. DeCrane Aircraft is wholly owned by DeCrane Holdings, and a significant amount of the outstanding shares of common stock of DeCrane Holdings are held by DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. Those DLJ affiliates own approximately 83.7% of the common stock of DeCrane Holdings, on a fully diluted basis assuming exercise of all outstanding warrants and options. As a result of their stock ownership, the DLJ affiliates control DeCrane Holdings and DeCrane Aircraft and have the power to approve all matters requiring approval of the common stockholders, including electing all of their directors, appointing new management, and approving sales of all or substantially all of the assets of the companies. The directors elected by the DLJ affiliates will have the ability to control decisions affecting our capital structure, including issuing additional capital stock, establishing stock purchase programs and declaring dividends. DLJ Capital Funding, Inc., which is an agent and lender under our bank credit facility, DLJ Bridge Finance, Inc., which purchased the original bridge notes refinanced by the old notes, and Donaldson, Lufkin & Jenrette Securities Corporation, which was the initial purchaser of the old notes, are also DLJ affiliates, but they do not own any equity securities of DeCrane Aircraft or DeCrane Holdings. The interests of the principal shareholders could conflict with your interests as a holder of the notes. For example, those shareholders may have an interest in pursuing transactions that they believe enhance the value of their equity investment in DeCrane Aircraft or DeCrane Holdings, even though the transactions involve risks to your investment in the notes. FRAUDULENT TRANSFERS--FEDERAL AND STATE "FRAUDULENT TRANSFER" STATUTES ALLOW COURTS TO ORDER NOTEHOLDERS TO RETURN PAYMENTS ALREADY MADE, OR VOID GUARANTEES, IF THE ISSUER'S OR GUARANTOR'S FINANCIAL CONDITION MEETS SPECIFIC TESTS. Your rights to repayment of the notes, and to retain amounts already paid under the notes, could be affected by the application of federal or state "fraudulent transfer" laws. These statutes permit obligations to be undone or rescinded if tests having to do with the obligation, the person's intent and the person's financial condition are satisfied. Our repayment obligations to you under the notes could be impaired by those laws if a court determined that, when we issued or exchanged the notes, or, in some states, when payments become due on the notes, we either: - had the actual intent to hinder, delay or defraud current or future creditors, or - received less than fair consideration or reasonably equivalent value for incurring the debt represented by the notes, AND we either: - were insolvent or were rendered insolvent by reason of the incurrence, or - were engaged, or about to engage, in a business or transaction for which our remaining unencumbered assets were unreasonably small, or - intended to incur, or believed or should have believed we would incur, debts beyond our ability to pay as such debts mature. 17 Based on such a finding, a court could void all or a portion of our obligations to you, subordinate your right to repayment to our other existing and future senior debt, in which case those other creditors would be paid in full before any payment could be made on the notes, and take other action detrimental to your rights, including invalidating the notes. A court would likely find that we received less than fair consideration or reasonably equivalent value for our obligations under the notes to the extent that we used the proceeds from the original issuance of the notes for the acquisition of DeCrane Aircraft by DLJ Merchant Banking. We cannot assure you that, if that occurred, you would ever recover any repayment on your notes. In addition, the obligations of our subsidiary guarantors under their subsidiary guarantees may be subject to review under the same laws. In that event, if a court were to find that when a subsidiary guarantor issued its subsidiary guarantee (or, in some jurisdictions, when it became obligated to make payments thereunder), the factors set forth above applied to that subsidiary guarantor, a court could avoid the subsidiary guarantee and the subsidiary guarantor's obligations thereunder and direct the return of any amount paid to you pursuant to that subsidiary guarantee. A court would likely find that a subsidiary guarantor received less than fair consideration or reasonably equivalent value for its obligations under the subsidiary guarantee to the extent that it did not receive direct or indirect benefit from the issuance of the notes. If a court were to avoid a subsidiary guarantee of any subsidiary guarantor, holders of notes would retain their rights against us and the other subsidiary guarantors, although those entities' assets may be insufficient to pay the notes in full. The definition of insolvency used in the foregoing tests varies among jurisdictions, depending upon the court and the law that is being applied. A given court might apply different standards in determining whether we were insolvent on a particular date, or regarding other grounds that might lead it to take the actions noted above. Generally, however, an entity would be considered insolvent if: - the sum of its debts, including contingent and unliquidated liabilities, were greater than the fair saleable value of all of its assets; or - the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent and unliquidated liabilities, as they become absolute and mature. INDUSTRY AND MARKET DATA--WE CANNOT GUARANTEE THE ACCURACY AND COMPLETENESS OF THE INDUSTRY AND MARKET DATA INCLUDED IN THIS PROSPECTUS. Industry and market data used throughout this prospectus is based on the good faith estimates of our management, which estimates are based primarily upon internal management information and, to the extent available, independent industry publications and other publicly available information. However, the nature of the aircraft industry and competition in our markets results in limited availability of reliable, independent data. Although we believe that the sources we have used are reliable, we do not guarantee, and have not independently verified, the accuracy and completeness of the information. TRADING MARKET FOR THE NOTES--WE CANNOT ASSURE YOU THAT A MARKET FOR THE NOTES WILL CONTINUE. We cannot assure you about your ability to sell the notes or the price at which you may be able to sell them. The notes may trade at prices that may be higher or lower, and have recently traded at prices lower than their initial offering price. The trading price depends on many factors, including prevailing interest rates, our operating results and the market for similar securities. DLJ Securities Corporation currently makes a market in the notes. However, DLJ Securities Corporation is not obligated to do so and it may discontinue or interrupt any such market-making at any time without notice. Because DLJ Securities Corporation may be deemed to be our "affiliate" (as defined in the Securities Act), we maintain a registration statement that allows DLJ to engage in market-making transactions in the notes and DLJ delivers a prospectus in connection with its market-marking activities. If at any time the market-making prospectus is not in compliance with the disclosure obligations of the Securities Act, DLJ Securities Corporation may be unable to engage in market-making activities until the prospectus is brought into compliance. There are no other market-makers in the notes. DEPENDENCE ON KEY PERSONNEL--WE NEED TO RETAIN THE SERVICES OF OUR KEY EMPLOYEES. Our success and growth depends in large part on the skills and efforts of our management team and on our ability to attract and retain qualified personnel experienced in the various operations of our business. The loss of key personnel, including our founder, R. Jack DeCrane, combined with the failure to attract 18 additional qualified personnel for whatever reason, could delay implementation of our business plan or otherwise adversely affect our operations. We do not carry key man life insurance on any members of our management team. YEAR 2000--SOME OF THE ADMINISTRATIVE AND MANUFACTURING SYSTEMS ON WHICH WE RELY MAY NOT OPERATE CORRECTLY DUE TO THE DATE CHANGES THAT OCCURRED ON OR AROUND JANUARY 1, 2000. Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results when dealing with dates later than December 31, 1999. This "Year 2000" issue is believed to affect virtually all companies and organizations, including DeCrane Aircraft. We are dependent in part on computer- and date-controlled systems for some internal functions, particularly inventory control, purchasing, customer billing and payroll. Similarly, suppliers of components and services on which we rely, and our customers, may have Year 2000 compliance risks which would affect their operations and their transactions with us. Other parties with whom we have commercial relationships rely heavily on computer-based technology. Any problems related to these or other Year 2000 issues could adversely affect our business. As of the date of this prospectus, the January 1, 2000 date has passed and we are not aware of any significant internal-, customer- or vendor-related Year 2000 issues or computer-related failures. However, as of this date we have not performed all of the month-, quarter- and year-end update and closing procedures for our computer and date-controlled systems. We cannot assure you that our efforts to address Year 2000 issues were fully effective, or that Year 2000 issues will not have a material adverse effect on our business, financial condition or results of operations. 19 RECENT DEVELOPMENTS ACQUISITIONS SUBSEQUENT TO SEPTEMBER 30, 1999 Continuing our acquisition strategy, subsequent to September 30, 1999 we acquired: - substantially all of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of composite material and components for middle- and high-end corporate aircraft, on October 6, 1999; - all of the common stock of International Custom Interiors, Inc., a Florida-based provider of upholstery services and manufacturer of furniture for middle- and high-end corporate aircraft, on October 8, 1999; and - substantially all of the assets of The Infinity Partners, LLC, a Texas-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on December 17, 1999. The total purchase price was $29.6 million, plus contingent consideration totaling a maximum of $29.7 million payable over five years based on future attainment of defined performance criteria. Our historical consolidated financial statements for periods after September 30, 1999 will reflect the financial position and results of operations of the companies acquired for periods subsequent to their respective acquisition dates. The acquisitions were funded with borrowings under our senior credit facility. For additional information on these acquisitions, see our unaudited financial statements included elsewhere in this prospectus. REORGANIZATION AND RESTRUCTURING CHARGE In December 1999, we announced a plan to reorganize and restructure the operations of two of our subsidiaries, Hollingsead and Elsinore Engineering. In conjunction with this restructuring, we expect to record a nonrecurring pre-tax charge of approximately $9.5 million in the fourth quarter of 1999, resulting in a net loss for the quarter and year ending December 31, 1999. The historical and pro forma consolidated financial data included in this prospectus does not reflect this restructuring charge. For additional information, see our unaudited financial statements included elsewhere in this prospectus. 20 USE OF PROCEEDS This prospectus is delivered in connection with the sale of the notes by DLJ Securities Corporation in market-making transactions. We have not received and will not receive any of the proceeds from such transactions. CAPITALIZATION The following table sets forth our consolidated cash and cash equivalents and total capitalization as of September 30, 1999 on a historical and pro forma basis. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our "Unaudited Pro Forma Consolidated Financial Statements" and related notes, and our consolidated financial statements and related notes included elsewhere in the prospectus.
AS OF SEPTEMBER 30, 1999 ----------------------- ACTUAL PRO FORMA(1) -------- ------------ (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 3,139 $ 4,530 ======== ======== Total debt: Bank credit facility: Term facility........................................... $169,050 $214,050 Revolving credit facility............................... 13,500 -- Senior Subordinated Notes due 2008........................ 100,000 100,000 Other debt................................................ 2,627 2,754 -------- -------- Total debt.................................................. 285,177 316,804 Stockholder's equity........................................ 110,033 110,033 -------- -------- Total capitalization........................................ $395,210 $426,837 ======== ========
- ------------------------ (1) Pro forma reflects the additional borrowings required to fund the PCI NewCo, International Custom Interiors and Infinity acquisitions. 21 SELECTED CONSOLIDATED FINANCIAL DATA The following tables present our selected historical consolidated financial data. The data as of and for each of the four years in the period ended December 31, 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998 were derived from our audited financial statements. The data as of September 30, 1998 and 1999 and for the one month ended September 30, 1998 and the nine months ended September 30, 1999 were derived from our unaudited historical financial statements for such periods, which, in the opinion of management, reflect normal and recurring adjustments necessary to present fairly the financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. All dollar amounts are in thousands.
YEAR ENDED DECEMBER 31,(1) --------------------------------------------------------------------------- 1998 ------------------------------- EIGHT MONTHS FOUR MONTHS ENDED ENDED AUGUST 31, DECEMBER 31, 1994 1995 1996 1997 1998 1998 -------- -------- -------- -------- ------------- -------------- (PREDECESSOR)(2) (SUCCESSOR)(2) STATEMENT OF OPERATIONS DATA: Revenues. $ 47,092 90,077,83$ $ 6516,012 $1$8177,836$ 90,077 $ 60,356 Cost of sales(3)..................... 36,407 43,463 49,392 80,247 60,101 42,739 ------- ------- ------- -------- ------- ------- Gross profit......................... 10,685 12,376 15,707 28,656 29,976 17,617 Selling, general and administrative expenses........................... 7,716 9,426 10,747 15,756 15,719 10,274 Nonrecurring charges(4).............. -- -- -- -- 3,632 -- Amortization of intangible assets.... 1,209 1,115 709 905 1,347 3,148 ------- ------- ------- -------- ------- ------- Operating income..................... 1,760 1,835 4,251 11,995 9,278 4,195 Interest expense..................... 3,244 3,821 4,248 3,154 2,350 6,852 Terminated debt offering expenses.... -- -- -- -- 600 -- Other expenses, net.................. 332 382 108 243 247 335 ------- ------- ------- -------- ------- ------- Income (loss) before provision for income taxes and extraordinary item................. (1,816) (2,368) (105) 8,598 6,081 (2,992) Provision for income taxes (benefit)(5)....................... 613 1,078 712 3,344 2,892 (2,668) ------- ------- ------- -------- ------- ------- Income (loss) before extraordinary item............................... (2,429) (3,446) (817) 5,254 3,189 (324) Extraordinary loss from debt refinancing(6)..................... (264) -- -- (2,078) -- (2,229) ------- ------- ------- -------- ------- ------- Net income (loss).................... $(2,693) $(3,446) $ (817) $ 3,176 $ 3,189 $(2,553) ======= ======= ======= ======== ======= ======= OTHER FINANCIAL DATA: Cash flows from operating activities......................... $(2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,014 $ 1,008 Cash flows from investing activities......................... (993) (1,462) (24,016) (27,809) (87,378) (1,813) Cash flows from financing activities......................... 3,028 41 21,051 22,957 89,871 (1,597) EBITDA(7)............................ 5,196 5,471 7,602 16,915 13,743 13,476 EBITDA margin(8)..................... 11.0% 9.8% 11.7% 15.5% 15.3% 22.3% Depreciation and amortization(9)..... $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604 Capital expenditures: Paid in cash(10) 1,016 1,203 5,821 3,842 1,745 1,813 Financed with capital lease obligations...................... 276 33 414 182 116 48 Ratio of earnings to fixed charges(11)........................ -- -- 1.0x 3.3x 3.0x -- OTHER OPERATING DATA: Bookings(12)......................... $47,896 $50,785 $81,914 $112,082 $94,439 $54,021 Backlog at end of period(13)......... 24,493 19,761 44,433 49,005 84,184 75,388 (PREDECESSOR)(2) (SUCCESSOR)(2) Cost of sales(3)..................... 60,101 11,080 118,081 -------- ------- --------- Gross profit......................... 29,976 4,932 59,755 Selling, general and administrative expenses........................... 15,719 3,170 27,507 Nonrecurring charges(4).............. 3,632 -- -- Amortization of intangible assets.... 1,347 802 9,506 -------- ------- --------- Operating income..................... 9,278 960 22,742 Interest expense..................... 2,350 1,765 19,884 Terminated debt offering expenses.... 600 -- -- Other expenses, net.................. 247 181 (311) -------- ------- --------- Income (loss) before provision for income taxes and extraordinary item................. 6,081 (986) 3,169 Provision for income taxes (benefit)(5)....................... 2,892 (506) 2,669 -------- ------- --------- Income (loss) before extraordinary item............................... 3,189 (480) 500 Extraordinary loss from debt refinancing(6)..................... -- (296) -- -------- ------- --------- Net income (loss).................... $ 3,189 $ (776) $ 500 ======== ======= ========= OTHER FINANCIAL DATA: Cash flows from operating activities......................... $ 3,014 $(1,506) $ 10,222 Cash flows from investing activities......................... (87,378) (307) (121,431) Cash flows from financing activities......................... 89,871 358 110,929 EBITDA(7)............................ 13,743 3,310 38,821 EBITDA margin(8)..................... 15.3% 20.7% 21.8% Depreciation and amortization(9)..... $ 4,358 $ 1,166 $ 4,219 Capital expenditures: Paid in cash(10) 1,745 307 4,752 Financed with capital lease obligations...................... 116 -- 1,323 Ratio of earnings to fixed charges(11)........................ 3.0x -- 1.2x OTHER OPERATING DATA: Bookings(12)......................... $ 94,439 $16,890 $ 226,468 Backlog at end of period(13)......... 84,184 84,607 139,758
AS OF AS OF DECEMBER 31,(1) SEPTEMBER 30,(1) --------------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999(14) -------- -------- -------- ---- ---- ---- -------- (PREDECESSOR)(2) (SUCCESSOR)(2) (SUCCESSOR)(2) BALANCE SHEET DATA: Cash and cash equivalents. $ 236 $ 305 $ 320 $ 206 $ 3,518 $ 4,267 $ 3,139 Working capital................................ 11,459 12,583 10,486 24,772 46,033 46,683 59,056 Total assets................................... 37,685 36,329 69,266 99,137 330,927 333,300 458,763 Total debt(15)................................. 23,874 24,672 42,250 38,838 186,765 184,893 285,177 Mandatorily redeemable preferred stock and common stock warrants........................ 2,329 1,633 6,879 -- -- -- -- Stockholders' equity (deficit)................. 766 (1,697) 1,236 39,527 97,921 98,362 110,033
See accompanying Notes to Selected Consolidated Financial Data. 22 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Reflects the results of operations and financial position of companies acquired for all periods subsequent to their respective acquisition dates as follows: - the remaining 25% minority interest in Cory Components beginning on February 20, 1996; - Aerospace Display Systems beginning on September 18, 1996; - Elsinore Engineering beginning on December 5, 1996; - Audio International beginning on November 14, 1997; - Avtech beginning on June 26, 1998; - Dettmers beginning on June 30, 1998; - PATS beginning on January 22, 1999; - PPI beginning on April 23, 1999; and - Custom Woodwork beginning on August 5, 1999. Excludes the results of operations and financial position of PCI NewCo, International Custom Interiors and Infinity because they were acquired subsequent to September 30, 1999. (2) Reflects our results of operations and financial position prior to (predecessor) and subsequent to (successor) our acquisition by DLJ. (3) Includes non-cash charges to reflect cost of sales based on the fair value of inventory acquired as follows: - $4.4 million for the four months ended December 31, 1998 and $1.2 million for the one month ended September 30, 1998 in connection with the DLJ acquisition; and - $1.6 million for the nine months ended September 30, 1999 in connection with our PPI and Custom Woodworks acquisitions. (4) Reflects $3.6 million of non-capitalizable transaction costs associated with the DLJ acquisition in August 1998. Excludes an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (5) Prior to the acquisition of the remaining 25% minority interest in Cory Components in 1996, DeCrane Aircraft did not consolidate the earnings of Cory Components for tax purposes. As such, despite a consolidated pre-tax loss in each of the years, DeCrane Aircraft recorded a provision for income taxes from 1993 up to the date of the acquisition in 1996 which primarily relates to Cory Components. For the four months ended December 31, 1998, includes a $2.6 million benefit from the reduction of the deferred tax valuation allowance. (6) Represents: - the write-offs of unamortized deferred financing costs, unamortized original issue discounts and a prepayment penalty incurred as a result of the refinancing by DeCrane Aircraft of a substantial portion of our debt in November 1994; - the write-offs, net of an income tax benefit, of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by DeCrane Aircraft with the net proceeds from its initial public offering in April 1997; and - the write-offs, net of an income tax benefit, of deferred financing costs as a result of the repayment of our then existing indebtedness in connection with the DLJ acquisition and the refinancing of the bridge notes during the four months ended December 31, 1998. (7) EBITDA equals operating income plus depreciation, amortization, parent company management fees, non-cash acquisition related charges described in Note 3 above and other acquisition related costs. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of our operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. The funds depicted by EBITDA are not available for our discretionary use due to funding requirements for working capital, capital expenditures, debt service, income taxes and other commitments and contingencies. We believe that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method, and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (8) EBITDA margin is computed by dividing EBITDA by revenues. (9) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts that are classified as a component of interest expense. (10) Includes $4.4 million for the year ended December 31, 1996 related to our acquisition of a manufacturing facility. (11) For purposes of calculating the ratio of earnings to fixed charges, earnings represent net income before income taxes, minority interests in the income of majority-owned subsidiaries, cumulative effect of an accounting change, extraordinary items and fixed charges. Fixed charges consist of: - interest, whether expensed or capitalized; - amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and - one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense. There were deficiencies of earnings to cover fixed charges for the years ended December 31, 1994 and 1995, the four months ended December 31, 1998 and the one month ended September 30, 1998 of $1.8 million, $2.3 million, $2.9 million and $1.0 million, respectively. (12) Bookings represent the total invoice value of purchase orders received during the period. (13) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled. (14) Excludes the effect of an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (15) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Our financial position and results of operations have been affected by our history of acquisitions. Since our formation in 1989, we have completed seventeen acquisitions of businesses or assets. As a result, our historical financial statements do not reflect the financial position and results of operations of our current businesses. Our most recent acquisitions, which affect the comparability of the historical financial statements included herein, consist of: - the remaining 25% minority interest in Cory Components, acquired on February 20, 1996; - Aerospace Display Systems, acquired on September 18, 1996; - Elsinore Engineering, acquired on December 5, 1996; - Audio International, acquired on November 14, 1997; - Avtech, acquired on June 26, 1998; - Dettmers, acquired on June 30, 1998; - PATS, acquired on January 22, 1999; - PPI, acquired on April 23, 1999; and - Custom Woodwork on August 5, 1999. Our historical financial statements included in this prospectus reflect the financial position and results of operations of the acquired businesses subsequent to their respective acquisition dates. Additionally, our capital structure was significantly altered in August 1998 by the financing obtained to fund the tender offer for our stock in conjunction with our acquisition by DLJ. In October 1999, we acquired PCI NewCo and International Custom Interiors and in December 1999 we acquired Infinity. Our historical financial statements do not reflect these acquisitions because they were acquired subsequent to September 30, 1999. THE DLJ ACQUISITION AND FINANCING In August 1998, DeCrane Holdings and its two subsidiaries, an acquisition subsidiary and a financing subsidiary, completed a successful $186.3 million cash tender offer for all of the shares of DeCrane Aircraft. DeCrane Holdings was organized by DLJ Merchant Banking II, L.P. and several of its affiliates. The funds for the tender offer and the refinancing of DeCrane Aircraft's existing debt were obtained from the sale of equity by DeCrane Holdings and the issuance of debt by its finance subsidiary. DeCrane Holdings received an initial capital contribution of approximately $99.0 million from the sale of its preferred and common stock and warrants to DLJ Merchant Banking. DeCrane Holdings used these funds to capitalize its finance subsidiary. The finance subsidiary then entered into a $130.0 million syndicated bank credit facility with a group of lenders led by DLJ Capital Funding, Inc. and issued $100.0 million of senior subordinated increasing rate bridge notes to DLJ Bridge Finance Inc. The finance subsidiary capitalized the acquisition subsidiary with the funds necessary to complete the tender offer. Upon completion of the tender offer, the acquisition and finance subsidiaries were merged into DeCrane Aircraft, and DeCrane Aircraft's existing debt was repaid. As a result of the mergers, DeCrane Aircraft became a wholly-owned subsidiary of DeCrane Holdings, and the bank credit facility and bridge notes became obligations of DeCrane Aircraft. In October 1998, DeCrane Aircraft refinanced the bridge notes with the proceeds from the sale of the old notes issued under the indenture described in this prospectus. The gross purchase price for DeCrane Aircraft's shares and options was $186.3 million. Assets acquired and liabilities assumed have been recorded at their estimated fair values based on an independent appraisal. The purchase price was allocated to the assets acquired based on the estimated fair values of $4.4 million for inventory, $2.6 million for fixed assets, and $50.0 million for identifiable intangible assets. The excess of the 24 purchase price over the fair value of the net assets acquired totalling $70.0 million was allocated to goodwill. The increase in inventory value was expensed as the inventory was sold during the four months ended December 31, 1998. The intangible assets, other than goodwill, are being amortized on a straight-line basis over periods between five and fifteen years. Goodwill is being amortized on a straight-line basis over a period of thirty years. In connection with the DLJ acquisition, DeCrane Holdings raised approximately $99.0 million through its sale of common stock, preferred stock, and warrants. The proceeds of those sales were contributed to the paid-in capital of DeCrane Aircraft. The DeCrane Holdings preferred stock provides for cumulative dividends that do not require payment in cash through 2003, but will be payable in cash thereafter and will be mandatorily redeemable in 2009. The DeCrane Holdings preferred stock is exchangeable into debentures that will contain customary covenants and events of default, including covenants that limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay dividends and acquire or make equity investments in other companies. INDUSTRY OUTLOOK AND TRENDS We sell our products to the corporate, commercial, retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related electronic equipment, aircraft repair and modification centers and commercial airlines. The Teal Group Corporation, an industry-recognized aerospace research group, projects delivery of 5,067 corporate aircraft between 1999 and 2008, representing an increase of approximately 52% over the 3,326 corporate aircraft that were delivered between 1989 and 1998. Similarly, the 1999 CURRENT MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that the world jetliner fleet will grow from 12,600 aircraft at the end of 1998 to 19,100 aircraft by 2008, and to 28,400 aircraft by 2018. The Boeing report also projects that, between 1999 and 2008, the commercial aircraft industry will require 8,900 new commercial aircraft, and between 2009 and 2018, it will require an additional 11,250 new aircraft, both to support the projected world fleet expansion and to replace capacity lost as aircraft are removed from commercial airline service. Boeing has, however, announced production cutbacks in several of its lines for 2000 and 2001. Our sales to Boeing, our largest customer, have decreased due to a number of factors at the manufacturer and the overall commercial aircraft industry. For example, Boeing deliveries of its 747, 767 and 777 airplanes have declined due to the recent financial difficulties of many Asian carriers. We believe that over the next two years, Boeing's commercial aircraft deliveries will stabilize at about 490 aircraft, a decline from the record level of 620 aircraft in 1999. As a result, we expect short-term demand for our commercial aircraft products to be lower than in previous years, with recovery in the longer term. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) AND THE ONE MONTH ENDED SEPTEMBER 31, 1998 (SUCCESSOR). REVENUES. Revenues increased $71.7 million, or 67.6%, to $177.8 million for the nine months ended September 30, 1999 from $106.1 million for the nine months ended September 30, 1998. Revenues increased due to: - the inclusion of $76.9 million of revenues resulting from the Avtech, Dettmers, PATS, PPI and Custom Woodwork acquisitions; and - a $6.7 million increase in entertainment and cabin management product revenues. The increases were offset by: - a $8.7 million decrease in revenues due to weak demand for our commercial aircraft products; and - a $3.2 million net decrease in revenues from our other products and services. GROSS PROFIT. Gross profit increased $24.9 million, or 71.3%, to $59.8 million for the nine months ended September 30, 1999. Gross profit as a percent of revenues increased to 33.6% for the nine months ended September 30, 1999 from 32.9% for the same period last year. Factors contributing to the gross profit increase were: - a contribution of $29.1 million from the acquired companies; 25 - a $3.5 million increase due to higher entertainment and cabin management products revenues; and - a $1.2 million increase resulting from the portion of the DLJ acquisition purchase price allocated to inventory and charged to operations as the inventory was sold during the one month ended September 30, 1998. Offsetting the above favorable factors were: - a $2.8 million decrease due to lower commercial aircraft product revenues; - a $2.5 million decrease due to lower margins resulting from fixed overhead costs absorbed over a lower revenue base; - a $1.6 million charge for the portions of PPI and Custom Woodwork acquisition purchase prices allocated to inventory and charged to operations as the inventory was sold during the nine months ended September 30, 1999; and - a $2.0 million decrease related to other products and services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $8.6 million, or 45.5%, to $27.5 million for the nine months ended September 30, 1999, from $18.9 million for the same period last year. SG&A expenses as a percent of revenues decreased to 15.5% for the nine months ended September 30, 1999 compared to 17.8% for the same period last year. SG&A expenses increased as a result of: - a $8.0 million increase from the inclusion of expenses from acquired companies; and - a $0.6 million increase in expenses at our other companies. OPERATING INCOME. Operating income increased $12.5 million to $22.7 million for the nine months ended September 30, 1999, from $10.2 million for the same period last year. Operating income as a percent of revenues increased to 12.8% for the nine months ended September 30, 1999, from 9.6% for the same period last year. Operating income increased due to: - the inclusion of $21.0 million from the acquired companies; - a $3.6 million charge recorded in 1998 for nonrecurring tender offer expenses; - a $2.6 million increase related to entertainment and cabin management products; and - a $1.2 million charge resulting from the portion of the DLJ acquisition purchase price allocated to inventory and charged to operations as the inventory was sold during the one month ended September 30, 1998. The increases were offset by: - higher amortization expenses of $7.4 million associated with the DLJ acquisition and the PATS, PPI and Custom Woodwork acquisitions; and - a $5.5 million reduction resulting from weakened demand for our commercial aircraft products; - a $1.6 million charge for the portions of the PPI and Custom Woodwork acquisition purchase prices allocated to inventory and charged to operations as the inventory was sold during the nine months ended September 30, 1999; and - a $1.4 million decrease related to other products and services. INTEREST EXPENSE. Interest expense increased $15.8 million to $19.9 million for the nine months ended September 30, 1999, from $4.1 million for the same period last year. Higher debt levels resulting from the tender offer and the Avtech, Dettmers, PATS, PPI, and Custom Woodwork acquisitions caused the increase. PROVISION FOR INCOME TAXES. The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of higher goodwill amortization. NET INCOME. Net income decreased $1.9 million, to $0.5 million for the nine months ended September 30, 1999 compared to $2.4 million for the same period in 1998. 26 BOOKINGS AND BACKLOG. Bookings increased $115.1 million, or 103.4%, to $226.4 million for the nine months ended September 30, 1999 compared to $111.3 million for the same period in 1998. An increase in bookings of $132.5 million attributable to companies acquired was offset by decreases of $15.3 million for commercial aircraft products and $2.1 million for our other products and services. Backlog increased $64.4 million, or 85.4%, to $139.8 million as of September 30, 1999 compared to $75.4 million as of December 31, 1998. A $71.0 million increase in backlog attributable to companies acquired was offset by decreases of $5.7 million for commercial aircraft products and $0.9 million for our other products and services. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999 COMPANIES ACQUIRED. We acquired PCI NewCo, International Custom Interiors and Infinity for a total purchase price of $29.6 million, plus contingent consideration totaling a maximum of $29.7 million payable over five years based on future attainment of defined performance criteria. The acquisitions were funded with borrowings under our senior credit facility. REORGANIZATION AND RESTRUCTURING CHARGE. In December 1999, we announced a plan to reorganize and restructure the operations of two of our subsidiaries, Hollingsead and Elsinore Engineering. In conjunction with this restructuring, we expect to record a nonrecurring pre-tax charge of approximately $9.5 million in the fourth quarter of 1999, resulting in a net loss for the quarter and year ending December 31, 1999. MANAGEMENT STOCK PURCHASE. In December 1999, our management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash at closing and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. STOCK OPTION PLAN. The DeCrane Holdings qualified management incentive stock option plan provides for the granting of options, to employees of DeCrane Aircraft and its subsidiaries, to purchase 356,257 common shares of DeCrane Holdings and expires in 2009. The options generally vest based upon future attainment of defined performance criteria, although alternate vesting schedules may be authorized. In December 1999, options to purchase 279,662 shares at $23.00 per share were granted, of which options to purchase approximately 28,000 shares immediately vested. DeCrane Holdings believes the per share exercise price of the options granted approximated the fair market value of the underlying common stock on the grant date. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR). REVENUES. Revenues increased $41.6 million, or 38.2%, to $150.5 million for the year ended December 31, 1998 from $108.9 million for the year ended December 31, 1997. Revenues increased primarily due to the inclusion of: - $20.2 million of revenues from Audio International, which was acquired on November 14, 1997; - $25.2 million of revenues from Avtech, which was acquired on June 26, 1998; and - $3.3 million of revenues from Dettmers, which was acquired on June 30, 1998. These revenue increases were somewhat offset by continued softness in the electrical contact markets, where we experienced a sales decline of approximately $8.6 million for the year ended December 31, 1998 compared with the same period last year. GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to $47.6 million for the year ended December 31, 1998 from $28.7 million for the year ended December 31, 1997. Gross profit as a percent of revenues increased to 31.6% for the year ended December 31, 1998 from 26.3% for the year ended December 31, 1997. Factors contributing to the gross profit increase were: - $12.4 million from an overall increase in sales volume, primarily a result of the November 1997 Audio International and June 1998 Avtech and Dettmers acquisitions; - $10.3 million due to the higher overall gross margins of the acquired companies; and - $1.8 million due to overall margin improvements at existing companies. 27 The increase was offset by: - a $1.2 million decrease due to a decline in electrical contact revenues; and - a $4.4 million charge for the portion of the DLJ acquisition purchase price allocated to inventory and expensed as the inventory was sold during the four months ended December 31, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for the year ended December 31, 1998 from $15.8 million for the year ended December 31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for the year ended December 31, 1998 from 14.5% for the year ended December 31, 1997. SG&A expenses increased primarily as a result of: - the inclusion of $9.2 million of expenses pertaining to Audio International, Avtech and Dettmers which were acquired during 1997 and 1998; - $3.6 of non-capitalizable costs associated with the DLJ acquisition; and - a $1.9 million increase in research and development costs related to new product introductions at Audio International and Dettmers. OPERATING INCOME. Operating income increased $1.5 million to $13.5 million for the year ended December 31, 1998 from $12.0 million for the year ended December 31, 1997. Operating income as a percent of revenues decreased to 8.9% for the year ended December 31, 1998 from 11.0% for the year ended December 31, 1997. An overall $13.1 million increase in operating income, including $12.0 million from the acquisitions of Audio International, Avtech and Dettmers, was offset by: - the $4.4 million charge for the portion of the DLJ purchase price allocated to inventory; - $3.6 million of higher amortization expense associated with acquisitions, including the DLJ acquisition; and - the $3.6 million charge for non-capitalizable costs associated with the DLJ acquisition. INTEREST EXPENSE. Interest expense increased $6.0 million, or 187.5%, to $9.2 million for the year ended December 31, 1998 from $3.2 million for the year ended December 31, 1997. This increase resulted primarily from the higher debt levels associated with the DLJ acquisition. PROVISION FOR INCOME TAXES. During the year ended December 31, 1998, we decreased our provision for income taxes by $3.2 million to $0.2 million from $3.4 million for the year ended December 31, 1997, as a result of lower income before taxes and the reduction of our deferred tax asset valuation allowance by $2.6 million. This decrease was significantly offset by an increase in non-deductible expenses, particularly the amortization of intangible assets, during the same period. We have approximately $17.4 million and $0.6 million in loss carry forwards available at December 31, 1998 for federal and state income tax purposes. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the year ended December 31, 1998, we incurred a $2.2 million extraordinary charge, net of an estimated $1.5 million income tax benefit, as a result of the refinancing of the bridge notes with a units offering consisting of notes and warrants. During the year ended December 31, 1997, we incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, as a result of a debt refinancing with the proceeds from our initial public offering. NET INCOME. Net income decreased $2.6 million to $0.6 million for the year ended December 31, 1998 compared to $3.2 million for the same period in 1997 primarily due to the higher amortization, interest and other expenses associated with the DLJ acquisition. BOOKINGS AND BACKLOG. Bookings increased $36.4 million, or 32.5%, to $148.5 million for the year ended December 31, 1998 compared to $112.1 million for the same period in 1997. The increase in bookings for 1998 includes: - $21.0 million attributable to Audio International; - $15.4 million attributable to Avtech; and - $2.9 million attributable to Dettmers. 28 As of December 31, 1998, we had a sales order backlog of $75.4 million compared to $49.0 million as of December 31, 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for 1997 from $65.1 million for 1996. Revenues increased primarily due to: - the inclusion of $10.7 million of revenues from Aerospace Display Systems; - growth in our private labeling programs of $6.4 million; - growth in contact sales of $6.3 million driven by new aircraft production rate increases; - an increase in sales of harness assemblies for in-flight entertainment systems of $5.1 million; - an increase in sales of specialty connectors for cabin management and in-flight entertainment systems principally on Boeing's 777 aircraft of $4.9 million; - an increase of sales to Interactive Flight Technologies, Inc. of $3.3 million relating to a major systems integration program for Swiss Air Transport Co. Ltd.; - the inclusion of $3.0 million of revenue from Elsinore; - new systems integration programs for navigational systems of $1.5 million; - the inclusion of $1.3 million of revenue from Audio International; - a new systems integration program for United Parcel Service, Inc. of $0.9 million; and - the overall growth in the commercial aircraft market. Partially offsetting this increase was a decline in sales to AT&T Wireless Services, Inc. of $3.8 million, reflecting the completion in late 1995 and early 1996 of a major systems integration program. GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7 million for 1997 from $15.7 million for 1996. Gross profit as a percentage of revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in gross profit was attributable to: - a $10.6 million increase as a result of increased sales volume, $3.8 million of which was attributable to the Aerospace Display Systems, Elsinore and Audio International acquisitions; and - a $2.3 million increase attributable to a favorable shift in revenues to higher margin products, cost reductions and sustained price increases. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $5.0 million, or 46.6%, to $15.8 million for 1997 from $10.7 million for 1996. SG&A expenses as a percentage of revenues decreased to 14.5% for 1997 from 16.5% for 1996. SG&A expenses increased primarily due to: - $2.3 million of incremental expenses resulting from the acquisition of Aerospace Display Systems, the AMP facility and Elsinore, all of which occurred in late 1996; - $0.8 million for additional staff to pursue higher sales to aircraft manufacturers and to develop capabilities for in-flight entertainment, navigation and satellite communication and safety systems integration services; and - $0.6 million of incremental expenses resulting from the acquisition of Audio International, which occurred in 1997. OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to $12.0 million for 1997 from $4.3 million for 1996. Operating income as a percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The increase in operating income resulted from the factors described above. INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to $3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the completion of the initial public offering on April 16, 1997 and the repayment of a substantial portion of debt with the net proceeds. 29 PROVISION FOR INCOME TAXES. During 1997, we reduced our deferred tax asset valuation allowance by $0.5 million to reflect the book benefit of federal and state net operating loss carry forwards not previously recognized. We have approximately $2.5 million of net operating loss carry forwards available at December 31, 1997 for federal income tax purposes. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, we incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, as a result of refinancing debt with the net proceeds from the initial public offering. NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for 1997 from a net loss of $0.8 million for 1996. The increase is a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES We have required cash primarily to fund acquisitions and, to a lesser extent, to fund capital expenditures and for working capital. Our principal sources of liquidity have been cash flow from operations and third party borrowings. For the nine months ended September 30, 1999, we generated $10.2 million of cash from operating activities, which is the net of $15.5 million of cash generated from operations after adding back depreciation, amortization and other non-cash items, and $5.9 million used for working capital and $0.1 million resulting from an increase in other liabilities. The following factors contributed to the $5.9 million working capital increase: - a net $5.7 million decrease in accounts payable and accrued expenses resulting from lower inventory levels, the 1999 payment of $3.0 million accrued contingent consideration pertaining to the 1997 Audio International acquisition and payment timing patterns; - a $2.6 million accounts receivable increase due to higher sales; and - a $1.3 million increase in prepaid expenses and other assets. The working capital increases were offset by: - a $1.4 million inventory decrease as a result of achieving a higher inventory turnover rate; and - a $2.3 million increase in income taxes payable due to higher current taxable income. For the year ended December 31, 1998, we generated cash from operating activities of $4.0 million. Our accounts receivable consist of trade receivables and unbilled receivables, which are recognized pursuant to the percentage of completion method of accounting for long-term contracts. Accounts receivable increased $6.6 million for the year ended December 31, 1998 from higher overall sales. Unbilled receivables comprised $3.5 million of this increase. Inventories decreased $2.2 million for the year ended December 31, 1998, due to improved inventory management at several subsidiaries as well as the sale of some contact product lines and the disposal of obsolete inventory items. Accounts payable decreased $2.9 million for the year ended December 31, 1998 as a result of payment of various assumed transaction expenses in the acquisitions of 1998 and an agreement with a new gold supplier for significantly lower prices in exchange for shorter payment terms. Accrued expenses, however, increased $5.9 million for the year ended December 31, 1998, primarily as a result of a $2.8 million increase in accrued interest. Cash used for investing activities during the nine months ended September 30, 1999 consisted of $113.8 million for the PATS, PPI and Custom Woodwork acquisitions, $3.0 million of contingent consideration paid during 1999 related to the 1997 Audio International acquisition, and $4.8 million for capital expenditures. We anticipate spending $6.6 million for capital expenditures in 1999. Cash used in investing activities was $89.2 million during the year ended December 31, 1998. Of this amount, $83.6 million was used for the Avtech acquisition and $2.2 million for the Dettmers acquisition, net of cash acquired. The total purchase price for the Dettmers acquisition also included additional contingent consideration with a maximum of $2.0 million payable between 1999 and 2002. We spent $3.6 million on capital expenditures during the year ended December 31, 1998, which was lower than the $4.5 million originally anticipated because the actual cash outlays for our information systems upgrade program were delayed until 1999. The bank credit facility contains restrictions on our ability to make capital expenditures; however, we believe the permitted capital expenditures will be sufficient to complete our investment program and maintain our facilities. 30 Cash provided by financing activities was $110.9 million for the nine months ended September 30, 1999. The cash provided was primarily used to fund our acquisitions as follows: - January 1999 -- the senior term loan facility was amended to provide for an additional $20.0 million of term loan borrowings and we used the funds, along with $14.9 million of borrowings under our acquisition revolving credit facility and a $5.0 million customer advance to acquire all of the common stock of PATS; - April 1999 -- the term loan facility was further amended and we borrowed an additional $70.0 million and used $50.0 million of the proceeds to partially fund the PPI acquisition and $20.0 million to repay borrowings under our acquisition and working capital revolving credit facilities; we also used an additional $12.5 million capital contribution received from DeCrane Holdings to fund the remaining portion of the PPI acquisition; and - August 1999 -- we borrowed an additional $13.8 million under our acquisition and working capital revolving credit facilities to fund the Custom Woodwork acquisition. Subsequent to September 30, 1999, we: - borrowed $11.5 million under our acquisition revolving credit facility in conjunction with the October 1999 PCI NewCo and International Custom Interiors acquisitions; - further amended our term loan facility in December 1999 to provide for an additional $45.0 million of term loan borrowings; the interest rate margins applicable to the incremental term loan borrowings are 2.50% for prime rate borrowings or 3.75% for Euro-Dollar borrowings; - used the term loan proceeds to fund the Infinity acquisition and repay $28.0 million of acquisition and working capital revolving credit facility borrowings; and - used the cash proceeds from the sale of DeCrane Holdings' common stock to management to repay senior credit facility borrowings. At September 30, 1999, senior credit facility borrowings totaling $182.6 million are at variable interest rates based on defined margins over the current prime or Euro-Dollar rates. As of September 30, 1999 we had $59.1 million of working capital, $25.0 million of borrowings available under our working capital senior credit facility and $11.5 million available under our acquisition senior credit facility. Although we cannot be certain, we believe that the current levels of working capital and amounts available under our senior credit facilities will enable us to meet our liquidity requirements for the foreseeable future. Cash provided by financing activities was $88.3 million for the year ended December 31, 1998. In connection with the DLJ acquisition, we entered into a new bank credit facility that initially provided for term loan borrowings in the aggregate principal amount of $80.0 million, now increased to $99.9 million, and revolving loan borrowings up to an aggregate principal amount of $50.0 million, including $25.0 million for working capital purposes which expires in 2004. In 1998, prior to the DLJ acquisition, we also completed a common stock offering and used the $34.8 million net proceeds to reduce the amount outstanding under our credit facility, and borrowed $85.8 million under our then-existing senior credit facility to finance the Avtech and Dettmers acquisitions. The DLJ acquisition created substantial debt for us, resulting in significant debt service obligations. Although we cannot be certain, we anticipate that operating cash flow, together with borrowings under the bank credit facility, will be sufficient to meet our future short- and long-term operating expenses, working capital, capital expenditures and debt service obligations for the foreseeable future. However, our ability to pay principal or interest, to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance. We will be affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. In addition, we are continually considering acquisitions that complement or expand our existing businesses or that may enable us to expand into new markets. Future acquisitions may require additional debt, equity financing or both. We may not be able to obtain any additional financing on acceptable terms. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for 31 hedge accounting. Adoption of SFAS No. 133, as amended by SFAS No. 137 in June 1999, is required for the fiscal year beginning January 1, 2001. Management believes the adoption of SFAS No. 133 will not have a material impact on our consolidated financial position or results of operations. SWISS FRANC FORWARD EXCHANGE CONTRACTS Some of the contact blanks we use in the production of our contacts are manufactured at our Swiss facility and shipped to our El Segundo, California facility for plating and assembly. In 1996, 1997 and 1998, solely in an effort to mitigate the effects of currency fluctuations between the U.S. Dollar and the Swiss Franc, we entered into forward exchange contracts at fixed rates. However, we have not entered into any such contracts during the nine months ended September 30, 1999 and no such contracts are open as of that date. We plan to continue efforts to mitigate this risk in the future. We do not engage in any currency exchange transactions for trading or speculative purposes. Realized and unrealized gains and losses on foreign exchange contracts are recognized currently in the consolidated statements of operations. COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS We are dependent in part on computer- and date-controlled systems for some internal functions, particularly inventory control, purchasing, customer billing and payroll. Similarly, suppliers of components and services on which we rely, and our customers, may have Year 2000 compliance risks, which would affect their operations and their transactions with us. Other parties with whom we have commercial relationships, including raw materials suppliers and service providers, such as banking and financial services, data processing services, telecommunications services and utilities, are highly reliant on computer-based technology. We have incurred less than $1.0 million in the aggregate to remediate and test our systems, and evaluate and address the risks of our key customers and vendors. All of our Year 2000 compliance costs have been funded from our operating cash flow. We believe the number of products manufactured by us whose functioning is dependent upon computer-controlled or other date-controlled systems is not significant. Our manufacturing operations and our products generally are not based upon date-controlled machinery; our business operations and systems are not so time-sensitive that brief interruptions, or a shift to backup paper records, should cause significant losses. As of the date of this prospectus, the January 1, 2000 date has passed and we are not aware of any significant internal-, customer- or vendor-related Year 2000 issues or computer-related failures. However, as of this date we have not performed all of the month-, quarter and year-end update and closing procedures for our computer and date-controlled systems. We cannot assure you that our efforts to address Year 2000 issues were fully effective, or that Year 2000 issues will not have a material adverse effect on our business, financial condition or results of operations. We intend to continue to monitor our systems and our vendors, suppliers and customers for Year 2000 related issues and take necessary actions to correct the problems, if any, as they occur. COMMON EUROPEAN CURRENCY The Treaty on European Economic and Monetary Union provides for the introduction of a single European currency, the Euro, in substitution for the national currencies of the member states of the European Union that adopt the Euro. In May 1998, the European Council determined the 11 member states that met the requirement for the Monetary Union and the currency exchange rates among the currencies for the member states joining the Monetary Union. The transitory period for the Monetary Union started on January 1, 1999. According to the European Council Resolution of July 7, 1997, the transition will be made in three steps, beginning with a transition period from January 1, 1999 to December 31, 2001, in which currency accounts may be opened and financial statements may be drawn in Euros, and local currencies and Euros will coexist. From January 1, 2002 to June 30, 2002, local currencies will be exchanged for Euros. On July 1, 2002, local currencies are scheduled to disappear. We could incur transitional costs as we redesign our software systems to reflect the adoption of the new currency, but we do not expect such costs to be material. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various market risks, including interest rates and changes in foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. From time to time we use derivative financial instruments to manage and reduce risks associated with these factors. We do not enter into derivatives or other financial instruments for trading or speculative purposes. 32 INTEREST RATE RISK. A significant portion of our capital structure is comprised of long-term variable- and fixed-rate debt. Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime or Euro-Dollar rates. At September 30, 1999, the current prime rate was 8.25% and the current Euro-Dollar rate was 5.52%. Based on $182.6 million of variable-rate debt outstanding as of September 30, 1999, a hypothetical one percent rise in interest rates, to 9.25% for prime rate borrowings and 6.52% for Euro-Dollar borrowings, would reduce our pre-tax earnings by $1.8 million annually. Subsequent to September 30, 1999, we increased our variable-rate debt by $28.5 million. Prior to December 31, 1997, we purchased interest rate cap contracts to limit our exposure related to rising interest rates on our variable-rate debt. While we have not entered into similar contracts since that date, we may do so in the future depending on our assessment of future interest rate trends. At September 30, 1999, the carrying value of our fixed-rate long-term debt approximated its fair value. Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million. FOREIGN CURRENCY EXCHANGE RATE RISK. Our foreign customers are located in various parts of the world, primarily Western Europe, the Far East and Canada, and two of our subsidiaries operate in Western Europe. To limit our foreign currency exchange rate risk related to sales to our customers, orders are primarily valued and sold in U.S. dollars. From time to time we have entered into forward foreign exchange contracts to limit our exposure related to foreign inventory procurement and operating costs. However, we have not entered into any such contracts during the nine months ended September 30, 1999 and no such contracts are open as of that date. 33 BUSINESS OVERVIEW Since our founding in 1989, through acquisitions and internal growth, we have become one of the premier suppliers to the general aviation market. We offer a complete line of interior cabin furniture, galleys, seating, and entertainment systems for corporate aircraft. In addition, we manufacture aviation electronic components, referred to as avionics, and provide systems integration services. We sell our products in the corporate, commercial (including regional), retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, commonly referred to as OEM's, major components suppliers, aircraft repair and modification centers and commercial airlines. For the twelve months ended September 30, 1999, we generated pro forma revenues and EBITDA (as defined) of $294.9 million and $67.1 million, respectively. During 1998 and 1999, we completed and integrated eight acquisitions, increasing our diversification within the aircraft industry and reducing our reliance on the commercial aircraft market. We have built a leading position in a number of niche markets in the aircraft industry. The substantial majority of our revenue is generated by businesses in which we have a leading market share. In order to take advantage of the complementary nature of our various product offerings, to rationalize and consolidate the operations of each of our separate companies and to provide even higher levels of customer service, in 1999 we reorganized our related businesses into three separate operating groups: Cabin Management, Specialty Avionics and Systems Integration. THE CABIN MANAGEMENT GROUP. We are the leading independent provider of cabin management products for the corporate aircraft market, serving major manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon. We provide a full line of interior cabin components, including seats, furniture, cabinetry, galleys, in-flight entertainment systems, sidewalls and headliners, which are either sold separately or as a pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers customized, pre-engineered, pre-fit interior cabinetry and galley kits to corporate jet OEM's and independent completion centers. We also have developed and are currently marketing our "cabin-in-a-box" product, which is comprised of a customized, pre-engineered, pre-fit cabin interior system, including furniture, galleys, seats, audio-visual entertainment systems, lighting, sidewalls, headliners and electrical control units. Our cabin-in-a-box product will enable our customers to rely on us as the single source for cabin-related products. We estimate that this product could decrease cycle times by 15% to 20%, offering significant cost reduction opportunities to our customers, and could increase the dollar content per plane for us. The Cabin Management Group contributed approximately 40% of our pro forma revenue for the twelve months ended September 30, 1999. THE SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures electronic components, electronic display devices and interconnect components and assemblies. Among the products offered by this group are flight deck communications and audio power control equipment, harness assemblies and connectors, power and signal contact products and liquid crystal display devices, commonly referred to as LCD's. Customers of this group include Airbus, Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics Group contributed approximately 39% of our pro forma revenue for the twelve months ended September 30, 1999. THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers of this group include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and Rockwell Collins. The Systems Integration Group contributed approximately 21% of our pro forma revenue for the twelve months ended September 30, 1999. INDUSTRY OVERVIEW AND TRENDS We sell our products in the corporate, commercial, retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, major component suppliers, aircraft repair and modification centers and commercial airlines. The leading manufacturers of corporate aircraft include Airbus, Boeing Business Jet, Cessna, Dassault, Gulfstream and Raytheon, while the leading manufacturers of regional aircraft include Bombardier, Embraer and Fairchild Dornier. Airbus and Boeing are the primary manufacturers of commercial aircraft designed to 34 carry 100 or more passengers. The major systems installed on new aircraft, such as flight deck avionics systems, are produced by a limited number of manufacturers, including Honeywell, Rockwell Collins and Sextant Avionique. The integration of new systems into existing aircraft, referred to as the retrofit market, and the manufacture and sale of replacement products for existing aircraft, referred to as the aftermarket, are served by a highly fragmented group of companies, including many of the foregoing manufacturers and a number of smaller, specialized companies. We market our commercial aircraft products directly to the aircraft manufacturers as well as to the manufacturers of major aircraft sub-systems. In some cases, we sell our products to competing manufacturers. We believe the following characteristics of our markets have contributed to our growth and profitability and should provide further opportunities for our success: - INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. The Teal Group Corporation, an industry-recognized aerospace research group, projects delivery of 5,067 corporate aircraft between 1999 and 2008, representing an increase of approximately a 52% over the 3,326 aircraft that were delivered between 1989 and 1998. We believe that the following factors have driven increased demand for new corporate aircraft: - the growing popularity of fractional aircraft ownership in the United States and the expansion of this form of ownership to Europe and the Far East; - the introduction of new, larger and more efficient aircraft, including: - several new mid to high end corporate aircraft, such as the Airbus CJ, Boeing Business Jet, and Bombardier Global Express; and - additional new model aircraft, such as the Bombardier Continental, Cessna Sovereign, and Raytheon Horizon, which are expected to be introduced in the next few years; - the need for long range flights to expanding international markets; - the increased demand for more expedient travel; - the worldwide threat of terrorism; and - the perceived decline in the level of service afforded commercial airline passengers. - INCREASED LONG-TERM DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1999 CURRENT MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that the world jetliner fleet will grow from 12,600 aircraft at the end of 1998 to 19,100 aircraft by 2008, and to 28,400 aircraft by 2018. The report also projects that, between 1999 and 2008, the commercial aircraft industry will require 8,900 new commercial aircraft, and between 2009 and 2018, it will require an additional 11,250 aircraft, both to support the projected world fleet expansion and to replace capacity lost as aircraft are removed from commercial airline service. Despite the increases projected for the commercial aircraft industry generally, Boeing has announced production cutbacks in several of its lines for 2000 and 2001, and our sales to Boeing have decreased. For example, Boeing deliveries of its 747, 767 and 777 airplanes have declined due to the recent financial difficulties of many Asian carriers. See "Risk Factors--Aircraft Industry Risks and--Concentration of Key Customers." - INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. As part of the total projected increase for the commercial aircraft fleet, Boeing's 1999 CURRENT MARKET OUTLOOK projects a compounded annual growth rate of 9.4% for the regional aircraft fleet from 1999 to 2008. We believe that the projected increase in the regional aircraft fleet is driven by the following factors: - the introduction of new regional aircraft with state-of-the-art cockpits and the same safety equipment as larger commercial aircraft; - continued integration of the services of regional carriers with major carriers; - newer longer-range turboprop and jet aircraft that allow regional carriers to consider new "point-to-point" routes, which would permit passengers to bypass hubs; and - upgraded airport facilities for regional passengers. - INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become increasingly dependent on new technology, passengers are demanding more advanced in-flight services, particularly in the corporate aircraft market. These services include in-flight passenger telecommunications systems and 35 in-flight entertainment systems, such as video, video-on-demand and other interactive systems. We believe that demand for systems in the passenger cabin, as well as avionics systems on the flight deck, is increasing as a result of: - a desire by airlines for additional revenue-producing services; - longer flights combined with a demand by passengers for more sophisticated forms of in-flight services and entertainment; and - the advent of new technologies and Federal Aviation Administration mandates related to aircraft safety and navigation. In corporate aircraft for example, Honeywell's AIS-1000 OneView-TM- Airborne Information System delivers more than 40 channels of live television programming and Internet and e-mail access to corporate aircraft via direct broadcast satellite service providers. - SIGNIFICANT BARRIERS TO ENTRY. We believe that there are many barriers to entry that limit access to the aircraft industry, including: - the reluctance of aircraft manufacturers to include new companies as additional approved vendors on their engineering drawings, a favored status often called "print position"; - the general FAA certification requirements necessary to perform aircraft modifications or maintenance; - the required compliance with FAA aircraft manufacturing and aircraft modification design and installation standards; - the required compliance with specifications for some products sold to commercial and military markets; - the required compliance with qualification and approval standards imposed by aircraft and electronic systems manufacturers; and - the initial capital investment and tooling requirements necessary for the manufacture of some aircraft components and systems. - REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines have come under increasing pressure to reduce the operating and capital costs associated with providing services. As a result, many OEM's are initiating proactive programs to reduce cycle times, decrease inventory and reduce costs. Boeing, for example, has announced that it intends to reduce its number of suppliers by 19%, from 31,000 to 25,000, by the end of 2000 and by 42% over the long term. Manufacturers can realize efficiencies by purchasing a higher number of assemblies from a smaller number of suppliers, each of whom has multiple related product capability. - NEW SAFETY MANDATES. New technologies and FAA mandates are driving a proliferation of new safety systems for airplanes. The world's airlines and aircraft and electronic systems manufacturers have cooperated with regulatory agencies in the development of industry standards, regulations and system requirements for future air navigation systems. We expect that this initiative will drive a complete modernization of both airborne and ground-based air traffic management systems. As navigation technology becomes more accurate, new navigation systems such as global positioning systems may become federally required. Other new technologies, which have already been mandated, include traffic collision avoidance systems, cargo hold fire detection and suppression systems, and windshear detection systems. In anticipation of new FAA recommendations and mandates, many airlines have already begun to install enhanced ground proximity warning systems, predictive windshear detection systems and enhanced digital flight data recorders. These safety mandates should provide significant retrofit opportunities for the commercial fleet, which today exceeds 12,000 aircraft. 36 ACQUISITION HISTORY DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the aircraft market through acquisitions. Since our formation, we have completed seventeen acquisitions, summarized as follows:
PRINCIPAL PRODUCTS AND SERVICES ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION - ----------------------------------------------- ----------------------------------------------- 1990 1 Hollingsead International Avionics support structures 1991 2 Tri-Star Electronics International Contacts and connectors 3 Tri-Star Europe Contact blanks 4 Tri-Star Technologies Wire marking equipment 5 Cory Components Connectors & harness assemblies 1996 6 Aerospace Display Systems Dichroic liquid crystal displays 7 Elsinore Engineering Engineering services 8 AMP manufacturing facility Contact blanks 1997 9 Audio International Cabin management & entertainment products 1998 10 Avtech Cockpit audio, lighting, power & control 11 Dettmers Industries Corporate aircraft seats 1999 12 PATS Auxiliary fuel & power systems 13 PPI Aircraft furniture components 14 Custom Woodwork and Plastics Aircraft furniture components 15 International Custom Interiors Aircraft furniture components 16 PCI NewCo Composite material components 17 Infinity Partners Aircraft furniture components
COMPETITIVE STRENGTHS We have used our strong market positions to compete more effectively, to capitalize on industry consolidation trends and to cross-sell products to our existing customer base. We believe that we are well-positioned to take advantage of the foregoing trends and expected growth in the aircraft industry as a result of the following competitive strengths: - LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of components within a number of the niche markets we serve. Our strategy has been to combine complementary businesses in markets in which we have a leading position, thereby increasing sales volume with our customers and strengthening our competitive position. The substantial majority of our revenue is generated by businesses in which we have a leading market share. We believe our combination of component manufacturing and integration and installation capabilities provides us with competitive advantages. The combination of product lines we offer provides opportunities for our customers to deal with a reduced number of vendors and suppliers, to reduce the number of component parts through the purchase of sub-assemblies and to reduce cycle times, all of which help to reduce costs and simplify the production process. - STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of our performance, we have enjoyed long-term relationships with leaders in our primary markets, including Boeing and Boeing Business Jet, Bombardier, Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins. We believe we have been able to develop and solidify these relationships by combining production and engineering capabilities, providing engineering support services and enhancing our customers' in-house production processes. - DIVERSIFIED REVENUE BASE. We sell our products in the corporate, commercial, retrofit, aftermarket and military aircraft markets. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, aircraft repair and modification centers, and airlines. Each of these markets has different demand drivers and operates on different production cycles. Accordingly, our involvement in these multiple markets reduces our exposure to cyclical product demand in any 37 one segment of the aircraft industry. Demand for new products in the commercial aircraft market, for example, is driven largely by the age of the existing commercial fleet, the growth in revenue passenger miles and industry load factors, whereas demand in the corporate aircraft market is driven largely by the growth in fractional ownership, competition from commercial airlines and the growth in the global economy. Our aftermarket sales are dependent in part upon the growing number of aircraft in the existing fleet while technology advances and safety updates help drive demand in the retrofit market. - COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we have completed seventeen acquisitions of businesses and assets. We believe that our acquisitions complement each other and create a core of interrelated products and services, which increases our cross-selling opportunities to existing and new customers. The complementary nature of our business lines should allow us to help our customers reduce their production costs. For example, our acquisitions of PPI, Custom Woodwork, International Custom Interiors and Infinity, corporate aircraft furnishings manufacturers; Dettmers, a corporate aircraft seat manufacturer; and Audio International, a corporate aircraft entertainment and cabin management product manufacturer; should enable us to offer a more integrated set of products and services to the middle and high-end corporate aircraft market. - LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations through cost reduction programs, technological development and, where appropriate, the use of vertical integration. For example, our low-cost production capabilities, coupled with our focus on delivering high-quality products, has enabled us to grow the number of programs under which we supply electrical contacts to many of our competitors. We use sophisticated processes to ensure that our products meet or exceed industry and customer quality requirements. Many customers formally have recognized the effectiveness of our quality programs by issuing quality approval letters, awarding quality compliance certificates and authorizing our inspection personnel to act as their authorized quality certification representatives. For example, four of our facilities have received a quality award from Boeing, and nine of our facilities are currently certified according to the International Standards Organization specifications ISO-9001 or ISO-9002. - REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and power-plant mechanics who are authorized to perform specified aircraft modification functions provide us with a significant competitive advantage. As of December 31, 1999, our subsidiaries include one of only 31 currently active FAA Designated Alteration Stations worldwide, hold nine FAA domestic repair station certificates and hold numerous Parts Manufacturer Approval authorizations from the FAA. These certifications make us one of a few companies with the in-house capability to design, engineer, produce, install and certify a part, which together help reduce cycle times. GROWTH STRATEGY Our principal strategy is to establish and expand leading positions in high-margin, niche markets within the corporate, commercial, retrofit, aftermarket and military aircraft markets. We focus on the manufacture of corporate aircraft interiors and avionics equipment and the integration of avionics systems. We also seek to maintain a balance of revenues among the equipment manufacturer market, the retrofit market and the aftermarket. We believe that this strategy positions us for future success by: - BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with virtually every major OEM and with fractional ownership programs, such as Executive Jet. We plan to continue cross-selling our portfolio of products to our existing customer base in order to increase our dollar content per plane. For example, we originally entered the corporate aircraft market by offering cabin management systems and entertainment systems. We then expanded our product offering to include seating and in 1999, through four separate acquisitions, we added cabinetry and galley products, which we sell to OEM's. Finally, we developed pre-fabricated interior kits, cabinet-in-a-box and cabin-in-a-box, to facilitate cross-selling and further encourage OEM's to outsource their cabin engineering requirements to us. We believe these products should reduce cycle times and costs for manufacturers and increase our dollar content per plane. We currently provide cabinet-in-a-box kits to several of our customers and are in discussions with a number of corporate jet manufacturers regarding our cabin-in-a-box product. - STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen our position in niche markets by providing engineering and customer service support to our existing customer base through 38 the integration of our engineering services with the OEM's engineering capabilities. We also plan to continue to examine new market niches and consolidate the fragmented sectors in our markets to further service our customers. We target for acquisition aircraft component manufacturers and systems integration and installation providers that meet the following criteria: - are complementary to our existing businesses; - have a leading market share in their own niches; - leverage our existing strengths; - add new expertise; and/or - increase cross-selling opportunities. In analyzing a potential acquisition's value, we focus on economies of scale, product line extensions, new customer relationships, increased manufacturing capacity and opportunities for increased cost reductions. - CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of areas of synergies across and within our three business segments by making operational efficiency improvements in human resources, support, procurement and cross-selling. For example, we recently formed the Systems Integration Group to leverage the engineering capabilities of our Hollingsead subsidiary with the manufacturing and systems integration and installation capabilities of our PATS subsidiary. In addition, as part of the Systems Integration Group's strategy, we are consolidating facilities, reducing headcount and replacing relatively expensive manufacturing at Hollingsead with more economical outsourced products. This will allow Hollingsead to focus on its core engineering and systems integration competencies. We are also standardizing processes and centralizing procurement at our four recently acquired cabin furniture companies, and we continue to evaluate our operations to streamline or increase efficiencies. - EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features increases demand for many of our products and provides attractive cross-selling opportunities. For example, our newly introduced e-CABIN, an "office in the sky," provides leading-edge business and entertainment services for the corporate jet cabin and its passengers. Our e-CABIN provides each passenger with on-demand audio and video entertainment, including live television and Internet and e-mail access via Honeywell's OneView system. We will continue considering strategic partnerships with leading technology companies to keep our product offerings on the cutting edge, as we have done with Honeywell and its OneView system. PRODUCTS AND SERVICES Our principal products and services, on a pro forma basis, are:
TWELVE MONTHS ENDED SEPTEMBER 30, 1999 PRO FORMA PRINCIPAL PRODUCTS AND SERVICES REVENUES - ------------------------------------------------------------ ------------------- CABIN MANAGEMENT GROUP Interior furnishings, seating, composite components, and entertainment and cabin control systems................... 39.9% SPECIALTY AVIONICS GROUP Cockpit audio, communication, lighting and power and control devices, electrical contacts, connectors and harness assemblies, liquid crystal display devices, and wire marking and crimping equipment............................ 39.4 SYSTEMS INTEGRATION GROUP Auxiliary fuel systems and power units, and integration of cabin and fight deck systems.............................. 20.7 ----- Consolidated pro forma revenues......................... 100.0% =====
We believe historical data about our products and services is not meaningful because it is not reflective of the companies we have recently acquired and the products and services they provide. 39 CABIN MANAGEMENT GROUP. This group provides a full line of interior cabin components and services for the middle- to high-end corporate aircraft market. - INTERIOR FURNISHINGS, SEATING AND COMPOSITE COMPONENTS. We design, engineer and manufacture customized, pre-fit products and provide services including: INTERIOR FURNISHINGS - entertainment and refreshment centers; - conference tables; - hi-low dining/coffee tables; - end tables; - cabinets; - arm and side ledges; - galleys; - lavatories; - vanities; - room enclosures; - cabinetry refurbishment services; SEATING - executive track and swivel seats; - jump-seats; - divans, including models that convert to beds or contain storable tables; - upholstery services; COMPOSITE COMPONENTS - sound-damping side walls and headliners; - passenger service units; - environmental (HVAC) ducting; and - closets. Many of our products are made with what we believe to be high quality veneers, leathers and fabrics and lightweight structural aluminum honeycomb or foam- or balsa-core composites reinforced with Kevlar-TM-, Nomex-TM-, graphite or fiberglass. - ENTERTAINMENT AND CABIN CONTROL SYSTEMS. We design to customer specifications, engineer and manufacture fully-integrated in-flight entertainment and cabin management systems, including audio-video entertainment systems, cabin lighting, passenger switching and control modules, chimes and paging systems and headphone systems. Our entertainment systems include video on demand, and our cabin lighting products include both halogen and flat-candle fluorescent illumination. The fully-integrated systems are operated with our passenger switching and control modules, which includes membrane-type and touch-screen models. We recently introduced a new fiber-optic based technology for our systems that replaces traditional wire harnesses with lightweight fiber-optic cable. SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures electronic components and display devices, interconnect components and assemblies. - COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We are a leading manufacturer of cockpit audio, lighting and power and control devices used in commercial, regional and corporate aircraft. We also manufacture a variety of other commercial aircraft safety system components, including warning tone generators, temperature and de-icing monitoring systems, steep approach monitors and low voltage power supplies for traffic collision avoidance systems. - ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity and are installed at the terminus of a wire or an electronic or electrical device. We supply precision-machined contacts for use in connectors found in virtually every electronic and electrical system on a commercial aircraft. We sell contacts directly to aircraft and related electronics manufacturers and, through our private labeling programs, to several major connector manufacturers who sell connectors to the same markets under their brand name. - CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors link wires and devices in avionics systems, and permit their assembly, installation, repair and removal. Our connectors are specially manufactured to meet the critical performance requirements demanded by manufacturers and required in the harsh environment of an operating aircraft. We produce connectors that are used in aircraft galleys, flight decks and control panels in the passenger cabin. We also produce wire harness assemblies for use in cabin avionics systems, from wire, connectors, contacts and hardware. We typically sell our harness assemblies to manufacturers of aircraft electronic systems. In addition, we incorporate and sell our harness assemblies as part of our systems integration services. - LIQUID CRYSTAL DISPLAY DEVICES. We manufacturer dichroic liquid crystal displays, also known as LCD's, and modules used in commercial and military aircraft. Modules are liquid crystal displays packaged 40 with a backlight source and additional on-board electronic components. Our products are used in a variety of flight deck applications, such as flight control systems, fuel quantity indicators, airborne communications and safety systems. Dichroic liquid crystal display products are widely used in the aircraft industry because they are easily adapted to custom design, and they possess high performance characteristics, which include high readability in sunlight and darkness, readability from extreme viewing angles, and the ability to withstand wide temperature fluctuations. We also manufacture electronic clocks, capable of serving all types of aircraft, that use our liquid crystal display devices. - WIRE MARKING AND CRIMPING EQUIPMENT. Wires running between the individual contacts that comprise a connector are marked according to their function and, in some applications, the contacts are crimped onto the wire. We design and manufacture high-speed wire marking systems and portable crimping machines used by harness manufacturers, wire mills, aircraft manufacturers and the U.S. military. SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tank, auxiliary power units and systems integration products and services, including engineering, kit manufacturing, installation and certification. - AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. We manufacture and install auxiliary fuel tanks for commercial and corporate aircraft. Our unique design and tank construction has made us a leader in the auxiliary fuel tank market. We also manufacture auxiliary power units which provide ground power to corporate jets made by Cessna, Gulfstream, Learjet and Raytheon. - INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed and patented a wide range of avionics support structures. These structures are used to support and environmentally cool avionics equipment, including navigation, communication and flight control equipment. We sell our avionics support structures under the Box-Mount-TM- name. We sell these support structures to aircraft and related electronics manufacturers, airlines and major modification centers. In addition, these products are essential components of the installation kits used in our systems integration operations. We also perform all of the functions, including design, engineering, certification, manufacturing and installation, necessary to retrofit an aircraft with a new or upgraded avionics system. INDUSTRY REGULATION The aviation industry is highly regulated in the United States by the Federal Aviation Administration and in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. We and our customers are subject to these regulations. In addition, many customers impose their own compliance and quality requirements on their suppliers. The FAA prescribes standards and licensing requirements for aircraft components, issues Designated Alteration Station authorizations, and licenses private repair stations. Our subsidiaries hold various FAA approvals, which may only be used by the subsidiary obtaining such approval. The FAA can authorize or deny authorization of many of the services and products we provide. Any such denial would preclude our ability to provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, the FAA could exercise a wide range of remedies, including a warning letter, a letter of correction, a civil penalty action, and emergency or non-emergency suspension or revocation of a certificate or approval. In July of 1997, the FAA notified us that our FAA-approved repair station which holds Designated Alteration Station authorization did not fully comply with some of the requirements for some of the FAA ratings that it held. The FAA granted us until September 10, 1997 to bring the facility into full compliance, and curtailed several operations of the repair station, including prohibiting initiation of new projects under that authorization, until it achieved full compliance. On August 28, 1997 the FAA inspected the repair station and determined that it was in full compliance with all FAA requirements applicable to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency Certificate including those ratings, and removed the operating restrictions, as of September 5, 1997. The FAA also has the power to issue cease and desist orders and orders of compliance and to initiate court action for injunctive relief. If the FAA were to suspend or revoke our certificates or approvals on a nonemergency basis, we would be permitted to continue making the products and delivering the goods pending any available appeals, but would be required to stop if the FAA eventually prevailed on appeal. If the FAA did so on an emergency basis, we would be obliged to stop immediately the manufacturing of products and delivering of services that require such certificate or approval. If the FAA were to determine that noncompliance with its standards creates a safety hazard, it also could order that the pertinent component or aircraft immediately cease to be operated until the condition is corrected. This could require 41 that customers ground aircraft or remove affected components from aircraft currently in service, both of which are expensive actions. Each type of aircraft operated by airlines in the United States must possess an FAA type certificate, generally held by the aircraft manufacturer, indicating that the type design meets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated, that person must obtain an FAA-issued Supplemental Type Certificate for the modification. Historically, we have obtained several hundred of these Supplemental Type Certificates, most of which we obtained on behalf of our customers as part of our systems integration services. Some of these certificates we obtain are or will eventually be transferred to our customers. As of January 1, 2000, we own and/or manage 235 Supplemental Type Certificates. Many are multi-aircraft certificates which apply to all of the aircraft of a single type. We foresee the need to obtain additional Supplemental Type Certificates so that we can expand the services we provide and the customers we serve. Supplemental Type Certificates can be issued for proposed aircraft modifications directly by the FAA, or on behalf of the FAA by one of the 31 holders of currently active Designated Alteration Station authorizations as of January 1, 2000. The FAA designates what types of Supplemental Type Certificates can be issued by each Designated Alteration Station. Our subsidiary Hollingsead, as one of the 31, can directly issue many of the Supplemental Type Certificates we and our customers require for our systems integration operations. In many cases, this has increased the speed with which we can obtain such certificates and help bring our customers' systems to market. After obtaining a Supplemental Type Certificate, a manufacturer must apply for a Parts Manufacturer Approval from the FAA, or a supplement to an existing Parts Manufacturer Approval, which permits the holder to manufacture and sell installation kits according to the approved design and data package. We have nine Parts Manufacturer Approvals and over 200 supplements to those approvals. In general, each initial Parts Manufacturer Approval is an approval of a manufacturing or modification facility's production quality control system. Each Parts Manufacturer Approval supplement authorizes the manufacture of a particular part in accordance with the requirements of the corresponding Supplemental Type Certificate. We routinely apply for and receive such Parts Manufacturer Approval supplements. In order to perform the actual installations of a modification, we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvals and related supplements, or in our repair station certificates. In order for a company to perform most kinds of repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. As of January 1, 2000, we had nine authorized repair stations. In addition to its approval of design, production, and installation, the FAA certifies personnel. Several of our engineering personnel have been certified by the FAA to perform specific tasks related to the design, production, and performance of aircraft modifications. Such certified personnel include mechanics and repairmen. The FAA also delegates some of its oversight responsibilities, such as testing and inspection responsibilities, to FAA-certified Designated Engineering Representatives. We employ or contract for several of such designated representatives who evaluate engineering design data packages, ensure compliance with applicable FAA regulations, oversee product testing to ensure airworthiness, and work with the FAA to obtain approvals of those data packages. U. S. military specification standards are frequently used by both military and commercial customers in the aircraft industry to define and control characteristics of a product. Through the use of a government Qualified Parts List and Qualified Vendor's List, a customer may be assured that a product or service has met all of the requirements set forth in the military specification. Parts listed with a Qualified Parts List allow others to reliably design parts to interface with such parts as a result of the military specification standards used. We believe that we hold more Qualified Parts Lists for our contact product line than any other manufacturer. 42 SALES AND MARKETING Product line managers and our product engineering staff provide technical sales support for our direct sales personnel and agents. We may also assign responsibility for marketing, sales and/or services for key customers to one of our senior executives. We have nine authorized distributors who purchase, stock and resell several of our product lines. Our systems integration services are sold by sales managers on our staff who are assigned to geographic territories. Because of the significant amount of technical engineering work required in the sales process, our sales managers are generally assisted by a support team of program management, installation and engineering personnel. Each support team specializes in safety systems, in-flight entertainment, or navigation systems. These support teams continue to manage the project throughout the entire integration process. CUSTOMERS We estimate that in 1999, we sold our products and services to about 1,300 customers on a pro forma basis. Our primary customers include manufacturers of aircraft and related avionics equipment, airlines, aircraft component manufacturers and distributors, and aircraft repair and modification companies. The following customers accounted for 10.0% or more of our consolidated pro forma revenues:
TWELVE MONTHS ENDED SEPTEMBER 30, 1999 PRO FORMA SIGNIFICANT CUSTOMER REVENUES(A) - ------------------------------------------------------------ ------------------- Boeing(b)................................................... 18.3% Textron(c).................................................. 14.6 Bombardier.................................................. 11.4 ---- Total pro forma revenues.................................. 44.3% ====
- ------------------------ (a) Historical data is not deemed to be meaningful because it is not reflective of the companies we have recently acquired. (b) Reflects only our direct revenues from Boeing. Excludes revenues from components we provide indirectly to Boeing through our sales to other Boeing suppliers. (c) Includes Cessna. Most of our sales to Boeing are pursuant to contracts which may be terminated by Boeing at any time and include various terms favorable to the buyer. For example, one provides that we must extend to Boeing any reductions in prices or lead times that we provide to other customers and that we must match other suppliers' price reductions of more than five percent, or delete the affected products from the contract. Another contract relieves Boeing from any obligation to order products covered by the contract if Boeing's customers request an alternate supplier, or our product is not technologically competitive in Boeing's judgment, or Boeing changes the design of an aircraft so that our products are no longer needed, or Boeing reasonably determines that we cannot meet its requirements in the amounts and within the schedules it requires. Our contracts with Boeing also generally grant Boeing an irrevocable non-exclusive worldwide license to use our designs, tooling and other intellectual property rights related to products sold to Boeing, if we default, or suffer a bankruptcy filing, or transfer our manufacturing rights to a third party. MANUFACTURING AND QUALITY CONTROL Many of our product lines use process-specific equipment and procedures that have been custom-designed or fabricated to provide high-quality products at relatively low cost. Some of our key product lines are vertically integrated, which we believe improves our product performance, customer service and competitive pricing. We have conducted programs to reduce costs including overhead expenses. In some cases, these programs have involved the use of proprietary equipment or processes which have enabled us to reduce costs without reducing quality levels. Several of our key customers have developed their own design, product performance, manufacturing process and quality system standards and require their suppliers to comply with such standards. As a result, we have developed and conducted comprehensive quality policies and procedures which meet or exceed our 43 customers' requirements. Many of our customers have recognized formally the effectiveness of our quality programs by issuing quality approval letters and awarding quality compliance certificates. In addition, some of our customers have authorized our inspection personnel also to act as their authorized quality representatives. That authorization enables us to ship directly into the inventory stockrooms of these customers, eliminating the need for inspection at the receiving end. We use sophisticated equipment and procedures to ensure the quality of our products and to comply with United States military specifications and FAA certification requirements. We perform a variety of testing procedures, including environmental testing under different temperature, humidity and altitude levels, shock and vibration testing and X-ray fluorescent measurement. These procedures, together with other customer approved techniques for document, process and quality control, are used throughout our manufacturing facilities. RAW MATERIALS AND COMPONENT PARTS The components we manufacture require the use of various raw materials including gold, aluminum, copper, rhodium, plating chemicals, hardwoods and plastics. The availability and prices of these materials may fluctuate. Their price is a significant component in, and part of, the sales price of many of our products. Although some of our contracts have prices tied to raw materials prices, we cannot always recover increases in raw materials prices in our product sale prices. We also purchase a variety of manufactured component parts from various suppliers. Raw materials and component parts are generally available from multiple suppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials and component parts may affect our ability to meet customer production needs. See "Risk Factors--Gold and Copper Prices." INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION We have various trade secrets, proprietary information, trademarks, trade names, patents, copyrights and other intellectual property rights which we believe are important to our business in the aggregate, but not individually. COMPETITION We operate in a highly competitive industry and compete with a number of companies, many of whom have significantly greater financial, technological, manufacturing and marketing resources than we do. We believe that our ability to compete depends on high product performance, short lead-time and timely delivery, competitive price and superior customer service and support. The niche markets within the aircraft industry that we serve are relatively fragmented, with several competitors offering the same products and services we provide. Due to the global nature of the aircraft industry, competition comes from both U.S. and foreign companies. Our principal competitors in contacts and connectors are large and diversified corporations which produce a broad range of products. In other areas we generally face a group of smaller companies and enterprises, except for the corporate aircraft manufacturers, which are generally part of large and diversified companies.
GROUP--PRINCIPAL PRODUCTS AND SERVICES--PRINCIPAL COMPETITORS - ------------------------------------------------------------- CABIN MANAGEMENT GROUP INTERIOR FURNISHINGS - Aviart - Custom Aircraft Cabinets - Hiller - Corporate aircraft manufacturers and independent completion and modification companies SEATING - Aircraft Modular Products, a division of BE Aerospace - ERDA COMPOSITE COMPONENTS - AAR - Burnham - Fibre Art
44
GROUP--PRINCIPAL PRODUCTS AND SERVICES--PRINCIPAL COMPETITORS - ------------------------------------------------------------- - Plastic Fab - Sealed Composites Works - The Nordam Group ENTERTAINMENT AND CABIN CONTROL SYSTEMS - Aerospace Lighting - Baker Electronics - DPI Labs - Grimes Aerospace - Nellcor Puritan Bennett - Air Show / Pacific Systems SPECIALTY AVIONICS GROUP COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES - Becker Avionics - Crane ELDEC - Diehl GmbH - Gables Engineering - Page Aerospace ELECTRICAL CONTACTS - Amphenol - Deutsch Engineered Connecting Devices, a division of Deutsch CONNECTORS AND HARNESS ASSEMBLIES - AMP (connectors) - Electronic Cable Specialists (harness assemblies) - ITT Cannon (connectors) - Radiall S.A. (connectors) LIQUID CRYSTAL DISPLAY DEVICES - Cristalloid SYSTEMS INTEGRATION GROUP AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS - Allied Signal (power units) - Marshall Engineering (fuel systems) INTEGRATION OF CABIN AND FIGHT DECK SYSTEMS - Electronic Cable Specialists (avionics support structures) - Engineering departments of airlines - Numerous independent airframe maintenance and modification companies
BACKLOG As of September 30, 1999, we had an aggregate sales order backlog of $150.8 million compared to $143.9 million as of December 31, 1998, all on a pro forma basis. Orders are generally filled within twelve months; however, our orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date will be materially affected by when we receive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predict actual shipments or sales for any future period. EMPLOYEES As of December 31, 1999, we had 2,536 employees, of whom 1,997 were in manufacturing operations, 261 were in engineering, 183 were in finance and administration and 95 were in sales. The foregoing numbers include 83 temporary employees but do not reflect the anticipated employee reductions resulting from the Hollingsead and Elsinore Engineering restructuring. None of our employees is subject to a collective bargaining agreement, and we have not experienced any material business interruption as a result of labor disputes since DeCrane Aircraft was formed. We believe that we generally have a good relationship with our employees. FACILITIES Our principal facilities are described in the following table. We believe that our facilities are in good condition and are adequate to support our operations for the foreseeable future. 45
APPROXIMATE LEASE LOCATION FACILITY DESCRIPTION SQ. FT. EXPIRATION - ---------------------------------------------- ---------------------------------------------- ------------ ---------- LEASED FACILITIES Wichita, KS (two buildings)................... Manufacturing, engineering and administration 156,500 2007 Georgetown, DE (a)............................ Manufacturing and aircraft modifications 110,000 2041 El Segundo, CA................................ Manufacturing, engineering and administration 81,300 2010 Columbia, MD.................................. Manufacturing, engineering and administration 65,923 2007 Garden Grove, CA (b).......................... Manufacturing, engineering and administration 58,303 2007 Denton, TX (three buildings).................. Manufacturing, engineering and administration 47,905 2015 Goleta, CA.................................... Engineering 33,200 2010 Wichita, KS................................... Manufacturing and administration 33,000 2009 Stuart, FL.................................... Manufacturing, engineering and administration 29,700 2008 Orlando, FL................................... Manufacturing and administration 28,500 2010 Hatfield, PA.................................. Manufacturing, engineering and administration 27,500 2002 Bioggio, Switzerland.......................... Manufacturing 21,915 2004 Denton, TX (d)................................ Manufacturing and administration 20,000 2015 Orlando, FL (c)............................... Manufacturing 20,000 2000 Mezzovico, Switzerland........................ Manufacturing 18,046 2001 Lewisville, TX (d)............................ Manufacturing 13,000 2004 Garden Grove, CA (b).......................... Warehouse 10,000 2003 Seattle, WA................................... Warehouse 10,000 2001 North Little Rock, AR (three buildings) (e)... Engineering 8,828 2000 Santa Ana, CA................................. Engineering and aircraft hanger 8,816 2000 El Segundo, CA................................ Corporate administration 7,853 2007 Anaheim, CA................................... Manufacturing 6,036 2004 Goleta, CA (b)................................ Engineering 5,816 2000 Hutchinson, KS................................ Manufacturing 5,300 2000 Bioggio, Switzerland (two buildings).......... Administration 4,660 2000 Tucson, AZ.................................... Field service office 580 2000 Quebec, Canada................................ Field service office 380 2000 Wichita, KS................................... Field service office 350 2000 Cedex, France................................. Field service office 210 2000 OWNED FACILITIES Seattle, WA (six buildings)................... Manufacturing, engineering and administration 87,382 Pooler, GA.................................... Manufacturing and administration 24,000 North Little Rock, AR (e)..................... Manufacturing and engineering 20,000 North Little Rock, AR......................... Manufacturing, engineering and administration 18,000 OWNED AND LEASED FACILITIES--SUBLEASED TO OTHERS Seattle, WA (owned)........................... Office space 34,229 Santa Fe Springs, CA (leased)................. Manufacturing and office space 24,000 2000 Santa Fe Springs, CA (leased)................. Manufacturing and office space 17,600 2000 Wiltshire, United Kingdom (leased)............ Manufacturing and office space 4,823 2013
- ------------------------------ (a) Includes a 25,000 square foot expansion under construction and expected to be ready for occupancy in 2000. (b) Will be vacated in 2000 and subleased in conjunction with the Hollingsead and Elsinore Engineering restructuring. (c) Will be replaced with a 33,000 square foot building under construction and expected to be ready for occupancy in 2000; the new lease will expire in 2010. (d) During 2000, the Lewisville, TX facility will be vacated and subleased for the remaining lease term upon occupancy of the Denton, TX facility. (e) A new, owned 20,000 square foot facility is under construction and expected to be ready for occupancy in 2000; upon occupancy, the three leased buildings will be vacated and subleased for the remainder of their lease terms, if any. ENVIRONMENTAL MATTERS Our facilities and operations are subject to various federal, state, local, and foreign environmental laws and regulations, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, some environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended (CERCLA) and similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may create "joint and several" liability among multiple parties who have some relationship to a site or a source of waste. We have sent waste to treatment, storage, or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of several of those sites. In addition, some of our operations are located on properties which are contaminated to varying degrees. 46 We have not incurred, nor do we expect to incur, liabilities in any significant amount as a result of the foregoing matters, because in these cases other entities have been held primarily responsible, the levels of contamination are sufficiently low so as not to require remediation, or we are indemnified against such costs. In most cases, we do not believe that we have any material liability for past waste disposal. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. It is possible, given the potentially retroactive nature of environmental liability, that we will receive additional notices of potential liability relating to current or former activities. Some of our manufacturing processes create wastewater which requires chemical treatment, and one of our facilities was cited for excessive quantity and strength of its wastewater. The costs associated with remedying that failure have not been material. In addition, volatile organic compounds were discovered at a different facility of ours during groundwater sampling in 1998. We have completed a voluntary cleanup program there and have received a "no further action" letter. We believe that we have been and are in substantial compliance with environmental laws and regulations and that we have no liabilities under environmental laws and regulations, except for liabilities which we do not expect would likely have a material adverse effect on our business, financial position, results of operations or cash flows. However, some risk of environmental liability is inherent in the nature of our business, and we might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws and regulations. See "Risk Factors--Environmental Risks and Regulations." LEGAL PROCEEDINGS As part of its investigation of the crash off the Canadian coast on September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety Board (TSB) notified us that they recovered burned wire which was attached to the in-flight entertainment system installed on some of Swissair's aircraft by one of our subsidiaries. We are fully cooperating with the on-going TSB investigation. Although the TSB has not issued a final report, it has advised us that it has no evidence to date that the system we installed malfunctioned or failed during the flight. Families of the 229 persons who died aboard the flight have filed actions in federal and state courts against us, and many other parties unaffiliated with us, including Swissair and Boeing. The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system. The actions seek compensatory and punitive damages and costs in an unstated amount. We intend to defend the claims vigorously. We are a party to a license agreement with McDonnell Douglas (now a part of Boeing) pursuant to which we may request specified data in order to design and market modifications to aircraft manufactured by McDonnell Douglas. Under the agreement, we are to pay McDonnell Douglas a royalty of five percent of the net sales price of all modifications sold by us for which we have requested data from McDonnell Douglas. We requested data for a single modification, which we believe is exempt from the agreement's provision requiring royalties. In 1996, McDonnell Douglas made a demand for $650,000 for royalties. We do not believe that we are obligated to McDonnell Douglas in any amount. However, if the claim is asserted, and if we are unsuccessful in defending it, we may be required to pay royalties to McDonnell Douglas. We are party to other litigation incident to the normal course of business. We do not believe that the outcome of any of such other matters in which we are currently involved will have a material adverse effect on our financial condition or results of operations. WHERE YOU CAN GET MORE INFORMATION Any registered purchaser may request from us any information it wishes in order to verify the information in this prospectus. Apart from this prospectus and any responses we make to those requests, no-one is authorized to give information about this exchange offer or the notes on our behalf. We have filed with the Securities and Exchange Commission a registration statement on the SEC's Form S-1, to register the new notes. This prospectus is an update of that registration statement. However, the registration statement has additional information which is not included here, in accordance with SEC rules. Our descriptions and statements about any contract or other document in this prospectus are summaries only, and, in each instance, reference is made to a copy of such contract or other document filed as an exhibit to the registration statement, each such description or statement being qualified in all respects 47 by such reference. We are required to attach copies of our material contracts and documents as exhibits to the registration statement we filed with the SEC. We became a reporting company as a result of the registration of the notes, and file annual, quarterly and current reports, proxy statements and other information with the SEC. Our fiscal year ends on December 31. You may read and copy any reports, statements or other information we file with the SEC at the SEC's reference room in Washington D.C. Please call the SEC at (202) 942-8090 for further information on the operation of the reference rooms. You can also request copies of these documents, upon payment of a duplicating fee, by writing to the SEC, or review our SEC filings on the SEC's EDGAR web site, which can be found at http\\www.sec.gov. You may also write or call us at our corporate headquarters located at 2361 Rosecrans Avenue, Suite 180, El Segundo, California 90245. Our telephone number is (310) 725-9123. 48 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........................... 53 Director and Chief Executive Officer Charles H. Becker......................... 54 Senior Vice President and Group President Richard J. Kaplan......................... 56 Senior Vice President, Chief Financial Officer, Secretary and Treasurer Robert G. Martin.......................... 62 Senior Vice President and Group President Jeffrey A. Nerland........................ 42 Vice President, Business Development Jeffrey F. Smith.......................... 39 Senior Vice President and Group President Thompson Dean............................. 41 Chairman of the Board of Directors John F. Fort, III......................... 58 Director Dr. Robert J. Hermann..................... 66 Director Dr. Paul G. Kaminski...................... 57 Director Susan C. Schnabel......................... 38 Director Timothy J. White.......................... 38 Director
R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as President since it was founded in December 1989 until April 1993 when he was elected to the newly-created office of Chief Executive Officer. Prior to founding our company, Mr. DeCrane held various positions at the aerospace division of B.F. Goodrich. Mr. DeCrane was a Group Vice President at the aerospace division of B.F. Goodrich with management responsibility for three business units from 1986 to 1989. He has served on our board of directors since its inception. CHARLES H. BECKER has been our Senior Vice President and President of the Cabin Management Group since October 1999. Mr. Becker previously served as President and Chief Operating Officer of DeCrane Aircraft from April 1998 to October 1999, Group Vice President of Components of DeCrane Aircraft from December 1996 to April 1998, and President of Tri-Star from December 1994 to April 1998. Prior to joining us, Mr. Becker was President of the Interconnect Systems Division of Microdot, Inc., a manufacturer of contacts and connectors for aerospace applications, from 1984 to 1994. RICHARD J. KAPLAN has been the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft since March 1999. From April 1998 to March 1999, he served as Executive Vice President and Chief Operating Officer of Developers Diversified Realty Corporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP, having joined the firm in 1964. ROBERT G. MARTIN has been our Senior Vice President and President of the Systems Integration Group since October 1999 and President of PATS since we acquired it in January 1999. Mr. Martin also served as President of Aerospace Display Systems from September 1996 until October 1999. Prior to our acquisition of Aerospace Display Systems in 1996, Mr. Martin had served as its President since 1992. JEFFREY A. NERLAND has been our Vice President, Business Development, since January 1999. From July 1994 through December 1998, he was President of The Nerland Group and a partner with Budetti, Harrison, Nerland and Associates, a consulting and interim management firm. Previously, Mr. Nerland was a director with Kibel, Green Inc., a consulting firm. JEFFREY F. SMITH has been our Senior Vice President and President of the Specialty Avionics Group since October 1999 and President of Avtech since we acquired it in June 1998. Previously, he has served in various capacities with Avtech since 1989. THOMPSON DEAN has been the Managing Partner of DLJ Merchant Banking, Inc. since November 1996. Previously, Mr. Dean was a Managing Director of DLJ Merchant Banking, Inc. and its predecessor. Mr. Dean serves as a director of Commvault Inc., Von Hoffman Press, Inc., Manufacturer's Services Limited, Phase Metrics, Inc., AKI Holding Corp. and Insilco Holding Corporation. He became a director in 1998. JOHN F. FORT, III served as Chairman of the Board of Directors of Tyco International, Inc. from 1982 to December 1992, and as Chief Executive Officer from 1982 to June 1992. Mr. Fort serves as a director of Tyco International, Inc., Dover Corporation and Roper Industries. He became a director in 1998. DR. ROBERT J. HERMANN is a Senior Partner of Global Technology Partners. Dr. Hermann most recently served as Senior Vice President for Science and Technology at United Technologies Corporation and served 49 in various other capacities at United Technologies Corporation since 1982. Prior to joining United Technologies Corporation, Dr. Hermann spent 20 years with the National Security Agency. In 1977 he was appointed Principal Deputy Assistant Secretary of Defense for Communications, Command, Control and Intelligence, and in 1979 was named Assistant Secretary of the Air Force for Research, Development and Logistics and Director of the National Reconnaissance Office. He became a director in 1998. DR. PAUL G. KAMINSKI is a Senior Partner of Global Technology Partners. Dr. Kaminski currently serves as Chief Executive Officer of Technovation, Inc., a consulting firm focusing on business strategy and advanced technology. Dr. Kaminski served as U.S. Undersecretary of Defense for Acquisition and Technology from October 1994 to 1997. Prior to that time, he served as Chairman and Chief Executive Officer of Technology Strategies and Alliances. Dr. Kaminski is a former Chairman of the Defense Science Board and is currently a member of the Senate Select Committee on Intelligence-Technical Advisory Group, the NRO Advisory Council and the National Academy of Engineering. Dr. Kaminski is a director of General Dynamics Corporation, Dyncorp, Eagle-Picher Technologies and several privately held information technology companies. He became a director in 1998. SUSAN C. SCHNABEL has been a Managing Director of DLJ Merchant Banking, Inc. since January 1998. In 1997, she served as Chief Financial Officer of PETsMART, a specialty retailer of pet products and supplies. From 1990 to 1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation, where she became a Managing Director in 1996. Ms. Schnabel serves as a director of Dick's Clothing and Sporting Goods, Environmental Systems Products and Wavetek Corporation. She became a director in 1998. TIMOTHY J. WHITE has been a Vice President of DLJ Merchant Banking, Inc. since June 1998. From October 1994 to May 1998, Mr. White was an Associate and Vice President at Donaldson, Lufkin & Jenrette Securities Corporation. From May 1994 to October 1994, Mr. White was an Associate Counsel in the Office of the Independent Counsel, United States Department of Justice. Prior to that time, Mr. White was an attorney with Davis Polk & Wardwell. He became a director in 1998. An agreement entered into in connection with the DLJ acquisition entitled a holding company controlled by DLJ Merchant Banking Partners II, L.P. to designate a number of directors proportionally commensurate with its stock ownership of DeCrane Aircraft. DeCrane Holdings selected all of the current members of the Board of Directors of DeCrane Aircraft. DLJ Merchant Banking or its designate selected all of the members of the Board of Directors of DeCrane Holdings. SUMMARY COMPENSATION TABLE The following table describes all annual compensation awarded to, earned by or paid to our Chief Executive Officer and the four most highly compensated executive officers other than the Chief Executive Officer for the years ended December 31, 1999, 1998 and 1997.
ALL OTHER ANNUAL COMPENSATION COMPENSATION --------------------------------------------- ----------------------------------- OTHER ANNUAL SECURITIES COMPENSATION UNDERLYING OTHER YEAR SALARY BONUS (1) OPTIONS(2) (3) ---- -------- ---------- ------- ------------------------ ------- R. Jack DeCrane............................. 1999 $334,791 $ 700,000 $30,873 106,877 $ 9,025 Chief Executive Officer 1998 281,761 1,044,000 30,151 50,000 34,064 and Director(4) 1997 244,744 220,000 -- 50,000 29,411 Charles H. Becker........................... 1999 $235,000 $ 210,000 $19,158 26,719 -- Senior Vice President(5) 1998 206,948 160,000 14,678 -- -- 1997 174,492 102,000 6,168 15,000 $18,000 Richard J. Kaplan........................... 1999 $158,333 $ 258,000 $13,572 28,669 -- Senior Vice President(6) 1998 -- -- -- -- -- 1997 -- -- -- -- -- Robert G. Martin............................ 1999 $187,500 $ 209,000 $ 1,300 17,813 -- Senior Vice President(7) 1998 172,000 66,000 1,300 -- -- 1997 130,000 66,000 1,300 10,000 -- Jeffrey A. Nerland.......................... 1999 $160,000 $ 181,000 $ 6,366 10,688 -- Vice President(8) 1998 -- -- -- -- -- 1997 -- -- -- -- --
- ------------------------ (1) Amounts paid by us for premiums on health, life and long-term disability insurance and automobile leases provided by us for the benefit of the named executive officer. 50 (2) Number of shares of common stock of DeCrane Holdings issuable upon exercise of options granted pursuant to our management incentive plan during the last fiscal year. (3) Relocation costs. (4) Mr. DeCrane also served as Chairman of the Board of Directors through August 1998. (5) Mr. Becker served as Group Vice President of Components, and President of Tri-Star, through April 1998. Mr. Becker became President and Chief Operating Officer in April 1998 and Senior Vice President and Group President of Cabin Management in October, 1999. (6) Mr. Kaplan joined DeCrane Aircraft as Senior Vice President on March 15, 1999. (7) Mr. Martin served as President Aerospace Display Systems from September 1996 until October 1999. Mr. Martin has been President of PATS since we acquired it in January 1999, and became our Senior Vice President and Group President of Systems Integration in October 1999. (8) Prior to Mr. Nerland joining DeCrane Aircraft on January 1, 1999, he provided consulting services to us during 1998 for which either Mr. Nerland or The Nerland Group, of which Mr. Nerland was a principal, was paid a total of $127,800 in 1998 and early 1999, which amount has been excluded from the table above. STOCK OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth individual grants of options to purchase shares of DeCrane Holdings common stock granted to the executive officers named below during the fiscal year ended December 31, 1999, pursuant to the management incentive plan. See "Employment Agreements and Compensation Arrangements--INCENTIVE PLANS."
POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES ANNUAL RATES OF STOCK UNDERLYING % OF EXERCISE OR PRICE APPRECIATION (1) OPTIONS OPTIONS BASE PRICE EXPIRATION ----------------------- NAME GRANTED GRANTED PER SHARE DATE 5% 10% - ---- ---------- -------- ----------- ---------- ---------- ---------- R. Jack DeCrane............................ 106,877 38.2% $23.00 2009 $1,545,931 $3,917,691 Charles H. Becker.......................... 26,719 9.6 23.00 2009 386,479 979,414 Richard J. Kaplan.......................... 28,669 10.3 23.00 2009 414,685 1,050,893 Robert G. Martin........................... 17,813 6.4 23.00 2009 257,657 652,955 Jeffrey A. Nerland......................... 10,688 3.8 23.00 2009 154,597 391,780
- ------------------------ (1) The potential realizable value assumes stock price appreciation rates of 5% and 10%, compounded annually, from the date the option was granted over the full option term. These assumed annual compound rates are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future prices of the stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No stock options were exercised by our executive officers during the year ended December 31, 1999. The following tables sets forth information about the stock options held by the executive officers named below as of December 31, 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS NAME OPTIONS AT FISCAL YEAR-END(1) - ---- ------------------------- ------------------------- EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE R. Jack DeCrane......................................... 22,712/84,165 --/-- Charles H. Becker....................................... 5,678/21,041 --/-- Richard J. Kaplan....................................... 6,092/22,577 --/-- Robert G. Martin........................................ 3,785/14,028 --/-- Jeffrey A. Nerland...................................... 2,271/8,417 --/--
- ------------------------ (1) No options were in-the-money based on the common stock share price of $23.00 per share as of December 31, 1999, the measuring date. 51 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our Board of Directors makes decisions regarding officer compensation as a committee of the whole. R. Jack DeCrane, chief executive officer of DeCrane Aircraft, participates in those discussions as a member of the Board of Directors. EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS R. JACK DECRANE On July 17, 1998, the Compensation Committee of our Board of Directors approved a three-year employment agreement between DeCrane Aircraft and R. Jack DeCrane, replacing his prior employment agreement that was to expire on September 1, 1998. Mr. DeCrane's employment agreement provides for various benefits, including: - an initial salary of $310,000, which is subject to annual review and increase, but not decrease; - an annual bonus, currently determined pursuant to the performance-based cash incentive bonus plan; - a $500,000 bonus in recognition of our then-recent acquisition of Avtech Corporation; - a $250,000 signing bonus; - options to purchase 50,000 shares of common stock of DeCrane Aircraft at a price equal to the fair market value of the shares as of July 16, 1998, one-half of which were immediately exercisable; the rest became exercisable upon the completion of the DLJ acquisition; and - a $150,000 cash continuation bonus payable on January 2, 1999, if employed by us on January 1, 1999. Mr. DeCrane's options were cancelled in August 1998 and he received a cash payout in lieu of the options. The employment agreement also provides that if specified change-of-control events occur, and Mr. DeCrane's employment is terminated by us for any reason other than for cause or as a result of his death or disability, or by Mr. DeCrane for "good reason," as defined in the agreement, then we will pay Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment will be $1.00 less than three times the sum of Mr. DeCrane's average base salary plus bonus for the five calendar years preceding his termination date and accrued but unpaid salary and bonus through the termination date. Mr. DeCrane will also receive other specified benefits, including continued coverage under our welfare plans for up to two years; a lump sum payment in cash equal to any unvested portions of our contributions to him under specified savings plans, plus two times the amount of our annual contributions on his behalf to those plans; a lump sum payment in cash equal to our matching contributions under those savings plans that Mr. DeCrane would have received had he continued maximum participation in the plans until the earlier of two years following his termination and December 31 of the year he turns 65, plus the vested and unvested amounts credited to him under any of our deferred compensation plans and the amount required to be credited during the year of his termination; and outplacement consulting services to aid Mr. DeCrane with re-employment. We will reduce these payments to the extent necessary to ensure deductibility for tax purposes. ROBERT G. MARTIN We entered into an employment agreement with Robert G. Martin, Senior Vice President of DeCrane Aircraft and President of the Systems Integration Group on September 10, 1999, amending his prior employment agreement dated September 19, 1996. Mr. Martin's employment agreement provides for an annual salary of $210,000 and an annual bonus determined pursuant to the performance-based cash incentive bonus plan. Mr. Martin's employment agreement expires on December 31, 2001, and DeCrane Aircraft may terminate the agreement at any time for cause or if Mr. Martin otherwise breaches the agreement or in the event of Mr. Martin's death or disability. JEFFREY F. SMITH We entered into an employment agreement with Jeffrey F. Smith, Vice President and General Manager of our Avtech subsidiary, on June 26, 1998. Mr. Smith's employment agreement provides for an annual salary, initially in the amount of $145,000 and an annual bonus currently determined pursuant to the performance-based cash incentive bonus plan. Mr. Smith's employment agreement expires on June 30, 2000, and Avtech may terminate the agreement at any time for cause or in the event of Mr. Smith's death or disability. If Mr. Smith's employment is terminated without cause, Mr. Smith is entitled to receive severance compensation in an amount equal to his base salary plus his anticipated bonus for the year in which he resigns. 52 401(K) RETIREMENT PLAN Substantially all of our full-time employees are eligible to participate in one of six 401(k) retirement plans we sponsor. The 401(k) plans allow employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, as a retirement fund. Effective October 1, 1997, we matched 25% of the employee contribution up to 6% of the employee's salary for the fourth quarter of 1997 and each quarter of 1998. Currently, the plans generally provide for us to match 50% of the employee contribution for up to 6% of the employee's salary. The full amount vested in a participant's account will be distributed to a participant following termination of employment, normal retirement or in the event of disability or death. INCENTIVE PLANS Our management incentive plan provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries, in amounts determined by the plan's committee from time to time. The management incentive plan is administered by a committee appointed by the Board of Directors of DeCrane Holdings. The plan provides for the granting of options to purchase 356,257 common shares and expires in 2009. Generally, ten percent of the options awarded to each plan participant vest immediately, and the remaining ninety percent of each participant's options will vest at a later date. The options generally vest based upon future attainment of defined performance criteria, although alternate vesting schedules may be authorized by the committee appointed by the Board of Directors of DeCrane Holdings to administer the plan. As of the date of this prospectus, options to purchase 279,662 shares at $23.00 per shares have been granted, of which options to purchase approximately 28,000 shares vested immediately. We believe the per share exercise price of the options granted approximated the fair market value of the underlying common stock on the grant date. Our stock purchase plan provides for the purchase of shares of common stock of DeCrane Holdings by designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries, with a portion of the purchase price to be loaned to the participants by DeCrane Aircraft. This arrangement was made available to persons and in amounts determined by the committee appointed by the Board of Directors of DeCrane Holdings to administer the plan. In December 1999, management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash at closing and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. Our cash incentive bonus plan provides for the allocation of a bonus pool each year for incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries. The bonus pool for participants will be adjusted upwards or downwards each year based on EBITDA and cash flow, as defined, generated by the relevant participant's operating unit. Bonus payments will be made in the quarter following the end of the year or period to which they relate and have been approved. DIRECTORS' COMPENSATION The directors of DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors of DeCrane Aircraft or committees thereof. However, John F. Fort, III, an independent director not affiliated with any investor in DeCrane Holdings, receives a director's fee of $5,000 for each meeting attended. In addition, the Board of Directors of DeCrane Holdings extended the management incentive plan to independent non-management directors, and issued options to purchase 3,260 shares of DeCrane Holdings common stock to Mr. Fort under the terms of the management incentive plan. See "Related Party Transactions." Also, all directors are reimbursed for out-of-pocket expenses. We expect to continue those policies. DeCrane Holdings does not compensate or intend to compensate its directors. 53 SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND MANAGEMENT All of the 100 outstanding shares of common stock of DeCrane Aircraft are owned by DeCrane Holdings. DeCrane Aircraft has no other class of stock outstanding. DeCrane Holdings has 3,571,827 shares of common stock issued and outstanding, which are owned by 33 shareholders, and 342,417 shares of 14% Senior Redeemable Exchangeable Preferred Stock due 2008 issued and outstanding as of December 31, 1999. The following table sets forth the beneficial ownership of DeCrane Holdings' voting securities as of December 31, 1999 by its principal owners and our executive officers and directors.
COMMON STOCK(2) 14% SENIOR REDEEMABLE ------------------------- EXCHANGEABLE PREFERRED NUMBER OF STOCK DUE 2008 SHARES, ------------------------- PARTIALLY NUMBER OF NAME OF BENEFICIAL OWNER (1) DILUTED PERCENTAGE SHARES PERCENTAGE - ---------------------------- --------- ---------- --------- ---------- DLJ Merchant Banking Partners II, L.P., and affiliates(3)..................................... 3,519,565 94.6% 340,000 99.3% Thompson Dean(4).................................... -- -- -- DLJ Merchant Banking, Inc. 277 Park Avenue New York, New York 10172 Susan C. Schnabel(4)................................ -- -- -- -- DLJ Merchant Banking, Inc. 277 Park Avenue New York, New York 10172 Timothy J. White(4)................................. -- -- -- -- DLJ Merchant Banking, Inc. 277 Park Avenue New York, New York 10172 Global Technology Partners, LLC(5).................. -- -- -- -- 1300 I Street N.W. Washington, D.C. Dr. Robert J. Hermann(5)............................ 9,561 * 714 * c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. Dr. Paul G. Kaminski(5)............................. 9,561 * 714 * c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. John F. Fort, III(6)................................ 1,087 * -- -- R. Jack DeCrane(7).................................. 79,233 2.2% -- -- Charles H. Becker(8)................................ 23,069 * -- -- Richard J. Kaplan(9)................................ 27,831 * -- -- Robert G. Martin(10)................................ 8,132 * -- -- Jeffrey A. Nerland(11).............................. 8,792 * -- -- Jeffrey A. Smith(12)................................ 12,480 * -- -- All directors and named executive officers as a group (12 persons)...................................... 179,746 5.0% 1,428 *
- ------------------------ * Less than 1.0% (1) Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares. (2) The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1999. (3) Reflects 3,369,565 shares and warrants for the issuance of an additional 150,000 shares, held directly by DLJ Merchant Banking Partners II, L.P. and the following related investors: DLJ Merchant Banking 54 Partners II-A, L.P.; DLJ Offshore Partners II, C.V.; DLJ Diversified Partners, L.P.; DLJ Diversified Partners-A, L.P.; DLJ Millennium Partners, L.P.; DLJ Millennium Partners-A, L.P.; DLJMB Funding II, Inc.; UK Investment Plan 1997 Partners, Inc.; DLJ EAB Partners, L.P.; DLJ First ESC L.P. and DLJ ESC II L.P. See "Related Party Transactions" and "Plan of Distribution." The address of DLJ Offshore Partners II, C.V. is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of UK Investment Plan 1997 Partners, Inc. is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. The address of each of the other persons is 277 Park Avenue, New York, New York 10172. (4) Messrs. Dean and White and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of Merchant Banking Partners II, L.P. as well as Donaldson, Lufkin & Jennette Securities Corporation. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates separately listed in this table; Messrs. Dean and White and Ms. Schnabel disclaim beneficial ownership of those shares. (5) Messrs. Hermann and Kaminski are members of Global Technology Partners, LLC. Six members of Global Technology Partners, including Messrs. Hermann and Kaminski, acquired 30,967 shares of DeCrane Holdings common stock and 2,417 shares of DeCrane Holdings 14% Senior Redeemable Exchangeable Preferred Stock due 2008, in transactions negotiated with DeCrane Holdings. The share data shown for Global Technology Partners and Messrs. Hermann and Kaminski excludes shares shown as held by the individual members; Messrs. Hermann and Kaminski disclaim beneficial ownership in any of the shares held by the other members. (6) Includes 1,087 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (7) Includes 22,712 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (8) Includes 5,678 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (9) Includes 6,092 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (10) Includes 3,785 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (11) Includes 2,271 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. (12) Includes 3,785 shares that may be acquired upon the exercise of stock options which are exercisable or will become exercisable prior to 60 days from December 31, 1999. DeCrane Holdings is authorized to issue an aggregate of 4,500,000 shares of DeCrane Holdings common stock, par value $.01 per share, of which 3,571,827 are outstanding, excluding 305,000 reserved for issuance upon exercise of outstanding warrants and 400,869 reserved for issuance upon exercise of stock options outstanding. DeCrane Holdings is authorized to issue up to 2,500,000 shares of DeCrane Holdings preferred stock, par value $.01 per share, in one or more series, of which 342,417 are outstanding. For a full description of DeCrane Holdings' capital stock, please review DeCrane Holdings' Certificate of Incorporation and Certificate of Designation for its 14% Senior Redeemable Exchangeable Preferred Stock due 2008. You can obtain a copy from us or from the exhibits to the registration statement of which this prospectus is a part. See "Where You Can Obtain More Information" at the end of "Business." 55 RELATED PARTY TRANSACTIONS In August 1998, DeCrane Holdings, a holding company organized by DLJ Merchant Banking Partners, II, L.P. and several affiliates acquired all our then-outstanding common stock. An agreement entered into in connection with the DLJ acquisition entitled a holding company controlled by DLJ Merchant Banking Partners II, L.P. to designate a number of directors proportionally commensurate with its stock ownership of DeCrane Aircraft. DeCrane Holdings selected all of the current members of the Board of Directors of DeCrane Aircraft. DLJ Merchant Banking or its designate selected all of the members of the Board of Directors of DeCrane Holdings. We also entered into certain financing arrangements in connection with the DLJ Acquisition. DLJ Capital Funding, Inc., another DLJ affiliate of DLJ Merchant Banking, received customary fees and reimbursement of expenses in connection with the arrangement and syndication of our previous bank credit facility and as a lender thereunder. Donaldson, Lufkin & Jenrette Securities Corporation, which is also an affiliate of DLJ Merchant Banking, acted as the initial purchaser of the old notes and is the sole market-maker for the notes. In addition, DeCrane Aircraft is obligated to pay DLJ Securities Corporation an annual advisory fee of $300,000 until 2003. We may from time to time enter into other investment banking relationships with DLJ Securities Corporation or one of its affiliates pursuant to which DLJ Securities Corporation or its affiliate will receive customary fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of DLJ Securities Corporation against liabilities, including liabilities under the federal securities laws. In connection with the DLJ acquisition, an Investors' Agreement dated as of August 28, 1998, and amended as of October 2, 1998, was entered into among DeCrane Holdings, DLJ Merchant Banking and its affiliates which hold DeCrane Holdings stock. It provides that: - Any person acquiring shares of common stock or preferred stock of DeCrane Holdings who is required by the terms of the Investors' Agreement or any employment agreement or stock purchase, option, stock option or other compensation plan of DeCrane Holdings to become a party thereto shall execute an agreement to become bound by the Investors' Agreement and thereafter shall be bound by it. - Transfers of the shares of DeCrane Holdings common stock and preferred stock by the parties to the agreement are restricted. - Parties to the agreement may participate in some specific kinds of sales of shares of DeCrane Holdings' common stock by the DLJ affiliates. - The DLJ affiliates may require the other parties to the agreement to sell shares of DeCrane Holdings' common stock in some cases should the DLJ affiliates choose to sell any such shares owned by them. - The DLJ affiliates may request six demand registrations with respect to the warrants for DeCrane Holdings common stock held by DLJ Merchant Banking and the common stock and preferred stock held by those affiliates, which are immediately exercisable subject to customary deferral and cutback provisions. - The parties to the agreement are entitled to unlimited piggyback registration rights, subject to customary cutback provisions, and excluding registrations of shares issuable in connection with any employee stock options, employee benefit plan or an acquisition. - DeCrane Holdings will indemnify the shareholders against some liabilities and expenses, including liabilities under the Securities Act. - The DLJ affiliates have the right to appoint all of the members of the Boards of Directors of DeCrane Holdings and DeCrane Aircraft, and at least one of such directors on each board will be an independent director. Messrs. Hermann, Kaminski and Fort are independent directors. Each warrant for DeCrane Holdings common stock held by the DLJ affiliates entitles the holder thereof to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. Those DLJ warrants are exercisable at any time prior to 5:00 p.m. New York City time on August 28, 2009, subject to applicable federal and state securities laws. 56 In connection with the DLJ acquisition, seven members of Global Technology Partners, LLC, including Messrs. Hermann and Kaminski, were granted options to purchase 44,612 shares of DeCrane Holdings common stock effective July 30, 1999. The options vest over a three-year period, subject to acceleration if the foregoing DLJ affiliates sell any of their shares of common stock. Those options will be exercisable at an exercise price equal to the price paid for DeCrane Holdings common stock by DLJ Merchant Banking and its affiliates. In December 1998, six members of Global Technology Partners, including Messrs. Hermann and Kaminski, purchased for approximately $704,000, newly issued shares of preferred and common stock of DeCrane Holdings. DeCrane Aircraft loaned one-half of the purchase price for such shares to those members with interest at applicable federal rates. The loans are repayable out of the proceeds from the sale of such stock and are secured by such stock. DeCrane Holdings has indemnified Global Technology Partners against some claims and liabilities including, liabilities under the Securities Act. The Board of Directors of DeCrane Holdings extended the management incentive plan to independent non-management directors, and issued options to purchase 3,260 shares of DeCrane Holdings common stock to Mr. Fort, the only director presently qualifying for such plan. In connection with our acquisition of PPI in April 1999, DLJ Merchant Banking invested an additional $12.5 million of capital in DeCrane Holdings by purchasing 543,478 additional shares of its common stock, for $23.00 per share. DeCrane Holdings, in turn, contributed the proceeds to DeCrane Aircraft. Three members of Global Technology Partners, including Messrs. Hermann and Kaminski, also purchased 10,869 newly issued shares of DeCrane Holdings common stock at $23.00 per share. DeCrane Aircraft loaned one-half of the purchase price for such shares to those members with interest at applicable federal rates. The loans are repayable out of the proceeds from the sale of such stock and are secured by such stock. In December 1999, management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash at closing and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. The loans are repayable out of the proceeds from the sale of such stock and are secured by such stock. The following table sets forth all indebtedness owed to us by our executive officers and directors which individually exceed $60,000 as required by the rules of the Securities and Exchange Commission. All indebtedness set forth below results from the above-described purchases of DeCrane Holdings preferred and common stock and is payable to DeCrane Aircraft. The indebtedness, plus accrued interest, is payable upon the sale of the DeCrane Holdings stock held as collateral for each of the loans. See "Management" for information regarding each individual's relationship with DeCrane Aircraft and DeCrane Holdings.
TOTAL INDEBTEDNESS TO DECRANE AIRCRAFT NUMBER OF SHARES AS OF DECEMBER 31, 1999 HELD AS COLLATERAL(A) ---------------------------------------- --------------------- INTEREST ACCRUED NAME PREFERRED COMMON RATE(B) PRINCIPAL(C) INTEREST(D) TOTAL(E) - ---- --------- --------- -------- ------------ ----------- ----------- R. Jack DeCrane......................... -- 56,521 5.74% $649,991 $1,124 $651,115 Charles H. Becker....................... -- 17,391 5.74 199,996 346 200,342 Richard J. Kaplan....................... -- 21,739 5.74 249,998 432 250,430 Jeffrey A. Nerland...................... -- 6,521 5.74 74,991 130 75,121 Jeffrey F. Smith........................ -- 8,695 5.74 99,992 173 100,165 Dr. Robert J. Hermann................... 714 13,184 (f) 145,664 5,375 151,039 Dr. Paul G. Kaminski.................... 714 13,184 (f) 145,664 5,375 151,039
- ------------------------ (a) Reflects the number of shares of DeCrane Holdings preferred and common stock held by DeCrane Aircraft as collateral for the loans. (b) Reflects the applicable federal rate of interest charged on the loans. Interest is compounded annually. (c) Reflects the original principal amount of the loans. (d) Reflects accrued interest payable through December 31, 1999. (e) Reflects the maximum amount of indebtedness during the year ended December 31, 1999. (f) Loans in the principal amount of $104,000 are at 4.33% and loans in the principal amount of $41,664 are at 5.54%. 57 DESCRIPTION OF BANK CREDIT FACILITY The bank credit facility is provided by a syndicate of lenders led by DLJ Securities Corporation, as arranger, DLJ Capital Funding, as syndication agent and Bank One, as administrative agent. The bank credit facility presently includes a $215 million term loan facility and a $50.0 million revolving credit facility, under which up to $10.0 million in letters of credit may be issued. The term loan facility is comprised of a Term A facility in the amount of $40.0 million which matures on September 30, 2004, a Term B facility in the amount of $65.0 million which matures on September 30, 2005, a Term C facility in the amount of $70.0 million which matures on April 23, 2006 and a Term D facility in the amount of $40.0 million which matures on December 17, 2006. The revolving credit facility is comprised of an acquisition facility of $25.0 million and a working capital facility of $25.0 million, each of which matures on September 30, 2004. Part of the working capital facility was initially used in August 1998 to finance the conversion of shares into cash in connection with the DLJ acquisition; the remainder can be used for general corporate and working capital purposes. The working capital facility is subject to a potential, but uncommitted, increase of up to $20.0 million at our request at any time prior to the 2004 maturity date. That increase will be available only if one or more financial institutions agree, at the time of our request, to provide it. Loans under the bank credit facility generally bear interest based on a margin over, at our option, the base rate or the Euro-Dollar rate. The margin for Term A loans through their maturity varies based upon DeCrane Aircraft's ratio of total debt to EBITDA, as defined in the credit agreement, ranging from 0.0% to 1.50% over the alternate base rate and from 1.00% to 2.75% over the reserve adjusted Euro-Dollar rate. The margin for Term B loans through their maturity is 1.75% for base rate borrowings and 3.00% for Euro-Dollar borrowings. The margin for Term C loans through their maturity is 2.00% for base rate borrowings and 3.25% for Euro-Dollar borrowings. The margin for Term D loans through their maturity is 2.5% for base rate borrowings and 3.75% for Euro-Dollar borrowings. The applicable commitment fees are determined based on the ratio of consolidated total debt to consolidated EBITDA of DeCrane Aircraft and its subsidiaries as specified in the bank credit agreement, called the "leverage ratio." We will pay commitment fees at a rate equal to 0.5% per annum on the unused portion of the working capital facility; and at a rate equal to 0.5% or 0.75% per annum, depending upon utilization, on the unused portion of the acquisition facility. Such fees are payable quarterly in arrears and upon the maturity or termination of the revolving credit facility. We will pay fees with respect to letters of credit issued hereunder equal to 0.125% per annum of the daily amount available to be drawn under such letter of credit. We will also pay fees with respect to letters of credit issued hereunder equal to, in the case of standby letters of credit, the applicable Euro-Dollar rate margin for working capital loans which are Euro-Dollar rate loans and, in the case of trade letters of credit, 1.25%, in each case multiplied by the daily amount available from time to time to be drawn under such letter of credit. All such fees are payable quarterly in arrears and computed on the basis of a 360-day year for the actual number of days elapsed. We will also pay documentary and processing charges with respect to the issuance, amendment or transfer of each letter of credit and each payment of a drawing made thereunder in accordance with such issuing lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment. The term loans are subject to the following amortization schedule:
TERM A TERM B TERM C TERM D YEAR LOAN LOAN LOAN LOAN - ---- -------- -------- -------- -------- Year 1................................... 0.00% 0.90% 1.00% 0.75% Year 2................................... 5.00% 1.00% 1.00% 1.00% Year 3................................... 10.00% 1.00% 1.00% 1.00% Year 4................................... 20.00% 1.00% 1.00% 1.00% Year 5................................... 25.00% 1.00% 1.00% 1.00% Year 6................................... 40.00% 1.00% 1.00% 1.00% Year 7................................... 0.00% 94.10% 94.00% 70.75% Year 8................................... 0.00% 0.00% 0.00% 23.50% ------- ------- ------- ------- Total.................................. 100.00% 100.00% 100.00% 100.00% ======= ======= ======= =======
58 The bank credit facility is subject to mandatory prepayment: - with 50% of the net cash proceeds received from the issuance of equity securities, to the extent that the leverage ratio exceeds 3.5 to 1, subject to certain exceptions, - with 100% of the net cash proceeds received from the issuance of debt, subject to certain exceptions, - with 100% of the net cash proceeds received from permitted asset sales, subject to certain exceptions and - with 50% of excess cash flow (as defined in the bank credit facility) for each fiscal year to the extent that the leverage ratio exceeds 3.5 to 1. We are required to apply all mandatory prepayment amounts first to the prepayment of the term loan facility, and thereafter to the prepayment of the revolving credit facility. DeCrane Holdings, and each of DeCrane Aircraft's wholly-owned direct and indirect domestic operating subsidiaries, are guarantors of the bank credit facility. Our obligations under the bank credit facility are secured by: - all existing and after-acquired personal property of DeCrane Aircraft and the foregoing subsidiary guarantors, including a pledge of all of the stock of all existing or future subsidiaries of DeCrane Aircraft (provided that no more than 65% of the voting stock of any foreign subsidiary shall be pledged), - first-priority perfected liens on all material existing and after-acquired real property interests of DeCrane Aircraft and the foregoing subsidiary guarantors, subject to customary permitted liens (as defined in the bank credit facility), - a pledge by DeCrane Holdings of the stock of DeCrane Aircraft, and - a negative pledge on all assets of DeCrane Aircraft and its subsidiaries, in each case subject to certain exceptions. The bank credit facility contains customary covenants and restrictions on our ability to engage in certain activities, including, but not limited to: - limitations on other indebtedness, liens, investments and guarantees. - restrictions on dividends and redemptions and payments on subordinated debt. - restrictions on mergers and acquisitions, sales of assets and leases. - a minimum level of EBITDA, a minimum coverage ratio of interest expense. - a minimum coverage ratio of fixed charges. - a maximum leverage ratio. - a maximum level of capital expenditures. Borrowings under the bank credit facility are subject to significant conditions, including compliance with several tests of our financial condition and the absence of any material adverse change. These restrictions may limit our access to borrowings, as described in "Risk Factors--Substantial Leverage." 59 DESCRIPTION OF NOTES GENERAL The notes have been issued pursuant to an indenture between DeCrane Aircraft Holdings, Inc. and State Street Bank and Trust Company, as Trustee. For purposes of this section only, "DeCrane Aircraft" and "we," "us," "our" and similar terms refer to DeCrane Aircraft Holdings, Inc. and its successors in accordance with the terms of the indenture and not to its subsidiaries, unless the context otherwise requires. The terms of the notes include those stated in the indenture, and those which are incorporated into the indenture by reference to the Trust Indenture Act of 1939. The notes are subject to all of those terms, and holders of notes are referred to the indenture and the Trust Indenture Act for a statement thereof. The terms of the new notes and the old notes are substantially the same in all material respects, except that the new notes will not be subject to liquidated damages penalties for failure to timely register the notes under the Securities Act, and will be more freely transferable by the holders thereof by reason of their registration thereunder. You should read the entire indenture for a complete understanding of the rights and obligations of the holders of notes. Copies of the indenture and registration rights agreement are available as set forth under "--Additional Information." Also, the terms of the indenture use many specially defined terms. In this summary, we have used the key defined terms, which are shown here as capitalized words. You should refer to the definitions listed in "--Key Definitions" below for their complete scope and meaning. The notes are: - general unsecured obligations of DeCrane Aircraft; - subordinated in right of payment to all existing and future Senior Indebtedness of DeCrane Aircraft, including the bank credit facility; - ranking at the same level of payment priority, sometimes called "PARI PASSU," with any future senior subordinated Indebtedness of DeCrane Aircraft and senior in right of payment to all future subordinated Indebtedness of DeCrane Aircraft; - effectively subordinated to all liabilities of DeCrane Aircraft's subsidiaries that are not Guarantors, including trade payables; - fully and unconditionally guaranteed on a senior subordinated basis by DeCrane Aircraft's existing wholly-owned domestic subsidiaries, as their general unsecured obligations, subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under our bank credit facility, and ranking senior in right of payment to any future subordinated indebtedness of the Guarantors. We may issue an unlimited amount of additional senior subordinated notes under the indenture, so long as the total amount of debt is permitted by our financial covenants. On a pro forma basis, as of September 30, 1999, DeCrane Aircraft and the Guarantors would have had outstanding approximately $216.3 million of Senior Indebtedness and DeCrane Aircraft's non-Guarantor subsidiaries would have had approximately $2.3 million of outstanding liabilities, including trade payables but excluding guarantees under the bank credit facility. The indenture will permit DeCrane Aircraft and its Subsidiaries to incur additional Indebtedness, including Senior Indebtedness, in the future. The risk of such indebtedness to you as an investor is described in "Risk Factors--Subordination." As of the date of the indenture, all of DeCrane Aircraft's Subsidiaries were designated as Restricted Subsidiaries. However, under some circumstances, DeCrane Aircraft will be permitted to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the indenture. PRINCIPAL, MATURITY AND INTEREST The notes will initially be limited in aggregate principal amount to $100.0 million and will mature on September 30, 2008. Interest on the notes will accrue at the rate of 12% per annum and will be payable semi-annually in arrears on March 30 and September 30, commencing on March 30, 1999, to holders of record on the immediately preceding March 15 and September 15. Interest on the notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 60 Principal of, premium, if any, and interest on the notes will be payable at the office or agency of DeCrane Aircraft maintained for such purpose in New York City or, at the option of DeCrane Aircraft, payment of interest may be made by check mailed to the holders of the notes at their respective addresses set forth in the register of holders of notes. However, all payments of principal, premium and interest with respect to notes represented by one or more permanent global notes will be paid by wire transfer of immediately available funds to the account of the Depository Trust Company or any successor thereto. Until otherwise designated by DeCrane Aircraft, DeCrane Aircraft's office or agency in New York will be the office of the Trustee maintained for such purpose. The notes will be issued in denominations of $1,000 and integral multiples thereof. SUBORDINATION The payment of Subordinated Note Obligations is subordinated in right of payment, as set forth in the indenture, to the prior payment in full in cash or cash equivalents of all Senior Indebtedness, whether outstanding on the date of the indenture or thereafter incurred. Upon any distribution to creditors of DeCrane Aircraft in a liquidation or dissolution of DeCrane Aircraft or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to DeCrane Aircraft or their property, an assignment for the benefit of creditors or any marshalling of DeCrane Aircraft's assets and liabilities, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness, including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness, before the holders of notes will be entitled to receive any payment with respect to the Subordinated Note Obligations. In that instance, until all Obligations with respect to Senior Indebtedness are paid in full in cash or cash equivalents, any distribution to which the holders of notes would be entitled shall be made to the holders of Senior Indebtedness except Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance." DeCrane Aircraft also may not make any payment upon or in respect of the Subordinated Note Obligations, except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance", if a default in the payment of the principal of, premium, if any, or interest on or commitment fees relating to, Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace, or if any other default occurs and is continuing with respect to Designated Senior Indebtedness that permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default from the holders of any Designated Senior Indebtedness. This right of a senior creditor is typically called "blockage." Payments on the notes may and shall be resumed, in the case of a payment default, upon the date on which such default is cured or waived, and otherwise, upon the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable blockage notice is received, unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior blockage notice. No nonpayment default that existed or was continuing on the date of delivery of any blockage notice to the Trustee shall be, or be made, the basis for a subsequent blockage notice unless such default shall have been waived or cured for a period of not less than 90 days. "Designated Senior Indebtedness" means any Indebtedness outstanding under the bank credit facility, and any other Senior Indebtedness permitted under the indenture the principal amount of which is $25.0 million or more and that has been designated by DeCrane Aircraft in writing to the Trustee as "Designated Senior Indebtedness." "Permitted Junior Securities" means Equity Interests in DeCrane Aircraft or debt securities of DeCrane Aircraft that are subordinated to all Senior Indebtedness, and any debt securities issued in exchange for Senior Indebtedness, to substantially the same extent as, or to a greater extent than, the notes are subordinated to Senior Indebtedness. "Senior Indebtedness" means, with respect to any person, - all Obligations of such person outstanding under the bank credit facility and all Hedging Obligations payable to a lender or an Affiliate thereof or to a person that was a lender or an Affiliate thereof at the time the contract was entered into under the bank credit facility or any of its Affiliates, including interest accruing subsequent to the filing of, or which would have accrued but for the filing of, a petition for bankruptcy, whether or not such interest is an allowable claim in such bankruptcy proceeding, 61 - 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 YEAR OF PRINCIPAL AMOUNT - ---- ------------------- 2003........................................................ 106.000% 2004........................................................ 104.000% 2005........................................................ 102.000% 2006 and thereafter......................................... 100.000%
62 Notwithstanding the foregoing, on or prior to September 30, 2001, DeCrane Aircraft may redeem up to 35% of the aggregate principal amount of notes ever issued under the indenture in cash at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings. However, the foregoing redemption is only permitted if at least 65% of the aggregate principal amount of notes ever issued under the indenture remains outstanding immediately after the occurrence of the redemption, and the redemption occurs within 90 days of the date of the closing of any such Public Equity Offering. In addition, at any time prior to September 30, 2003, DeCrane Aircraft may, at its option upon the occurrence of a Change of Control, redeem the notes, in whole but not in part, upon not less than 30 nor more than 60 days' prior notice, and no more than 60 days after the occurrence of such Change of Control, in cash at a redemption price equal to (1) the present value of the sum of all the remaining interest, excluding any accrued and unpaid interest, premium and principal payments that would become due on the notes as if the notes were to remain outstanding and be redeemed on September 30, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (2) accrued and unpaid interest to the date of redemption. "Treasury Rate" means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to September 30, 2003, as stated in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date or, if such Statistical Release is no longer published, any publicly available source of similar market data. However, if the period from the redemption date to September 30, 2003 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. SELECTION AND NOTICE If less than all of the notes are to be redeemed at any time, selection of notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the notes are listed, or, if the notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate. However, notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to such note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. MANDATORY REDEMPTION DeCrane Aircraft is not required to make mandatory redemption of, or sinking fund payments with respect to, the notes. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL Upon the occurrence of a Change of Control, as specifically defined in the indenture and summarized below, each holder of notes will have the right to require DeCrane Aircraft to repurchase all or any part, equal to $1,000 or an integral multiple thereof, of such holder's notes which the holder offers in the manner described below at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase. Within 60 days following any Change of Control, DeCrane Aircraft will cause the mailing of a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the payment date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the 63 provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to the foregoing offer and repurchase, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached their obligations described in the Indenture by virtue thereof. On the foregoing payment date, DeCrane Aircraft will, to the extent lawful, accept for payment all notes or portions thereof properly tendered pursuant to its offer to repurchase, deposit with the paying agent an amount equal to the foregoing payment in respect of all notes or portions thereof so tendered, and deliver or cause to be delivered to the Trustee the notes so accepted together with an officers' certificate stating the aggregate principal amount of notes or portions thereof being purchased by DeCrane Aircraft. The paying agent will promptly mail to each holder of notes so tendered the foregoing payment for such notes, and the Trustee will promptly authenticate and mail, or cause to be transferred by book-entry, to each holder a new Note equal in principal amount to any unpurchased portion of the notes surrendered, if any. However, each such new Note must be in a principal amount of $1,000 or an integral multiple thereof. The indenture provides that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, DeCrane Aircraft will either repay all outstanding Senior Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Senior Indebtedness to permit the repurchase of notes required by this covenant. DeCrane Aircraft will publicly announce the results of its offer to repurchase on or as soon as practicable after the foregoing payment date. The change of control provisions described above will be applicable whether or not any other provisions of the indenture are applicable. Except as described above, the indenture does not contain provisions that permit the holders of the notes to require that DeCrane Aircraft repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. The bank credit facility prohibits DeCrane Aircraft from purchasing any notes and also provides that change of control events, which may include events not otherwise constituting a "change of control" as defined in the indenture, with respect to DeCrane Aircraft would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Indebtedness to which DeCrane Aircraft becomes a party may contain similar restrictions and provisions. In the event such a change of control occurs at a time when DeCrane Aircraft is prohibited from purchasing notes, DeCrane Aircraft could seek the consent of its lenders to the purchase of notes or could attempt to refinance the borrowings that contain such prohibition. If DeCrane Aircraft does not obtain such a consent or repay such borrowings, DeCrane Aircraft will remain prohibited from purchasing notes. In such case, DeCrane Aircraft's failure to purchase tendered notes would constitute an Event of Default under the indenture, which would, in turn, constitute a default under the bank credit facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of notes. DeCrane Aircraft will not be required to make an offer to repurchase upon a change of control in the manner described above if a third party makes the offer to repurchase in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to an offer to repurchase made by DeCrane Aircraft and purchases all notes validly tendered and not withdrawn under such offer. "Change of Control" means the occurrence of any of the following: (1) the sale, lease, transfer, conveyance or other disposition, other than by way of merger or consolidation, in one or a series of related transactions, of all or substantially all of the assets of DeCrane Aircraft and its Subsidiaries, taken as a whole, to any "person" or "group," as such terms are used in Section 13(d) of the Exchange Act, other than the Principals and their Related Parties; (2) the adoption of a plan for the liquidation or dissolution of DeCrane Aircraft; (3) the consummation of any transaction, including, any merger or consolidation the result of which is that any "person" or "group," as such terms are used in Section 13(d) of the Exchange Act, other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly through one or more intermediaries, of 50% or more of the voting power of the outstanding voting stock of DeCrane Aircraft; or (4) the first day on which a majority of the members of the board of directors of DeCrane Aircraft are not Continuing Members. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of DeCrane Aircraft and its Subsidiaries taken as a 64 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, 65 plus accrued and unpaid interest thereon to the date of purchase, the notes that would otherwise be redeemed, or (2) an investment in property, the making of a capital expenditure or the acquisition of assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if (a) as a result of the acquisition by DeCrane Aircraft or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary or (b) the Investment in such Capital Stock is permitted by clause (f) of the definition of Permitted Investments. Pending the final application of any such Net Proceeds, DeCrane Aircraft may temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, DeCrane Aircraft will be required to make an offer to all holders of notes referred to as an "Asset Sale Offer," to purchase the maximum principal amount of notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in the indenture. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, DeCrane Aircraft may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of notes surrendered by holders thereof in connection with an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be purchased as set forth under "--Selection and Notice." Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the indenture relating to such Asset Sale Offer, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the indenture by virtue thereof. PRINCIPAL COVENANTS RESTRICTED PAYMENTS The indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (a) declare or pay any dividend or make any other payment or distribution on account of DeCrane Aircraft's or any of its Restricted Subsidiaries' Equity Interests, other than dividends or distributions payable in Equity Interests other than Disqualified Stock of DeCrane Aircraft or dividends or distributions payable to DeCrane Aircraft or any Wholly Owned Restricted Subsidiary of DeCrane Aircraft; (b) purchase, redeem or otherwise acquire or retire for value any Equity Interests of DeCrane Aircraft, any of its Restricted Subsidiaries or any other Affiliate of DeCrane Aircraft, other than any such Equity Interests owned by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft; (c) make any principal payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value, any Indebtedness of DeCrane Aircraft that is subordinated in right of payment to the notes, except in accordance with the mandatory redemption or repayment provisions set forth in the original documentation governing such Indebtedness, but not pursuant to any mandatory offer to repurchase upon the occurrence of any event; or (d) make any Restricted Investment; all such payments and other actions set forth in clauses (a) through (d) above are collectively referred to as "Restricted Payments"; unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and 66 (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 67 (x) $4.0 million in any calendar year with unused amounts in any calendar year being carried over to succeeding calendar years subject to a maximum, without giving effect to the following clause (y) of $7.0 million in any calendar year, plus (y) the aggregate cash proceeds received by DeCrane Aircraft during such calendar year from any reissuance of Equity Interests by DeCrane Aircraft or DeCrane Holdings to members of management of DeCrane Aircraft and its Restricted Subsidiaries and (2) no Default or Event of Default shall have occurred and be continuing immediately after such transaction; (e) payments and transactions in connection with the Acquisition, the Acquisition Financing, the Offering, the bank credit facility including commitment, syndication and arrangement fees payable thereunder, and the application of the proceeds thereof including the purchase of shares of common stock of DeCrane Aircraft and any payment therefor by way of dissenting rights or otherwise, and the payment of fees and expenses with respect thereto; (f) the payment of dividends or the making of loans or advances by DeCrane Aircraft to DeCrane Holdings not to exceed $3.0 million in any fiscal year for costs and expenses incurred by DeCrane Holdings in its capacity as a holding company or for services rendered by DeCrane Holdings on behalf of DeCrane Aircraft; (g) payments or distributions to DeCrane Holdings pursuant to any Tax Sharing Agreement; (h) the payment of dividends by a Restricted Subsidiary on any class of common stock of such Restricted Subsidiary if such dividend is paid pro rata to all holders of such class of common stock, and at least 51% of such class of common stock is held by DeCrane Aircraft or one or more of its Restricted Subsidiaries; (i) the repurchase of any class of common stock of a Restricted Subsidiary if such repurchase is made pro rata with respect to such class of common stock, and at least 51% of such class of common stock is held by DeCrane Aircraft or one or more of its Restricted Subsidiaries; (j) any other Restricted Investment made in a Permitted Business which, together with all other Restricted Investments made pursuant to this clause (j) since the date of the Indenture, does not exceed $25.0 million, in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (j), either as a result of (1) the repayment or disposition thereof for cash or (2) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, valued proportionate to DeCrane Aircraft's equity interest in such Subsidiary at the time of such redesignation at the fair market value of the net assets of such Subsidiary at the time of such redesignation, in the case of clause (1) and (2), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (j); PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Investment; (k) the declaration and payment of dividends to holders of any class or series of Disqualified Stock of DeCrane Aircraft or any Restricted Subsidiary issued on or after the date of the indenture in accordance with the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock"; PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (l) repurchases of Equity Interests deemed to occur upon exercise of stock options if such Equity Interests represent a portion of the exercise price of such options; (m) the payment of dividends or distributions on DeCrane Aircraft's common stock, following the first public offering of DeCrane Aircraft's common stock or DeCrane Holdings' common stock after the date of the Indenture, of up to 6.0% per annum of (1) the net proceeds received by DeCrane Aircraft from such public offering of its common stock or (2) the net proceeds received by DeCrane Aircraft from such public offering of DeCrane Holdings' common stock as common equity or preferred equity other than Disqualified Stock, 68 other than, in each case, with respect to public offerings with respect to DeCrane Aircraft's common stock or DeCrane Holdings' common stock registered on Form S-8; PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after any such payment of dividends or distributions; (n) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (n) since the date of the Indenture, does not exceed $10.0 million, in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (n) either as a result of (1) the repayment or disposition thereof for cash or (2) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary valued proportionate to DeCrane Aircraft's equity interest in such Subsidiary at the time of such redesignation at the fair market value of the net assets of such Subsidiary at the time of such redesignation, in the case of clause (1) and (2), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (n); PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (o) the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary; (p) the purchase, redemption or other acquisition or retirement for value of any Equity Interests of any Restricted Subsidiary issued after the date of the indenture, PROVIDED that the aggregate price paid for any such repurchased, redeemed, acquired or retired Equity Interests shall not exceed the sum of - the amount of cash and Cash Equivalents received by such Restricted Subsidiary from the issue or sale thereof and - any accrued dividends thereon the payment of which would be permitted pursuant to clause (k) above; (q) any Investment in an Unrestricted Subsidiary that is funded by Qualified Proceeds received by DeCrane Aircraft on or after the date of the Indenture from contributions to DeCrane Aircraft's capital or from the issue and sale on or after the date of the Indenture of Equity Interests of DeCrane Aircraft or of Disqualified Stock or convertible debt securities to the extent they have been converted into such Equity, other than Equity Interests, Disqualified Stock or convertible debt securities sold to a Subsidiary of DeCrane Aircraft and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock, in an amount measured at the time such Investment is made and without giving effect to subsequent changes in value that does not exceed the amount of such Qualified Proceeds; and (r) distributions or payments of Receivables Fees. The board of directors of DeCrane Aircraft may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such designation, all outstanding Investments by DeCrane Aircraft and its Restricted Subsidiaries, except to the extent repaid in cash, in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Restricted Investments in an amount equal to the greater of - the net book value of such Investments at the time of such designation and - the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Investment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments other than cash shall be the fair market value on the date of the Restricted Payment of the assets or securities proposed to be transferred or issued by DeCrane Aircraft or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The amount of all Qualified Proceeds other than cash shall be the fair market value on the date of receipt thereof by DeCrane Aircraft of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment shall be determined by the board of directors of DeCrane Aircraft whose resolution with respect thereto shall be delivered to the Trustee. Not later than the date of making any Restricted Payment, DeCrane Aircraft shall deliver to the Trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed. 69 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; 70 (8) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of intercompany Indebtedness between or among DeCrane Aircraft and/or any of its Restricted Subsidiaries; PROVIDED that (1) if DeCrane Aircraft is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the notes and (2) (A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than DeCrane Aircraft or a Restricted Subsidiary thereof and (B) any sale or other transfer of any such Indebtedness to a Person that is not either DeCrane Aircraft or a Restricted Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by DeCrane Aircraft or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (8); (9) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (A) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding and (B) exchange rate risk with respect to agreements or Indebtedness of such Person payable denominated in a currency other than U.S. dollars, PROVIDED that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (10) the guarantee by DeCrane Aircraft or any of its Restricted Subsidiaries of Indebtedness of DeCrane Aircraft or a Restricted Subsidiary of DeCrane Aircraft that was permitted to be incurred by another provision of this covenant; (11) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Acquired Indebtedness in an aggregate principal amount or accreted value, as applicable not to exceed $10.0 million outstanding after giving effect to such incurrence; (12) obligations in respect of performance and surety bonds and completion guarantees provided by DeCrane Aircraft or any Restricted Subsidiary in the ordinary course of business; and (13) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount or accreted value, as applicable outstanding after giving effect to such incurrence, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (13), not to exceed $20.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (13) above or is entitled to be incurred pursuant to the first paragraph of this covenant, DeCrane Aircraft shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, DeCrane Aircraft may, at any time, change the classification of an item of Indebtedness or any portion thereof to any other clause or to the first paragraph hereof, PROVIDED that DeCrane Aircraft would be permitted to incur such item of Indebtedness or such portion thereof pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. All Indebtedness under the bank credit facility outstanding on the date of the indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock." As a result, DeCrane Aircraft will be permitted to incur significant additional secured indebtedness under clause (1) of the definition above of "Permitted Indebtedness." 71 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, 72 (j) secured Indebtedness otherwise permitted to be incurred pursuant to the covenants described under "--Incurrence of Indebtedness and Issuance of Preferred Stock" and "--Liens" that limit the right of the debtor to dispose of the assets securing such Indebtedness, (k) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business, (l) other Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be incurred subsequent to the Issuance Date pursuant to the provisions of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock", (m) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business, and (n) restrictions created in connection with any Receivables Facility that, in the good faith determination of the board of directors of DeCrane Aircraft, are necessary or advisable to effect such Receivables Facility. MERGER, CONSOLIDATION, OR SALE OF ASSETS The indenture provides that DeCrane Aircraft may not consolidate or merge with or into, whether or not DeCrane Aircraft is the surviving corporation, or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another person unless (a) DeCrane Aircraft is the surviving corporation, or the other person formed by or surviving any such consolidation or merger or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia, (b) the person other than DeCrane Aircraft formed by or surviving any such consolidation or merger or the person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of DeCrane Aircraft under the registration rights agreement, the notes and the indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, (c) immediately after such transaction no Default or Event of Default exists, and (d) DeCrane Aircraft or the other person formed by or surviving any such consolidation or merger, or to which such sale, assignment, transfer, conveyance or other disposition shall have been made (1) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (2) would together with its Restricted Subsidiaries have a higher Fixed Charge Coverage Ratio immediately after such transaction, after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, than the Fixed Charge Coverage Ratio of DeCrane Aircraft and its Restricted Subsidiaries immediately prior to such transaction. The foregoing clause (d) will not prohibit a merger between DeCrane Aircraft and a Wholly Owned Subsidiary of DeCrane Holdings created for the purpose of holding the Capital Stock of DeCrane Aircraft, a merger between DeCrane Aircraft and a Wholly Owned Restricted Subsidiary or a merger between DeCrane Aircraft and an Affiliate incorporated solely for the purpose of reincorporating DeCrane Aircraft in another state of the United States so long as, in each case, the amount of Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries is not increased thereby. The indenture provides that DeCrane Aircraft will not lease all or substantially all of its assets to any person. TRANSACTIONS WITH AFFILIATES The indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or 73 assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate of DeCrane Aircraft each of which the indenture refers to as an "Affiliate Transaction", unless (a) such Affiliate Transaction is on terms that are no less favorable to DeCrane Aircraft or such Restricted Subsidiary than those that would have been obtained in a comparable transaction by DeCrane Aircraft or such Restricted Subsidiary with an unrelated Person and (b) DeCrane Aircraft delivers to the Trustee, with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $7.5 million, either (1) a resolution of the board of directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the board of directors or (2) an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions: (a) customary directors' fees, indemnification or similar arrangements or any employment agreement or other compensation plan or arrangement entered into by DeCrane Aircraft or any of its Restricted Subsidiaries in the ordinary course of business, including ordinary course loans to employees not to exceed (1) $5.0 million outstanding in the aggregate at any time and (2) $2.0 million to any one employee, and consistent with the past practice of DeCrane Aircraft or such Restricted Subsidiary; (b) transactions between or among DeCrane Aircraft and/or its Restricted Subsidiaries; (c) payments of customary fees by DeCrane Aircraft or any of its Restricted Subsidiaries to DLJ Merchant Banking and its Affiliates made for any financial advisory, financing, underwriting or placement services or in respect of other investment banking activities, including, without limitation, in connection with acquisitions or divestitures which are approved by a majority of the board of directors in good faith; (d) any agreement as in effect on the date of the indenture or any amendment thereto which such amendment is not disadvantageous to the holders of the notes in any material respect, or any transaction contemplated thereby; (e) payments and transactions in connection with the Acquisition, the bank credit facility and the bridge notes and the Offering and the application of the proceeds thereof, and the payment of the fees and expenses with respect thereto; (f) Restricted Payments that are permitted by the provisions of the indenture described under "--Restricted Payments" and any Permitted Investments; (g) payments and transactions in connection with the Global Technology Investment, and the payment of fees and expenses with respect thereto; and (h) sales of accounts receivable, or participations therein, in connection with any Receivables Facility. SALE AND LEASEBACK TRANSACTIONS The indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; PROVIDED that DeCrane Aircraft or any Restricted Subsidiary may enter into a sale and leaseback transaction if (a) DeCrane Aircraft or such Restricted Subsidiary, as the case may be, could have incurred Indebtedness in an amount equal to the Attributable Indebtedness relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the 74 covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock," and incurred a Lien to secure such Indebtedness pursuant to the covenant described under "--Liens," (b) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value, as determined in good faith by the board of directors and set forth in an officers' certificate delivered to the Trustee, of the property that is the subject of such sale and leaseback transaction and (c) the transfer of assets in such sale and leaseback transaction is permitted by, and DeCrane Aircraft applies the proceeds of such transaction in compliance with, the covenant described under "--Repurchase at the Option of Holders--Asset Sales." NO SENIOR SUBORDINATED INDEBTEDNESS The indenture provides that DeCrane Aircraft will not incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the notes and no Guarantor will incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the Note Guarantees. ADDITIONAL NOTE GUARANTEES The indenture provides that, if any Wholly-Owned Restricted Subsidiary of DeCrane Aircraft that is a Domestic Subsidiary guarantees any Indebtedness under the bank credit facility, then such Restricted Subsidiary shall become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel, in accordance with the terms of the indenture. ACCOUNTS RECEIVABLE FACILITY The indenture provides that no Accounts Receivable Subsidiary will incur any Indebtedness if immediately after giving effect to such incurrence the aggregate outstanding Indebtedness of all Accounts Receivable Subsidiaries, excluding any Indebtedness owed to DeCrane Aircraft or any Restricted Subsidiary, would exceed $60.0 million. REPORTS The indenture provides that, whether or not required by the rules and regulations of the SEC, so long as any notes are outstanding, DeCrane Aircraft will furnish to the holders of notes (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if DeCrane Aircraft were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by DeCrane Aircraft's certified independent accountants and (2) all current reports that would be required to be filed with the SEC on Form 8-K if DeCrane Aircraft were required to file such reports, in each case, within the time periods specified in the SEC's rules and regulations. In addition, following the consummation of the exchange offer contemplated by the registration rights agreement, whether or not required by the rules and regulations of the SEC, DeCrane Aircraft will file a copy of all such information and reports with the SEC for public availability within the time periods specified in the SEC's rules and regulations and make such information available to securities analysts and prospective investors upon request. In addition, DeCrane Aircraft and the Guarantors have agreed that, for so long as any notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES The indenture provides that each of the following constitutes an Event of Default: (a) default for 30 days in the payment when due of interest on the notes, whether or not prohibited by the subordination provisions of the indenture; 75 (b) default in payment when due of the principal of or premium, if any, on the notes, whether or not prohibited by the subordination provisions of the indenture; (c) failure by DeCrane Aircraft or any of its Restricted Subsidiaries for 30 days after receipt of notice from the Trustee or holders of at least 25% in principal amount of the notes then outstanding to comply with the provisions described under "Repurchase at the Option of Holders--Change of Control," "--Asset Sales," "Principal Covenants--Restricted Payments," "--Incurrence of Indebtedness and Issuance of Preferred Stock" or "Merger, Consolidation or Sale of Assets"; (d) failure by DeCrane Aircraft for 60 days after notice from the Trustee or the holders of at least 25% in principal amount of the notes then outstanding to comply with any of its other agreements in the Indenture or the notes; (e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by DeCrane Aircraft or any of its Restricted Subsidiaries, or the payment of which is guaranteed by DeCrane Aircraft or any of its Restricted Subsidiaries, whether such Indebtedness or guarantee now exists, or is created after the date of the indenture, which default (1) is caused by a failure to pay Indebtedness at its stated final maturity after giving effect to any applicable grace period provided in such Indebtedness (a "Payment Default") or (2) results in the acceleration of such Indebtedness prior to its stated final maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (f) failure by DeCrane Aircraft or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $10.0 million, net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing, which judgments are not paid, discharged or stayed for a period of 60 days; (g) except as permitted by the indenture, any note guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any person acting of behalf of any Guarantor, shall deny or disaffirm its obligations under its note guarantee; and (h) events of bankruptcy or insolvency with respect to DeCrane Aircraft or any of its Restricted Subsidiaries that is a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately; PROVIDED that, so long as any Indebtedness permitted to be incurred pursuant to the bank credit facility shall be outstanding, such acceleration shall not be effective until the earlier of (a) an acceleration of any such Indebtedness under the bank credit facility or (b) five business days after receipt by DeCrane Aircraft and the administrative agent under the bank credit facility of written notice of such acceleration. Notwithstanding the foregoing, in the case of an Event of Default arising from events of bankruptcy or insolvency with respect to DeCrane Aircraft or any Significant Subsidiary, all outstanding notes will become due and payable without further action or notice. holders of the notes may not enforce the indenture or the notes except as provided in the indenture. In the event of a declaration of acceleration of the notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (e) of the preceding paragraph, the declaration of acceleration of the notes shall be automatically annulled if the holders of any Indebtedness described in clause (e) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration, and if the annulment of the acceleration of the notes would not conflict with any judgment or decree of a court of competent jurisdiction, and all existing Events of Default, except non-payment of principal or interest on the notes that became due solely because of the acceleration of the notes, have been cured or waived. 76 Subject to limitations, holders of a majority in principal amount of the then outstanding notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the notes notice of any continuing Default or Event of Default, except a Default or Event of Default relating to the payment of principal or interest, if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the Trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the notes. DeCrane Aircraft is required to deliver to the Trustee annually a statement regarding compliance with the indenture, and DeCrane Aircraft is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF MEMBER, DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No member, director, officer, employee, incorporator or stockholder of DeCrane Aircraft, as such, shall have any liability for any obligations of DeCrane Aircraft under the notes or the indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. Such waiver may not be effective to waive liabilities under the federal securities laws, and it is the view of the SEC that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE DeCrane Aircraft may, at its option and at any time, elect to have all of its and the Guarantors' obligations discharged with respect to the outstanding notes, the note guarantees and the indenture ("Legal Defeasance") except for (a) the rights of holders of outstanding notes to receive payments in respect of the principal of, premium, if any, and interest on such notes when such payments are due from the trust referred to below, (b) DeCrane Aircraft's obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust, (c) the rights, powers, trusts, duties and immunities of the Trustee, and DeCrane Aircraft's obligations in connection therewith and (d) the Legal Defeasance provisions of the indenture. In addition, DeCrane Aircraft may, at its option and at any time, elect to have their obligations released with respect to some covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, some of the events described under "--Events of Default and Remedies" other than non-payment and bankruptcy will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (a) DeCrane Aircraft must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and DeCrane Aircraft must specify whether the notes are being defeased to maturity or to a particular redemption date, (b) in the case of Legal Defeasance, DeCrane Aircraft shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that DeCrane Aircraft has received from, or there has been published by, the Internal Revenue Service a ruling, or since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, subject to 77 customary assumptions and exclusions, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred, (c) in the case of Covenant Defeasance, DeCrane Aircraft shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred, (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit, other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit, or, insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit, (e) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument other than the indenture to which DeCrane Aircraft or any of its Subsidiaries is a party or by which DeCrane Aircraft or any of its Subsidiaries is bound, (f) DeCrane Aircraft must have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions, after the 123rd day following the deposit, the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision or any other applicable federal or New York bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (g) DeCrane Aircraft must deliver to the Trustee an officers' certificate stating that the deposit was not made by DeCrane Aircraft with the intent of preferring the holders of notes over the other creditors of DeCrane Aircraft with the intent of defeating, hindering, delaying or defrauding creditors of DeCrane Aircraft or others, and (h) DeCrane Aircraft must deliver to the Trustee an officers' certificate and an opinion of counsel, subject to customary assumptions and exclusions, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A holder may transfer or exchange notes in accordance with the indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and DeCrane Aircraft may require a holder to pay any taxes and fees required by law or permitted by the indenture. DeCrane Aircraft are not required to transfer or exchange any note selected for redemption. Also, DeCrane Aircraft is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. The registered holder of a note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the indenture, the note guarantees and the notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the notes then outstanding, and any existing default or compliance with any provision of the indenture, the note guarantees or the notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding notes. Without the consent of each holder affected, an amendment or waiver may not,with respect to any notes held by a non-consenting holder: (a) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver, 78 (b) reduce the principal of or change the fixed maturity of any note or alter the provisions with respect to the redemption of the notes, other than the provisions described under the caption "--Repurchase at the Option of Holders," (c) reduce the rate of or extend the time for payment of interest on any note, (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the notes, except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration, (e) make any note payable in money other than that stated in the notes, (f) make any change in the provisions of the indenture relating to waivers of past Defaults, (g) waive a redemption payment with respect to any note, other than the provisions described under the caption "--Repurchase at the Option of Holders," (h) release any Guarantor from its obligations under its note guarantee or the Indenture, except in accordance with the terms of the indenture or (i) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, any amendment to or waiver of the covenant described under the caption "--Repurchase at the Option of Holders--Change of Control," and any amendment to Article 10 of the indenture, which relates to subordination, will require the consent of the holders of at least two-thirds in aggregate principal amount of the notes then outstanding if such amendment would materially adversely affect the rights of holders of notes. Notwithstanding the foregoing, without the consent of any holder of notes, DeCrane Aircraft, the Guarantors and the Trustee may amend or supplement the indenture, the note guarantees or the notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated notes in addition to or in place of certificated notes, to provide for the assumption of DeCrane Aircraft's obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of DeCrane Aircraft's assets, to make any change that would provide any additional rights or benefits to the holders of notes or that does not materially adversely affect the legal rights under the indenture of any such holder, or to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act or to provide for guarantees of the notes. CONCERNING THE TRUSTEE The indenture contains limitations on the rights of the Trustee, State Street Bank & Trust Co., should it become a creditor of any Company, to obtain payment of claims in some cases, or to realize on property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions. However, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to exceptions. The indenture provides that in case an Event of Default shall occur and not be cured, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. KEY DEFINITIONS Set forth below are key defined terms used in the indenture. Please refer to the indenture for a full description of all such terms, and any other capitalized terms used herein for which no definition is provided. "ACCOUNTS RECEIVABLE SUBSIDIARY" means an Unrestricted Subsidiary of DeCrane Aircraft to which DeCrane Aircraft or any of its Restricted Subsidiaries sells any of its accounts receivable pursuant to a Receivables Facility. 79 "ACQUIRED INDEBTEDNESS" means, with respect to any specified person, (a) Indebtedness of any other person existing at the time such other person is merged with or into or became a Subsidiary of such specified person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other person merging with or into or becoming a Subsidiary of such specified person, and (b) Indebtedness secured by a Lien encumbering an asset acquired by such specified person at the time such asset is acquired by such specified person. "ACQUISITION" means the acquisition by an indirect subsidiary of DeCrane Holdings of at least majority of the outstanding stock of DeCrane Aircraft, the merger of such subsidiary into DeCrane Aircraft, the repayment of specified indebtedness of DeCrane Aircraft, the payment of related fees and expenses and the Finance Merger. "ACQUISITION FINANCING" means the issuance and sale by DeCrane Aircraft of the notes, the execution and delivery by DeCrane Aircraft and certain of its subsidiaries of the bank credit facility and the borrowing thereunder and the issuance and sale by DeCrane Aircraft of bridge notes to finance the Acquisition and the issuance and sale by DeCrane Holdings of common stock and preferred stock for consideration, the proceeds of each of which were used to fund the purchase price for the Acquisition. "AFFILIATE" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For purposes of this definition, "control," when used with respect to any person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "ASSET SALE" means (1) the sale, lease, conveyance, disposition or other transfer referred to as a "disposition" of any properties, assets or rights, provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole will be governed by the provisions of the indenture described under the caption "-- Change of Control" and the provisions described under the caption "--Merger, Consolidation or Sale of Assets" and not by the provisions of the indenture's asset sale covenant, and (2) the issuance, sale or transfer by DeCrane Aircraft or any of its Restricted Subsidiaries of Equity Interests of any of DeCrane Aircraft's Restricted Subsidiaries, in either case, whether in a single transaction or a series of related transactions that either have a fair market value in excess of $5.0 million or are for net proceeds in excess of $5.0 million. However, the following items shall not be deemed to be Asset Sales: - dispositions in the ordinary course of business; - a disposition of assets by DeCrane Aircraft to a Restricted Subsidiary or by a Restricted Subsidiary to DeCrane Aircraft or to another Restricted Subsidiary; - a disposition of Equity Interests by a Restricted Subsidiary to DeCrane Aircraft or to another Restricted Subsidiary; - the sale and leaseback of any assets within 90 days of the acquisition thereof; - foreclosures on assets; - any exchange of like property pursuant to Section 1031 of the Internal Revenue Code of 1986, for use in a Permitted Business; - any sale of Equity Interests in, or Indebtedness or other securities of, an Unrestricted Subsidiary; - a Permitted Investment or a Restricted Payment that is permitted by the covenant described under the caption "--Restricted Payments"; and - sales of accounts receivable, or participations therein, in connection with any Receivables Facility. 80 "ATTRIBUTABLE INDEBTEDNESS" in respect of a sale and leaseback transaction means, at the time of determination, the present value, discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP, of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended. "BANK CREDIT FACILITY" means that Credit Agreement dated as of August 28, 1998 among DeCrane Aircraft, various financial institutions party thereto, DLJ Capital Funding, Inc., as syndication agent, and The First National Bank of Chicago, as administrative agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, modified, renewed, refunded, replaced or refinanced from time to time, including any agreement (1) extending or shortening the maturity of any Indebtedness incurred thereunder or contemplated thereby, (2) adding or deleting borrowers or guarantors thereunder, (3) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, PROVIDED that on the date such Indebtedness is incurred it would not be prohibited by clause (1) of "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (4) otherwise altering the terms and conditions thereof. Indebtedness under the bank credit facility outstanding on the date of the indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under the caption "--Certain Covenants-- Incurrence of Indebtedness and Issuance of Preferred Stock." "CAPITAL EXPENDITURE INDEBTEDNESS" means Indebtedness incurred by any person to finance the purchase or construction or any property or assets acquired or constructed by such person which have a useful life or more than one year so long as - the purchase or construction price for such property or assets is included in "addition to property, plant or equipment" in accordance with GAAP, - the acquisition or construction of such property or assets is not part of any acquisition of a person or line of business and - such Indebtedness is incurred within 90 days of the acquisition or completion of construction of such property or assets. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (1) in the case of a corporation, corporate stock, (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents, however designated, of corporate stock, (3) in the case of a partnership or limited liability company, partnership or membership interests whether general or limited and (4) any other interest or participation that confers on a person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing person. "CASH EQUIVALENTS" means (1) Government Securities, (2) any certificate of deposit maturing not more than 365 days after the date of acquisition issued by, or demand deposit or time deposit of, an Eligible Institution or any lender under the bank credit facility, (3) commercial paper maturing not more than 365 days after the date of acquisition of an issuer, other than an Affiliate of DeCrane Aircraft, with a rating, at the time as of which any investment 81 therein is made, of "A-3" or higher according to Standard & Poor's Rating Group or "P-2" or higher according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (4) any bankers acceptances of money market deposit accounts issued by an Eligible Institution, (5) any fund investing exclusively in investments of the types described in clauses (1) through (4) above and (6) in the case of any Subsidiary organized or having its principal place of business outside the United States, investments denominated in the currency of the jurisdiction in which such Subsidiary is organized or has its principal place of business which are similar to the items specified in clauses (1) through (5) above, including without limitation any deposit with any bank that is a lender to any such Subsidiary. "CONSOLIDATED CASH FLOW" means, with respect to any person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period plus, to the extent deducted in computing Consolidated Net Income, - an amount equal to any extraordinary or non-recurring loss plus any net loss realized in connection with an Asset Sale, - provision for taxes based on income or profits of such person and its Restricted Subsidiaries for such period, - Fixed Charges of such person for such period, - depreciation, amortization, including amortization of goodwill and other intangibles, and all other non-cash charges, excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period, including charges related to non-cash minority interests, of such Person and its Restricted Subsidiaries for such period, - net periodic post-retirement benefits, - other income or expense net as set forth on the face of such person's statement of operations, - expenses and charges related to the Acquisition, the bank credit facility and the application of the proceeds thereof which are paid, taken or otherwise accounted for within 180 days of the consummation of the Acquisition, and - any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisition or divestitures, including, but not limited to, financing and refinancing fees and costs incurred in connection with the Acquisition, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent and in the same proportion that Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such person. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for any period, the sum of, without duplication, - the interest expense of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; PROVIDED that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense; and - the consolidated capitalized interest of such person and its Restricted Subsidiaries for such period, whether paid or accrued; 82 PROVIDED, however, that Receivables Fees shall be deemed not to constitute Consolidated Interest Expense. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent and in the same proportion that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "CONSOLIDATED NET INCOME" means, with respect to any person for any period, the aggregate of the Net Income of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; PROVIDED that - the Net Income or loss of any person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent person or a Restricted Subsidiary thereof, - the Net Income or loss of any Restricted Subsidiary other than a Subsidiary organized or having its principal place of business outside the United States shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income or loss is not at the date of determination permitted without any prior governmental approval that has not been obtained or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary, - the Net Income or loss of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, - the cumulative effect of a change in accounting principles shall be excluded and - expenses and charges related to the Acquisition, the bank credit facility and the application of the proceeds thereof which are paid, taken or otherwise accounted for within 180 days of the consummation of the Acquisition shall be excluded. "DECRANE HOLDINGS" means DeCrane Holdings Co., a Delaware corporation, the corporate parent of DeCrane Aircraft, or its successors. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DESIGNATED NONCASH CONSIDERATION" means the fair market value of non-cash consideration received by DeCrane Aircraft or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Noncash Consideration pursuant to an officers' certificate, setting forth the basis of such valuation, executed by the principal executive officer and the principal financial officer of DeCrane Aircraft, less the amount of cash or Cash Equivalents received in connection with a sale of such Designated Noncash Consideration. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms or by the terms of any security into which it is convertible, or for which it is exchangeable; or upon the happening of any event other than any event solely within the control of the issuer thereof, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, is exchangeable for Indebtedness, except to the extent exchangeable at the option of such Person subject to the terms of any debt instrument to which such Person is a party, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the notes mature. However, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require DeCrane Aircraft to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock, if the terms of such Capital Stock provide that DeCrane Aircraft may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described under the caption "--Principal Covenants--Restricted Payments." Further, if such Capital Stock is issued to any plan for the benefit of employees of DeCrane Aircraft or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by DeCrane Aircraft in order to satisfy applicable statutory or regulatory obligations. "DOMESTIC SUBSIDIARY" means a Subsidiary that is organized under the laws of the United States or any State, district or territory thereof other than Audio International Sales, Inc., a U.S. Virgin Islands corporation. 83 "ELIGIBLE INSTITUTION" means a commercial banking institution that has combined capital and surplus not less than $100.0 million or its equivalent in foreign currency, whose short-term debt is rated "A-3" or higher according to Standard & Poor's Ratings Group or "P-2" or higher according to Moody's Investor Services, Inc. or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments. "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock but excluding any debt security that is convertible into, or exchangeable for, Capital Stock. "EXISTING INDEBTEDNESS" means Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries other than in existence on the date of the Indenture, excluding Indebtedness under the Bank Credit Facility, until such amounts are repaid. "FINANCE MERGER" means the merger of DeCrane Finance Co. with and into DeCrane Aircraft. "FIXED CHARGES" means, with respect to any person for any period, the sum, without duplication, of the Consolidated Interest Expense of such person for such period, and all dividend payments on any series of preferred stock of such person other than dividends payable solely in Equity Interests that are not Disqualified Stock, in each case, on a consolidated basis and in accordance with GAAP. "FIXED CHARGE COVERAGE RATIO" means, with respect to any person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such person for such period, in each case exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made referred to as the "Calculation Date." In the event that the referent Person or any of its Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness other than revolving credit borrowings or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the Calculation Date, then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock and the use of the proceeds therefrom, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, acquisitions that have been made by DeCrane Aircraft or any of its Subsidiaries, including all mergers or consolidations and any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated to include the Consolidated Cash Flow of the acquired entities on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation practices, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, as determined in good faith by the principal financial officer of DeCrane Aircraft, regardless of whether such cost savings could then be reflected in PRO FORMA financial statements under GAAP, Regulation S-X promulgated by the SEC or any other regulation or policy of the SEC, and without giving effect to the third clause of the proviso set forth in the definition of Consolidated Net Income. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "GLOBAL TECHNOLOGY PARTNERS" means Global Technology Partners, LLC and its Affiliates. "GLOBAL TECHNOLOGY INVESTMENT" means the sale by DeCrane Holdings to Global Technology Partners of its common stock, the purchase price of which will be partially financed by Global Technology Loans, and the granting by DeCrane Holdings to Global Technology Partners of options to purchase shares of its common stock. "GLOBAL TECHNOLOGY LOANS" means one or more loans by DeCrane Aircraft or DeCrane Holdings to Global Technology Partners to finance Global Technology Partners' purchase of common stock of DeCrane 84 Holdings; PROVIDED, HOWEVER, that the aggregate principal amount of all such Global Technology Loans outstanding at any time shall not exceed $2.0 million. "GUARANTEE" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "GUARANTORS" means each of the Domestic Subsidiaries of DeCrane Aircraft that is a Wholly Owned Restricted Subsidiary on the date of the indenture, and any other Subsidiary that executes a note Guarantee in accordance with the provisions of the indenture. "HEDGING OBLIGATIONS" means, with respect to any person, the obligations of such person under (a) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (b) other agreements or arrangements designed to protect such person against fluctuations in interest rates and (c) agreements or arrangements designed to protect such person against fluctuations in exchange rates. "INDEBTEDNESS" means, with respect to any person, any indebtedness of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit, or reimbursement agreements in respect thereof, or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing Indebtedness, than letters of credit and Hedging Obligations would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such person whether or not such Indebtedness is assumed by such person and, to the extent not otherwise included, the guarantee by such Person of any Indebtedness of any other person, PROVIDED that Indebtedness shall not include the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be - the accreted value thereof, together with any interest thereon that is more than 30 days past due, in the case of any Indebtedness that does not require current payments of interest, and - the principal amount thereof, in the case of any other Indebtedness; PROVIDED that the principal amount of any Indebtedness that is denominated in any currency other than United States dollars shall be the amount thereof, as determined pursuant to the foregoing provision, converted into United States dollars at the Spot Rate in effect on the date that such Indebtedness was incurred, or, if such indebtedness was incurred prior to the date of the Indenture, the Spot Rate in effect on the date of the indenture. "INVESTMENTS" means, with respect to any person, all investments by such person in other persons including Affiliates in the forms of direct or indirect loans, including guarantees by the referent person of, and Liens on any assets of the referent person securing, Indebtedness or other obligations of other persons, advances or capital contributions, excluding commission, travel and similar advances to officers and employees made in the ordinary course of business, purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. However, an investment by DeCrane Aircraft for consideration consisting of common equity securities of DeCrane Aircraft shall not be deemed to be an Investment. If DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of DeCrane Aircraft such that, after giving effect to any such sale or disposition, such person is no longer a Subsidiary of DeCrane Aircraft, DeCrane Aircraft shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described under "--Restricted Payments." 85 "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code or equivalent statutes of any jurisdiction. "MANAGEMENT LOANS" means one or more loans by DeCrane Aircraft or DeCrane Holdings to officers and/or directors of DeCrane Aircraft and any of its Restricted Subsidiaries to finance the purchase by such officers and directors of common stock of DeCrane Holdings; PROVIDED, however, that the aggregate principal amount of all such Management Loans outstanding at any time shall not exceed $5.0 million. "NET INCOME" means, with respect to any person, the net income or loss of such person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (a) any gain (or loss), together with any related provision for taxes on such gain or loss, realized in connection with any Asset Sale, including dispositions pursuant to sale and leaseback transactions, or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (b) any extraordinary or nonrecurring gain or loss, together with any related provision for taxes on such extraordinary or nonrecurring gain or loss. "NET PROCEEDS" means the aggregate cash proceeds received by DeCrane Aircraft or any of its Restricted Subsidiaries in respect of any Asset Sale, including any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale, net of, without duplication: - the direct costs relating to such Asset Sale, including legal, accounting and investment banking fees, and sales commissions, recording fees, title transfer fees and appraiser fees and cost of preparation of assets for sale, and any relocation expenses incurred as a result thereof, - taxes paid or payable as a result thereof after taking into account any available tax credits or deductions and any tax sharing arrangements, - amounts required to be applied to the repayment of Indebtedness, other than revolving credit Indebtedness incurred pursuant to the bank credit facility, secured by a Lien on the asset or assets that were the subject of such Asset Sale and - any reserve established in accordance with GAAP or any amount placed in escrow, in either case for adjustment in respect of the sale price of such asset or assets until such time as such reserve is reversed or such escrow arrangement is terminated, in which case Net Proceeds shall include only the amount of the reserve so reversed or the amount returned to DeCrane Aircraft or its Restricted Subsidiaries from such escrow arrangement, as the case may be. "NON-RECOURSE DEBT" means Indebtedness - no default which, including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary, would permit upon notice, lapse of time or both any holder of any other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and - as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of DeCrane Aircraft or any of its Restricted Subsidiaries, other than the stock of an Unrestricted Subsidiary pledged by DeCrane Aircraft to secure debt of such Unrestricted Subsidiary. However, in no event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely as a result of any default provisions contained in a guarantee thereof by DeCrane Aircraft or any of its Restricted Subsidiaries if DeCrane Aircraft or such Restricted Subsidiary was otherwise permitted to incur such guarantee pursuant to the Indenture. "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OFFERING" means the offering of the notes by DeCrane Aircraft. 86 "PARI PASSU INDEBTEDNESS" means Indebtedness of DeCrane Aircraft that ranks pari passu in right of payment to the notes. "PERMITTED BUSINESS" means the avionics manufacturing industry and any business in which DeCrane Aircraft and its Restricted Subsidiaries are engaged on the date of the indenture or any business reasonably related, incidental or ancillary thereto. "PERMITTED INVESTMENTS" means - any Investment in DeCrane Aircraft or in a Restricted Subsidiary of DeCrane Aircraft, - any Investment in cash or Cash Equivalents, - any Investment by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft in a Person, if as a result of such Investment such Person becomes a Restricted Subsidiary of DeCrane Aircraft, or such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, DeCrane Aircraft or a Wholly Owned Restricted Subsidiary of DeCrane Aircraft, - any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales," - any Investment acquired solely in exchange for Equity Interests other than Disqualified Stock of DeCrane Aircraft, - any Investment in a Person engaged in a Permitted Business, other than an Investment in an Unrestricted Subsidiary, having an aggregate fair market value, taken together with all other Investments made pursuant to this clause that are at that time outstanding, not to exceed 15% of Total Assets at the time of such Investment, with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value, - Investments relating to any special purpose Wholly Owned Subsidiary of DeCrane Aircraft organized in connection with a Receivables Facility that, in the good faith determination of the board of directors of DeCrane Aircraft, are necessary or advisable to effect such Receivables Facility and - the Management Loans and Global Technology Loans. "PERMITTED LIENS" means: - Liens on property of a person existing at the time such person is merged into or consolidated with DeCrane Aircraft or any Restricted Subsidiary, PROVIDED that such Liens were not incurred in contemplation of such merger or consolidation and do not secure any property or assets of DeCrane Aircraft or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation; - Liens existing on the date of the indenture; - Liens securing Indebtedness consisting of Capitalized Lease Obligations, purchase money Indebtedness, mortgage financings, industrial revenue bonds or other monetary obligations, in each case incurred solely for the purpose of financing all or any part of the purchase price or cost of construction or installation of assets used in the business of DeCrane Aircraft or its Restricted Subsidiaries, or repairs, additions or improvements to such assets, PROVIDED that - such Liens secure Indebtedness in an amount not in excess of the original purchase price or the original cost of any such assets or repair, additional or improvement thereto, plus an amount equal to the reasonable fees and expenses in connection with the incurrence of such Indebtedness, - such Liens do not extend to any other assets of DeCrane Aircraft or its Restricted Subsidiaries, and, in the case of repair, addition or improvements to any such assets, such Lien extends only to the assets and improvements thereto or thereon repaired, added to or improved, - the Incurrence of such Indebtedness is permitted by "--Principal Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and 87 - such Liens attach within 365 days of such purchase, construction, installation, repair, addition or improvement; - Liens to secure any refinancings, renewals, extensions, modification or replacements, such events are collectively referred to as "refinancing," or successive refinancings, in whole or in part, of any Indebtedness secured by Liens referred to in the clauses above so long as such Lien does not extend to any other property other than improvements thereto; - Liens securing letters of credit entered into in the ordinary course of business and consistent with past business practice; - Liens on and pledges of the capital stock of any Unrestricted Subsidiary securing Non-Recourse Debt of such Unrestricted Subsidiary; - Liens securing Indebtedness and Obligations under the bank credit facility; and - other Liens securing indebtedness that is permitted by the terms of the Indenture to be outstanding having an aggregate principal amount at any one time outstanding not to exceed $50.0 million. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries issued within 60 days after repayment of, in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries; PROVIDED that - the principal amount accreted value, if applicable of such Permitted Refinancing Indebtedness does not exceed the principal amount of accreted value, if applicable, plus premium, if any, and accrued interest on the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded, plus the amount of reasonable expenses incurred in connection therewith, - such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded, and - if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to, the notes on terms at least as favorable, taken as a whole, to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PRINCIPALS" means DLJ Merchant Banking Partners II, L.P. and its Affiliates. "PUBLIC EQUITY OFFERING" means any issuance of common stock by DeCrane Aircraft, other than to DeCrane Holdings and other than Disqualified Stock, or common stock or preferred stock by DeCrane Holdings, other than Disqualified Stock, registered pursuant to the Securities Act, other than issuances registered on Form S-8 and issuances registered on Form S-4, excluding issuances of common stock pursuant to employee benefit plans of DeCrane Holdings or DeCrane Aircraft or otherwise as compensation to employees of DeCrane Aircraft or DeCrane Holdings. "QUALIFIED PROCEEDS" means any of the following or any combination of the following: - cash; - Cash Equivalents; - assets that are used or useful in a Permitted Business; and - the Capital Stock of any person engaged in a Permitted Business if, in connection with the receipt by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft of such Capital Stock, - such Person becomes a Restricted Subsidiary of DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft or - such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft. 88 "RECEIVABLES FACILITY" means one or more receivables financing facilities, as amended from time to time, pursuant to which DeCrane Aircraft or any of its Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable Subsidiary. "RECEIVABLES FEES" means distributions or payments made directly or by means of discounts with respect to any participation interests issued or sold in connection with, and other fees paid to a Person that is not a Restricted Subsidiary in connection with, any Receivables Facility. "RELATED PARTY" means, with respect to any Principal, any controlling stockholder or partner of such Principal on the date of the indenture, or any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding directly or through one or more Subsidiaries a 51% or more controlling interest of which consist of the Principals and/or such other persons referred to in the immediately preceding clauses. "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such person that is not an Unrestricted Subsidiary. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "SPOT RATE" means, for any currency, the spot rate at which such currency is offered for sale against United States dollars as determined by reference to the New York foreign exchange selling rates, as published in The Wall Street Journal on such date of determination for the immediately preceding business day or, if such rate is not available, as determined in any publicly available source of similar market data. "STATED MATURITY" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "SUBSIDIARY" means, with respect to any person, - any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled without regard to the occurrence of any contingency to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such person or one or more of the other Subsidiaries of that person or a combination thereof and - any partnership or limited liability company - the sole general partner or the managing general partner or managing member of which is such Person or a Subsidiary of such person or - the only general partners or managing members of which are such person or of one or more Subsidiaries of such Person or any combination thereof. "TAX SHARING AGREEMENT" means any tax sharing agreement or arrangement between DeCrane Aircraft and DeCrane Holdings, as the same may be amended from time to time; PROVIDED that in no event shall the amount permitted to be paid pursuant to all such agreements and/or arrangements exceed the amount DeCrane Aircraft would be required to pay for income taxes were it to file a consolidated tax return for itself and its consolidated Restricted Subsidiaries as if it were a corporation that was a parent of a consolidated group. "TOTAL ASSETS" means the total consolidated assets of DeCrane Aircraft and its Restricted Subsidiaries, as shown on the most recent balance sheet, excluding the footnotes of DeCrane Aircraft prepared in accordance with GAAP. "UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the board of directors as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary: - has no Indebtedness other than Non-Recourse Debt; 89 - is not party to any agreement, contract, arrangement or understanding with DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to DeCrane Aircraft or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of DeCrane Aircraft; - a person with respect to which neither DeCrane Aircraft nor any of its Restricted Subsidiaries has any direct or indirect obligation - to subscribe for additional Equity Interests other than Investments described in clause (g) of the definition of Permitted Investments or - to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels, of operating results; and - has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries. Any such designation by the board of directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described under "--Principal Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of DeCrane Aircraft as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under "--Principal Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," DeCrane Aircraft shall be in default of such covenant. The board of directors of DeCrane Aircraft may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of DeCrane Aircraft of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if such Indebtedness is permitted under the covenant described under "--Principal Covenants--Incurrence of Indebtedness and Issuance Preferred of Stock," and no Default or Event of Default would be in existence following such designation. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by the number of years calculated to the nearest one-twelfth that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such person all of the outstanding Capital Stock or other ownership interests of which other than directors' qualifying shares shall at the time be owned by such person or by one or more Wholly Owned Subsidiaries of such person. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any person means a Restricted Subsidiary of such person all the outstanding Capital Stock or other ownership interests of which other than directors' qualifying shares shall at the time be owned by such person or by one or more Wholly Owned Restricted Subsidiaries of such person or by such person and one or more Wholly Owned Restricted Subsidiaries of such person. ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the indenture and registration rights Agreement without charge by writing to us, or obtaining from public sources a copy of the exhibits to the registration statement of which this prospectus is a part. See "Where You Can Get More Information" at the end of the "Business" section. 90 PLAN OF DISTRIBUTION This prospectus is to be used by DLJ Securities Corporation in connection with offers and sales of the new notes in market-making transactions effected from time to time. DLJ Securities Corporation may act as a principal or agent for one party when acting as principal or as agent for both parties, and may receive compensation in the form of discounts and commissions, including from both parties when it acts as agent for both. Those sales will be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices. DLJ Merchant Banking Partners II, L.P. and certain of its affiliates beneficially own approximately 83.7% of the common stock of DeCrane Holdings, on a fully diluted basis assuming exercise of all outstanding warrants and options. Thompson Dean, Susan C. Schnabel and Timothy J. White, each of whom is a principal of DLJ Merchant Banking, are members of the Board of Directors of DeCrane Holdings and the issuer of the notes, DeCrane Aircraft. DLJ Capital Funding, Inc. acted as syndication agent in connection with our bank credit facility, for which it received certain customary fees and expenses. DLJ Bridge Finance Inc. purchased certain bridge notes which were refinanced by the initial offering of old notes, for which it received customary fees and expenses. DLJ Securities Corporation acted as dealer/manager in connection with the tender offer for our common stock in the DLJ acquisition, as arranger in connection with our prior bank credit facility, and as the initial purchaser of the old notes, and is the financial advisor to DeCrane Holdings and DeCrane Aircraft. DLJ Merchant Banking, DLJ Capital Funding, Inc. and DLJ Bridge Finance, Inc. are affiliates of DLJ Securities Corporation. DLJ Securities Corporation currently makes a market in the notes. However, DLJ Securities Corporation is not obligated to do so and it may discontinue or interrupt any such market-making at any time without notice. Any such market-making activity is also subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934. We cannot assure you that any market for the notes will continue, or about your ability to sell the notes or the price at which you may be able to sell them. See "Risk Factors--Trading Market for the Notes." DLJ Securities Corporation has, from time to time, provided investment banking and other financial advisory services to us, for which it has received customary compensation, and will provide such services and financial advisory services to us in the future. DLJ Securities Corporation was the initial purchaser in the initial offering of the old notes and received an underwriting discount of approximately $3.3 million in connection therewith. See "Related Party Transactions." We have entered into a registration rights agreement with DLJ Securities Corporation regarding its use of this prospectus. Pursuant to such agreement, we have agreed to bear all registration expenses incurred under that agreement, and to indemnify DLJ Securities Corporation against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the new notes offered hereby was passed upon for DeCrane Aircraft by Spolin & Silverman LLP, Santa Monica, California and Davis, Polk & Wardwell, New York, New York. 91 EXPERTS The following financial statements included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting: - the consolidated balance sheets as of December 31, 1997 and 1998 and the consolidated statements of operations, of stockholders' equity and of cash flows for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998 of DeCrane Aircraft Holdings, Inc.; - the balance sheets as of September 30, 1996 and 1997 and the statements of income, of stockholder's equity and of cash flows for each of the three years in the period ended September 30, 1997 of Avtech Corporation; - the consolidated balance sheets as of June 30, 1997 and 1998 and the consolidated statements of operations, of stockholders' equity and of cash flows for the years then ended of PATS, Inc.; - the balance sheets as of December 31, 1997 and 1998 and the statements of income, of stockholders' equity and of cash flows for the years then ended of Custom Woodwork & Plastics, Inc.; and - the balance sheets as of December 31, 1998 and September 30, 1999 and the statements of income, of partners' equity and of cash flows for the year ended December 31, 1998 and the nine months ended September 30, 1999 of The Infinity Partners, Ltd. The following financial statements included in this prospectus have been so included in reliance on the report of Baird, Kurtz & Dobson, independent accountants, given on the authority of said firm as experts in auditing and accounting: - the consolidated balance sheets as of December 31, 1997 and 1998 and the consolidated statements of income, stockholders' equity and cash flows for the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998 of PPI Holdings, Inc., and the consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 1996 and for the period from January 1, 1997 to June 11, 1997 of Precision Pattern Inc., the predecessor to PPI Holdings, Inc.; and - the balance sheets as of December 31, 1997 and 1998 and the statements of income, of stockholders' equity and of cash flows for the years then ended of PCI NewCo, Inc. 92 INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
PAGE ----------- Basis of Presentation............................................................................................ P-2 Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1999.......................................... P-3 Unaudited Pro Forma Consolidated Statement of Operations for the: Twelve months ended September 30, 1999......................................................................... P-4 Year ended December 31, 1998................................................................................... P-5 Nine months ended September 30, 1998........................................................................... P-6 Nine months ended September 30, 1999........................................................................... P-7 Notes to Unaudited Pro Forma Consolidated Financial Data......................................................... P-8
P-1 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA BASIS OF PRESENTATION The following unaudited pro forma consolidated financial data for DeCrane Aircraft is based on our historical financial statements adjusted to reflect: - DLJ's 1998 acquisition of us; - our 1998 Avtech and Dettmers acquisitions; - our 1999 PATS, PPI and Custom Woodwork acquisitions, which were completed prior to September 30, 1999; and - our 1999 PCI NewCo, International Custom Interiors and Infinity acquisitions, which were completed subsequent to September 30, 1999. For additional information on the 1998 acquisitions, see the notes to our audited 1998 consolidated financial statements included elsewhere in this prospectus. For additional information on the 1999 acquisitions, see the notes to our unaudited 1999 consolidated financial statements included elsewhere in this prospectus. Unaudited pro forma consolidated statements of operations are presented for the twelve months ended September, 30, 1999, the year ended December 31, 1998 and the nine months ended September 30, 1998 and 1999. The statements reflect the DLJ acquisition and all of our acquisitions as if they had occurred as of January 1, 1998. The unaudited pro forma consolidated balance sheet reflects the PCI NewCo, International Custom Interiors and Infinity acquisitions as of September 30, 1999; all of the 1998 acquisitions and the 1999 PATS, PPI and Custom Woodwork acquisitions had occurred by that date and are therefore reflected in our historical balance sheet. The pro forma adjustments are based upon available information and assumptions management believes are reasonable under the circumstances. The unaudited pro forma consolidated financial data and accompanying notes should be read in conjunction with our historical audited and unaudited financial statements and related notes and the historical audited financial statements and related notes of the companies we acquired included elsewhere in this prospectus. The pro forma financial data does not purport to represent what our actual results of operations or actual financial position would have been if the transactions described above in fact occurred on such dates or to project our results of operations or financial position for any future period or date. P-2 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999
COMPANIES ACQUIRED SUBSEQUENT DECRANE TO SEPTEMBER 30,1999(2) AIRCRAFT ------------------------------ HISTORICAL(1) HISTORICAL(3) ADJUSTMENTS PRO FORMA ------------- ------------- ------------ --------- (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents................. $ 3,139 $1,182 $ 209 (4) $ 4,530 Accounts receivable, net.................. 40,074 3,634 -- 43,708 Inventories............................... 51,290 2,197 111 (5) 53,598 Deferred income taxes..................... 2,916 -- -- 2,916 Prepaid expenses and other current assets.................................. 2,847 1,233 (1,128)(6) 2,952 -------- ------ -------- -------- Total current assets.................... 100,266 8,246 (808) 107,704 -------- ------ -------- -------- Property and equipment, net................. 36,531 1,431 -- 37,962 -------- ------ -------- -------- Other assets, principally intangibles, net Goodwill and other intangibles............ 309,729 -- 23,513 (7) 333,242 Deferred financing costs.................. 10,699 -- 1,700 (8) 12,399 Other assets.............................. 1,538 3 -- 1,541 -------- ------ -------- -------- Net other assets, principally intangibles........................... 321,966 3 25,213 347,182 -------- ------ -------- -------- Total assets.......................... $458,763 $9,680 $ 24,405 $492,848 ======== ====== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings..................... $ 401 $ -- $ -- $ 401 Current portion of long-term obligations............................. 3,682 660 20 (9) 4,362 Accounts payable.......................... 8,749 764 -- 9,513 Accrued expenses.......................... 23,740 1,396 -- 25,136 Income taxes payable...................... 4,638 298 -- 4,936 -------- ------ -------- -------- Total current liabilities............... 41,210 3,118 20 44,348 -------- ------ -------- -------- Long-term obligations Senior revolving credit facility.......... 13,500 -- (13,500)(10) -- Senior term facility...................... 165,950 -- 44,350 (10) 210,300 Senior subordinated notes................. 100,000 -- -- 100,000 Other long-term obligations............... 1,644 772 (675)(10) 1,741 -------- ------ -------- -------- Total long-term obligations............. 281,094 772 30,175 312,041 -------- ------ -------- -------- Deferred income taxes....................... 21,522 -- -- 21,522 Other long-term liabilities................. 4,904 -- -- 4,904 Stockholder's equity........................ 110,033 5,790 (5,790)(11) 110,033 -------- ------ -------- -------- Total liabilities and stockholder's equity.............................. $458,763 $9,680 $ 24,405 $492,848 ======== ====== ======== ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data. P-3 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED SEPTEMBER 30, 1999
ACQUISITION ADJUSTMENTS (13) DECRANE ---------------------------- AIRCRAFT HISTORICAL HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA -------------- ----------- ------------ --------- (DOLLARS IN THOUSANDS) Revenues..................................... $222,180 $73,095 $ (382)(15) $294,893 Cost of sales................................ 149,740 49,741 (5,277)(16) 194,204 -------- ------- -------- -------- Gross profit............................. 72,440 23,354 4,895 100,689 Selling, general and administrative expenses................................... 34,611 6,009 -- 40,620 Nonrecurring charges......................... -- 262 (262)(18) -- Nonrecurring bonuses and employment contract termination expenses....................... -- 360 (360)(19) -- Amortization of intangible assets............ 11,852 209 2,864 (21) 14,925 -------- ------- -------- -------- Operating income......................... 25,977 16,514 2,653 45,144 Interest expense............................. 24,971 516 7,932 (22) 33,419 Other income................................. (157) (24) -- (181) -------- ------- -------- -------- Income (loss) before provision for income taxes and extraordinary item............... 1,163 16,022 (5,279) 11,906 Provision for income taxes (benefit)......... 507 (287) 6,984 (24) 7,204 -------- ------- -------- -------- Income (loss) before extraordinary item (25)....................................... $ 656 $16,309 $(12,263) $ 4,702 ======== ======= ======== ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data. P-4 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
ACQUISITION ADJUSTMENTS (13) DECRANE ---------------------------- AIRCRAFT HISTORICAL HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA -------------- ----------- ------------ --------- (DOLLARS IN THOUSANDS) Revenues..................................... $150,433 $118,495 $ (458)(15) $268,470 Cost of sales................................ 102,840 81,494 541 (16) 184,875 -------- -------- -------- -------- Gross profit (loss)...................... 47,593 37,001 (999) 83,595 Selling, general and administrative expenses................................... 25,993 13,650 (1,728)(17) 37,915 Nonrecurring charges......................... 3,632 1,479 (5,111)(18) -- Nonrecurring bonuses and employment contract termination expenses....................... -- 4,072 (4,072)(19) -- ESOP contribution............................ -- 530 (530)(20) -- Amortization of intangible assets............ 4,495 328 10,151 (21) 14,974 -------- -------- -------- -------- Operating income......................... 13,473 16,942 291 30,706 Interest expense............................. 9,202 1,354 24,595 (22) 35,151 Other expenses (income)...................... 1,182 (35) (600)(23) 547 -------- -------- -------- -------- Income (loss) before provision for income taxes and extraordinary item............... 3,089 15,623 (23,704) (4,992) Provision for income taxes (benefit)......... 224 578 (415)(24) 387 -------- -------- -------- -------- Income (loss) before extraordinary item (25)....................................... $ 2,865 $ 15,045 $(23,289) $ (5,379) ======== ======== ======== ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data. P-5 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998
ACQUISITION ADJUSTMENTS(13) DECRANE ----------------------------- AIRCRAFT HISTORICAL HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA -------------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues...................................... $106,089 $91,191 $ (377)(15) $196,903 Cost of sales................................. 71,181 63,474 3,911 (16) 138,566 -------- ------- -------- -------- Gross profit (loss)....................... 34,908 27,717 (4,288) 58,337 Selling, general and administrative expenses.................................... 18,889 11,402 (1,728)(17) 28,563 Nonrecurring charges.......................... 3,632 1,417 (5,049)(18) -- Nonrecurring bonuses and employment contract termination expenses........................ -- 3,832 (3,832)(19) -- ESOP contribution............................. -- 530 (530)(20) -- Amortization of intangible assets............. 2,149 243 8,840 (21) 11,232 -------- ------- -------- -------- Operating income (loss)................... 10,238 10,293 (1,989) 18,542 Interest expense.............................. 4,115 992 21,503 (22) 26,610 Other expenses (income)....................... 1,028 (40) (600)(23) 388 -------- ------- -------- -------- Income (loss) before provision for income taxes and extraordinary item................ 5,095 9,341 (22,892) (8,456) Provision for income taxes (benefit).......... 2,386 38 (3,937)(24) (1,513) -------- ------- -------- -------- Income (loss) before extraordinary item (25)........................................ $ 2,709 $ 9,303 $(18,955) $ (6,943) ======== ======= ======== ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data. P-6 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999
ACQUISITION ADJUSTMENTS(13) DECRANE ----------------------------- AIRCRAFT HISTORICAL HISTORICAL(12) RESULTS(14) ADJUSTMENTS PRO FORMA -------------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues...................................... $177,836 $45,791 $ (301)(15) $223,326 Cost of sales................................. 118,081 31,721 (1,907)(16) 147,895 -------- ------- ------- -------- Gross profit.............................. 59,755 14,070 1,606 75,431 Selling, general and administrative expenses.................................... 27,507 3,761 -- 31,268 Nonrecurring charges.......................... -- 200 (200)(18) -- Nonrecurring bonuses and employment contract termination expenses........................ -- 120 (120)(19) -- Amortization of intangible assets............. 9,506 124 1,553 (21) 11,183 -------- ------- ------- -------- Operating income.......................... 22,742 9,865 373 32,980 Interest expense.............................. 19,884 154 4,840 (22) 24,878 Other income.................................. (311) (29) -- (340) -------- ------- ------- -------- Income (loss) before provision for income taxes and extraordinary item................ 3,169 9,740 (4,467) 8,442 Provision for income taxes (benefit).......... 2,669 (827) 3,462 (24) 5,304 -------- ------- ------- -------- Income (loss) before extraordinary item....... $ 500 $10,567 $(7,929) $ 3,138 ======== ======= ======= ========
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Data. P-7 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (1) Reflects our financial position subsequent to our 1998 Avtech and Dettmers acquisitions, the 1998 DLJ acquisition and our 1999 PATS, PPI and Custom Woodwork acquisitions. Excludes the effect of our PCI NewCo, International Custom Interiors and Infinity acquisitions that occurred subsequent to September 30, 1999 and the effect of an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (2) Reflects our acquisition of the following companies subsequent to September 30, 1999: - substantially all of the assets of PCI NewCo on October 6, 1999; - all of the common stock of International Custom Interiors on October 8, 1999; and - substantially all of the assets of Infinity on December 17, 1999. Concurrently with the Infinity acquisition, we also increased our term debt borrowings and repaid borrowings existing under our revolving credit facility. Pro forma sources and uses of funds for the acquisitions and senior term debt borrowings, had they occurred on September 30, 1999, are as follows:
HISTORICAL RECLASSIFICATION(C) PRO FORMA ---------- ------------------- --------- (DOLLARS IN THOUSANDS) SOURCES: Senior credit facility: Working capital revolving credit facility (a)......... $ 491 $ (491) $ -- Acquisition revolving credit facility (a)............. 11,500 (11,500) -- Term A facility (b)................................... 5,000 -- 5,000 Term D facility (b)................................... 40,000 -- 40,000 ------- -------- ------- Total sources....................................... $56,991 $(11,991) $45,000 ======= ======== ======= USES: Purchase of net assets and common stock................. $28,091 $-- $28,091 Acquisition fees and expenses........................... 1,500 -- 1,500 Senior credit facility:................................. Acquisition revolving credit facility (c)............. 25,000 (11,500) 13,500 Working capital revolving credit facility (c)......... 700 (700) -- Financing fees and expenses........................... 1,700 -- 1,700 Excess cash (c)....................................... -- 209 209 ------- -------- ------- Total uses.......................................... $56,991 $(11,991) $45,000 ======= ======== =======
- ------------------------ (a) Reflects borrowings for our PCI NewCo and International Custom Interiors acquisitions. (b) Reflects senior term debt borrowings. (c) A portion of the proceeds from the senior term debt borrowings in December 1999 was used to repay then existing working capital revolving credit facility borrowings. The pro forma balance sheet reflects the repayment of $13.5 million of acquisition revolving credit facility borrowings outstanding as of September 30, 1999 and the excess funds as cash. P-8 (3) Reflects the historical financial position of companies acquired subsequent to September 30, 1999 as follows:
INTERNATIONAL PCI CUSTOM NEWCO INTERIORS INFINITY TOTAL -------- ------------- -------- -------- (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents........................ $ 410 $ 168 $ 604 $1,182 Accounts receivable, net......................... 1,116 494 2,024 3,634 Inventories...................................... 764 341 1,092 2,197 Prepaid expenses and other current assets........ 56 421 756 1,233 ------ ------ ------ ------ Total current assets........................... 2,346 1,424 4,476 8,246 ------ ------ ------ ------ Property and equipment, net........................ 304 80 1,047 1,431 Other assets....................................... -- 3 -- 3 ------ ------ ------ ------ Total assets................................... $2,650 $1,507 $5,523 $9,680 ====== ====== ====== ====== LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY Current liabilities Current portion of long-term obligations......... $-- $ 228 $ 432 $ 660 Accounts payable................................. 94 64 606 764 Accrued expenses................................. 224 32 1,140 1,396 Income taxes payable............................. -- 298 -- 298 ------ ------ ------ ------ Total current liabilities...................... 318 622 2,178 3,118 Other long-term obligations........................ -- -- 772 772 Stockholders' and partners' equity................. 2,332 885 2,573 5,790 ------ ------ ------ ------ Total liabilities and equity................... $2,650 $1,507 $5,523 $9,680 ====== ====== ====== ======
(4) Reflects excess cash received in connection with the senior term debt borrowings. (5) Reflects the increase in PCI NewCo's inventory to its estimated fair value as of the acquisition date. (6) Reflects the elimination of notes receivable not acquired, which were due from former International Custom Interiors stockholders and an Infinity partner. (7) Reflects the excess of the PCI NewCo, International Custom Interiors and Infinity purchase prices over the fair value of the assets acquired. For purposes of this pro forma consolidated financial data, we allocated the excess purchase prices to goodwill and amortized the amounts on a straight-line basis over 30 years. Such allocations are preliminary and may change upon completion of the final valuations of the assets acquired. (8) Reflects financing fees and expenses for the December 1999 senior term debt borrowings. (9) Reflects the net increase in the current portion of our long-term obligations caused by: - a $650,000 increase to reflect the current portion of our $45.0 million of senior term debt borrowings; offset by - a $630,000 decrease to reflect the elimination of International Custom Interiors and Infinity debt not assumed. (10) Reflects the net increase in the long-term portion or our long-term obligations caused by: - our $45.0 million of senior term debt borrowings for our PCI NewCo, International Custom Interiors and Infinity acquisitions; offset by - the $13.5 million of senior revolving credit facility borrowings repaid; and - a $675,000 decrease to reflect the elimination of International Custom Interiors and Infinity debt not assumed. The terms of the senior credit facility are described in our historical consolidated financial statements included elsewhere in this prospectus. P-9 (11) Reflects the elimination of PCI NewCo, International Custom Interiors and Infinity stockholders' and partners' equity upon acquisition. (12) For the twelve months and the nine months ended September 30, 1999, reflects our historical results of operations subsequent to our acquisition by DLJ (successor). For the year ended December 31, 1998, reflects our historical results of operations for the eight months ended August 31, 1998 prior to our acquisition by DLJ (predecessor) and the four months ended December 31, 1998 subsequent to our acquisition by DLJ (successor) as summarized in the table below. For the nine months ended September 30, 1998, reflects our historical results of operations for the eight months ended August 31, 1998 prior to our acquisition by DLJ (predecessor) and the one month ended September 30, 1998 subsequent to our acquisition by DLJ (successor) as summarized in the table below. The data was derived from our historical audited and unaudited consolidated financial statements included elsewhere in this prospectus.
DECRANE AIRCRAFT HISTORICAL -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 NINE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------------- --------------------------------------- EIGHT FOUR TWELVE EIGHT ONE NINE MONTHS MONTHS MONTHS MONTHS MONTH MONTHS (PREDECESSOR) (SUCCESSOR) TOTAL (PREDECESSOR) (SUCCESSOR) TOTAL ------------- ----------- -------- ------------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues....................... $90,077 $60,356 $150,433 $90,077 $16,012 $106,089 Cost of sales.................. 60,101 42,739 102,840 60,101 11,080 71,181 ------- ------- -------- ------- ------- -------- Gross profit................... 29,976 17,617 47,593 29,976 4,932 34,908 Selling, general and administrative expenses...... 15,719 10,274 25,993 15,719 3,170 18,889 Nonrecurring charges........... 3,632 -- 3,632 3,632 -- 3,632 Amortization of intangible assets....................... 1,347 3,148 4,495 1,347 802 2,149 ------- ------- -------- ------- ------- -------- Operating income............... 9,278 4,195 13,473 9,278 960 10,238 Interest expense............... 2,350 6,852 9,202 2,350 1,765 4,115 Other expenses................. 847 335 1,182 847 181 1,028 ------- ------- -------- ------- ------- -------- Income (loss) before provision for income taxes and extraordinary item........... 6,081 (2,992) 3,089 6,081 (986) 5,095 Provision for income taxes (benefit).................... 2,892 (2,668) 224 2,892 (506) 2,386 ------- ------- -------- ------- ------- -------- Income (loss) before extraordinary item........... $ 3,189 $ (324) $ 2,865 $ 3,189 $ (480) $ 2,709 ======= ======= ======== ======= ======= ========
(13) Reflects the historical results of operations for companies we acquired and adjustments for DLJ's acquisition of us for the periods not included in our historical results. (14) Reflects the results of operations of companies we acquired that are not included in our historical results. The results of operations for the companies we acquired are for the periods from the beginning of the period presented to the dates indicated below. For periods subsequent to those dates, their respective results of operations are included in our historical results. (a) Avtech--June 25, 1998; (b) Dettmers--June 29, 1998; (c) PATS--January 21, 1999; (d) PPI--April 22, 1999; (e) Custom Woodwork--August 4, 1999; (f) PCI NewCo--September 30, 1999; (g) International Custom Interiors--September 30, 1999; and (h) Infinity--September 30, 1999. P-10 Tables summarizing the acquired companies' results of operations for the twelve months ended September 30, 1999, the year ended December 31, 1998 and the nine months ended September 30, 1998 and 1999 are summarized below.
INTERNATIONAL CUSTOM PCI CUSTOM PATS PPI WOODWORK NEWCO INTERIORS INFINITY (C) (D) (E) (F) (G) (H) TOTAL -------- -------- ---------- -------- ------------- -------- -------- (DOLLARS IN THOUSANDS) TWELVE MONTHS ENDED SEPTEMBER 30, 1999 Revenues................................ $10,459 $22,869 $6,133 $8,869 $4,724 $20,041 $73,095 Cost of sales........................... 8,962 13,261 2,801 6,282 3,531 14,904 49,741 ------- ------- ------ ------ ------ ------- ------- Gross profit............................ 1,497 9,608 3,332 2,587 1,193 5,137 23,354 Selling, general and administrative expenses.............................. 1,226 1,659 381 667 504 1,572 6,009 Nonrecurring charges.................... 262 -- -- -- -- -- 262 Nonrecurring bonuses and employment contract termination expenses......... 360 -- -- -- -- -- 360 Amortization of intangible assets....... -- 209 -- -- -- -- 209 ------- ------- ------ ------ ------ ------- ------- Operating income (loss)................. (351) 7,740 2,951 1,920 689 3,565 16,514 Interest expense (income)............... 123 384 (16) 8 (21) 38 516 Other expenses (income)................. 16 (28) (2) (6) (4) -- (24) ------- ------- ------ ------ ------ ------- ------- Income (loss) before provision for income taxes and extraordinary item... (490) 7,384 2,969 1,918 714 3,527 16,022 Provision for income taxes (benefit).... (575) -- -- -- 288 -- (287) ------- ------- ------ ------ ------ ------- ------- Income before extraordinary item........ $ 85 $ 7,384 $2,969 $1,918 $ 426 $ 3,527 $16,309 ======= ======= ====== ====== ====== ======= =======
- ------------------------ Notes (c) through (h) appear at the beginning of this note.
CUSTOM PCI AVTECH DETTMERS PATS PPI WOODWORK NEWCO (A) (B) (C) (D) (E) (F) -------- -------- -------- -------- ---------- -------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 Revenues............................... $20,984 $2,013 $33,348 $37,714 $4,480 $7,933 Cost of sales.......................... 13,267 1,454 24,321 24,376 2,358 5,807 ------- ------ ------- ------- ------ ------ Gross profit (loss).................... 7,717 559 9,027 13,338 2,122 2,126 Selling, general and administrative expenses............................. 3,695 760 4,906 2,218 397 536 Nonrecurring charges................... 1,229 -- 250 -- -- -- Nonrecurring bonuses and employment contract termination expenses........ 3,592 -- 480 -- -- -- ESOP contribution...................... 300 -- 230 -- -- -- Amortization of intangible assets...... -- -- -- 328 -- -- ------- ------ ------- ------- ------ ------ Operating income (loss)................ (1,099) (201) 3,161 10,792 1,725 1,590 Interest expense (income).............. (60) 13 296 1,096 (35) 35 Other expenses (income)................ (35) -- -- 5 (2) (7) ------- ------ ------- ------- ------ ------ Income (loss) before provision for income taxes and extraordinary item................................. (1,004) (214) 2,865 9,691 1,762 1,562 Provision for income taxes (benefit)... (322) -- 1,013 -- -- -- ------- ------ ------- ------- ------ ------ Income (loss) before extraordinary item................................. $ (682) $ (214) $ 1,852 $ 9,691 $1,762 $1,562 ======= ====== ======= ======= ====== ====== INTERNATIONAL CUSTOM INTERIORS INFINITY (G) (H) TOTAL ------------- -------- -------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 Revenues............................... $1,887 $10,136 $118,495 Cost of sales.......................... 1,913 7,998 81,494 ------ ------- ------- Gross profit (loss).................... (26) 2,138 37,001 Selling, general and administrative expenses............................. 422 716 13,650 Nonrecurring charges................... -- -- 1,479 Nonrecurring bonuses and employment contract termination expenses........ -- -- 4,072 ESOP contribution...................... -- -- 530 Amortization of intangible assets...... -- -- 328 ------ ------- ------- Operating income (loss)................ (448) 1,422 16,942 Interest expense (income).............. (2) 11 1,354 Other expenses (income)................ 4 -- (35) ------ ------- ------- Income (loss) before provision for income taxes and extraordinary item................................. (450) 1,411 15,623 Provision for income taxes (benefit)... (113) -- 578 ------ ------- ------- Income (loss) before extraordinary item................................. $ (337) $ 1,411 $15,045 ====== ======= =======
- ------------------------ Notes (a) through (h) appear at the beginning of this note. P-11
CUSTOM PCI AVTECH DETTMERS PATS PPI WOODWORK NEWCO (A) (B) (C) (D) (E) (F) -------- -------- -------- -------- ---------- -------- (DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenues............................... $20,984 $2,013 $23,340 $27,602 $3,319 $5,756 Cost of sales.......................... 13,267 1,454 16,588 19,550 1,760 4,272 ------- ------ ------- ------- ------ ------ Gross profit........................... 7,717 559 6,752 8,052 1,559 1,484 Selling, general and administrative expenses............................. 3,695 760 3,971 1,503 278 389 Nonrecurring charges................... 1,229 -- 188 -- -- -- Nonrecurring bonuses and employment contract termination expenses........ 3,592 -- 240 -- -- -- ESOP contribution...................... 300 -- 230 -- -- -- Amortization of intangible assets...... -- -- -- 243 -- -- ------- ------ ------- ------- ------ ------ Operating income (loss)................ (1,099) (201) 2,123 6,306 1,281 1,095 Interest expense (income).............. (60) 13 196 839 (30) 25 Other expenses (income)................ (35) -- (5) -- -- (4) ------- ------ ------- ------- ------ ------ Income (loss) before provision for income taxes and extraordinary item................................. (1,004) (214) 1,932 5,467 1,311 1,074 Provision for income taxes (benefit)... (322) -- 344 -- -- -- ------- ------ ------- ------- ------ ------ Income (loss) before extraordinary item................................. $ (682) $ (214) $ 1,588 $ 5,467 $1,311 $1,074 ======= ====== ======= ======= ====== ====== INTERNATIONAL CUSTOM INTERIORS INFINITY (G) (H) TOTAL ------------- -------- -------- (DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenues............................... $1,916 $ 6,261 $91,191 Cost of sales.......................... 1,439 5,144 63,474 ------ ------- ------- Gross profit........................... 477 1,117 27,717 Selling, general and administrative expenses............................. 410 396 11,402 Nonrecurring charges................... -- -- 1,417 Nonrecurring bonuses and employment contract termination expenses........ -- -- 3,832 ESOP contribution...................... -- -- 530 Amortization of intangible assets...... -- -- 243 ------ ------- ------- Operating income (loss)................ 67 721 10,293 Interest expense (income).............. -- 9 992 Other expenses (income)................ 4 -- (40) ------ ------- ------- Income (loss) before provision for income taxes and extraordinary item................................. 63 712 9,341 Provision for income taxes (benefit)... 16 -- 38 ------ ------- ------- Income (loss) before extraordinary item................................. $ 47 $ 712 $ 9,303 ====== ======= =======
- ------------------------ Notes (a) through (h) appear at the beginning of this note.
INTERNATIONAL CUSTOM PCI CUSTOM PATS PPI WOODWORK NEWCO INTERIORS INFINITY (C) (D) (E) (F) (G) (H) TOTAL -------- -------- ---------- -------- ------------- -------- -------- (DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues................................ $ 451 $12,757 $4,972 $6,692 $4,753 $16,166 $45,791 Cost of sales........................... 1,229 8,435 2,203 4,747 3,057 12,050 31,721 ------- ------- ------ ------ ------ ------- ------- Gross profit (loss)..................... (778) 4,322 2,769 1,945 1,696 4,116 14,070 Selling, general and administrative expenses.............................. 291 944 262 520 492 1,252 3,761 Nonrecurring charges.................... 200 -- -- -- -- -- 200 Nonrecurring bonuses and employment contract termination expenses......... 120 -- -- -- -- -- 120 Amortization of intangible assets....... -- 124 -- -- -- -- 124 ------- ------- ------ ------ ------ ------- ------- Operating income (loss)................. (1,389) 3,254 2,507 1,425 1,204 2,864 9,865 Interest expense (income)............... 23 127 (11) (2) (19) 36 154 ------- ------- ------ ------ ------ ------- ------- Other expenses (income)................. 11 (33) -- (3) (4) -- (29) ------- ------- ------ ------ ------ ------- ------- Income (loss) before provision for income taxes and extraordinary item... (1,423) 3,160 2,518 1,430 1,227 2,828 9,740 Provision for income taxes (benefit).... (1,244) -- -- -- 417 -- (827) ------- ------- ------ ------ ------ ------- ------- Income (loss) before extraordinary item.................................. $ (179) $ 3,160 $2,518 $1,430 $ 810 $ 2,828 $10,567 ======= ======= ====== ====== ====== ======= =======
- ------------------------ Notes (c) through (h) appear at the beginning of this note. P-12 (15) Reflects the elimination of intercompany sales. (16) Reflects the net change in cost of sales attributable to the following:
NINE MONTHS TWELVE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------- 1999 1998 1998 1999 ------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Increase (decrease) in cost of goods sold (a): DLJ acquisition....................................... $(3,289) $ -- $ 3,289 $ -- PPI, Custom Woodwork and PCI NewCo acquisitions....... (1,606) 1,717 1,717 (1,606) Decrease in depreciation expense (b).................... -- (658) (658) -- Elimination of intercompany sales....................... (382) (458) (377) (301) Work force reductions attributable to merging the companies acquired.................................... -- (60) (60) -- ------- ------- ------- ------- Net increase (decrease) in cost of sales $(5,277) $ 541 $ 3,911 $(1,907) ======= ======= ======= =======
- ------------------------ (a) To reflect cost of goods sold based on the fair value of inventory acquired in conjunction with the DLJ acquisition and the companies we acquired as if all occurred on January 1, 1998. (b) To reflect a decrease in depreciation expense resulting from the fair value and remaining economic useful lives of depreciable assets acquired in connection with the DLJ acquisition. (17) Reflects the net decrease in selling, general and administrative expenses attributable to the following:
NINE MONTHS TWELVE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------- 1999 1998 1998 1999 ------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Decrease in compensation expense (a).................... $ -- $(1,775) $(1,775) $ -- Decrease in investor relations expenses (b)............. -- (221) (221) -- Other, net (c).......................................... -- 268 268 -- ------- ------- ------- ------ Net decrease in selling, general and administrative expenses.............................................. $ -- $(1,728) $(1,728) $ -- ======= ======= ======= ======
- ------------------------ (a) To reflect the resignation of some former employees and changes to employment agreements for several employees of the companies we acquired. (b) To reflect the decrease in investor relations expenses associated with becoming a privately held company as a result of the DLJ acquisition. (c) To reflect an increase in depreciation expense resulting from the fair value and remaining economic useful lives of depreciable assets we assigned in connection with the DLJ acquisition, net of cost savings attributable to employee benefit plans implemented at the companies we acquired. (18) Reflects a reduction for nonrecurring charges incurred by DeCrane Aircraft on behalf of its stockholders related to the DLJ acquisition, and by Avtech and PATS on behalf of their stockholders related to their respective acquisitions by us. Excludes an approximate $9.5 million pre-tax charge we will incur in the fourth quarter of 1999 in connection with the Hollingsead and Elsinore Engineering restructuring. (19) Reflects a reduction in expense attributable to employment contract termination expenses and nonrecurring bonuses awarded prior to, and in anticipation of, our acquisitions of Avtech and PATS. (20) Reflects a reduction in expense attributable to the termination of the Employee Stock Ownership Plans in conjunction with our acquisitions of Avtech and PATS. P-13 (21) Reflects a net increase in amortization expense pertaining to the amortization of goodwill and other intangible assets related to the DLJ acquisition and our acquisitions on a straight-line basis as follows:
NINE MONTHS YEARS TWELVE MONTHS ENDED INTANGIBLE ESTIMATED ENDED YEAR ENDED SEPTEMBER 30, ASSET USEFUL SEPTEMBER 30, DECEMBER 31, ------------------- AMOUNT LIFE 1999 1998 1998 1999 ---------- --------- -------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Elimination of predecessor basis amortization: DeCrane Aircraft........................ $ -- $(1,347) $(1,347) $ -- PPI..................................... (209) (328) (243) (124) DLJ acquisition amortization (a): Goodwill................................ $166,675 30 -- 3,704 3,704 -- FAA certifications...................... 30,391 15 -- 1,351 1,351 -- Engineering drawings.................... 9,138 15 -- 406 406 -- Assembled workforce..................... 6,588 7 -- 627 627 -- Tradenames, trademarks and patents...... 3,908 5 to 12 -- 269 269 -- Adjustment of intangible asset value (b)................................... 29 -- (29) -- Amortization attributable to our acquisitions (c): Goodwill................................ 109,396 30 2,345 3,646 2,735 1,434 Customer contracts...................... 8,515 7 405 1,216 912 101 FAA certifications...................... 2,000 15 44 133 100 11 Engineering drawings.................... 2,624 15 69 175 131 25 Assembled workforce..................... 2,090 7 181 299 224 106 ------ ------- ------- ------ Net increase in amortization.......... $2,864 $10,151 $ 8,840 $1,553 ====== ======= ======= ======
- ------------------------ (a) For the twelve months and nine months ended September 30, 1999, amortization is reflected in our historical results. For the year ended December 31, 1998 and the nine months ended September 30, 1998, amortization is reflected for the period from January 1, 1998 to August 31, 1998, the date the DLJ acquisition occurred; subsequent to that date, amortization is reflected in our historical results. (b) Reflects adjustment upon completion of the final valuation of the assets acquired. (c) Reflects adjustments for the all of our 1999 acquisitions from the beginning of the period presented to their respective acquisition dates; subsequent to those dates, amortization is included in our historical results. The Avtech and Dettmers acquisitions occurred prior to the DLJ acquisition; therefore, their intangible asset amortization is included in the DLJ acquisition amortization amounts. Amortization may change upon completion of the final valuation of the net assets acquired. (22) Reflects the net increase in interest expense, including deferred financing cost amortization and commitment fees, as a result of our 1998 Avtech and Dettmers acquisitions, the 1998 DLJ acquisition, all of our 1999 acquisitions and the December 1999 senior term debt borrowings as if they all had occurred on January 1, 1998. P-14 Pro forma interest expense consists of the following:
NINE MONTHS TWELVE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------- RATE OR TERM AMOUNT 1999 1998 1998 1999 ------------------- -------- -------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Senior credit facility (a): Revolving credit facilities........ LIBOR (b) + 2.75% $ (c) $ 494 $ 1,393 $ 1,176 $ 277 Term facilities: Term A............................. LIBOR (b) + 2.75% (d) 3,185 3,378 2,557 2,364 Term B........................... LIBOR (b) + 3.00% (e) 5,329 5,612 4,248 3,965 Term C........................... LIBOR (b) + 3.25% (f) 5,894 6,220 4,707 4,381 Term D........................... LIBOR (b) + 3.75% (g) 3,568 3,756 2,841 2,653 Senior subordinated notes............ 12.00% 100,000 12,000 12,000 9,000 9,000 Customer advance..................... 7.50% (h) 292 380 288 200 Other long-term obligations.......... 4.34% to 18.08% (i) 324 150 107 281 Deferred financing cost amortization: Senior revolving credit facilities....................... 6 years (j) 1,277 213 213 160 160 Senior term facilities: Term A........................... 6 years (k) 894 198 200 150 148 Term B........................... 7 years (k) 2,043 315 317 238 236 Term C........................... 7 years (k) 2,168 334 337 253 250 Term D........................... 6 years (k) 1,700 262 264 198 196 Senior subordinated notes.......... 10 years (k) 5,810 581 581 436 436 Commitment fees and expenses......... 430 350 251 331 ------- ------- ------- ------- Pro forma interest expense (l)... $33,419 $35,151 $26,610 $24,878 ======= ======= ======= =======
- ------------------------ (a) Reflects the senior credit facility established in conjunction with the DLJ acquisition, as amended for all of our 1999 acquisitions and the December 1999 senior term debt borrowings, as if all events had occurred on January 1, 1998. (b) Calculations based on the historical LIBOR rates charged during the respective periods. The weighted average historical LIBOR rates were as follows:
TWELVE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------- 1999 1998 1998 1999 ------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Revolving credit facilities................... 5.220% 5.588% 5.633% 5.120% Term A facility............................... 5.287% 5.694% 5.775% 5.231% Term B facility............................... 5.292% 5.666% 5.735% 5.236% Term C facility............................... 5.266% 5.669% 5.738% 5.199% Term D facility............................... 5.272% 5.676% 5.743% 5.205%
(c) Reflects revolving credit facility borrowings for the DLJ acquisition and all of our 1999 acquisitions reduced by revolving credit facility borrowings repaid with a portion of the senior term debt borrowings as of January 1, 1998. The pro forma weighted average borrowings outstanding under the revolving credit facilities were: $6.2 million for the twelve months ended September 30, 1999; $16.7 million for the twelve months ended December 31, 1998; $18.7 million for the nine months ended September 30, 1998; and $4.7 million for the nine months ended September 30, 1999. (d) Reflects Term A facility borrowings of $35.0 million for the DLJ acquisition and $5.0 million for our Infinity acquisition and to repay then existing acquisition related revolving credit facility borrowings as of January 1, 1998, reduced by quarterly principal payments of $500,000 commencing March 31, 1999. The pro forma weighted average borrowings outstanding under the Term A facility were: $39.6 million for the twelve months ended September 30, 1999; $40.0 million for the twelve months ended December 31, 1998; $40.0 million for the nine months ended September 30, 1998; and $39.5 million for the nine months ended September 30, 1999. (e) Reflects Term B facility borrowings of $65.0 million for the DLJ acquisition and our PATS acquisition as of January 1, 1998, reduced by quarterly principal payments of $163,000 commencing March 31, 1998. The pro forma weighted average borrowings outstanding under the Term B facility were: $64.3 million for the twelve months ended September 30, 1999; $64.8 million for the twelve P-15 months ended December 31, 1998; $64.8 million for the nine months ended September 30, 1998; and $64.2 million for the nine months ended September 30, 1999. (f) Reflects Term C facility borrowings of $70.0 million for our PPI acquisition and to repay then existing acquisition related revolving credit facility borrowings as of January 1, 1998, reduced by quarterly principal payments of $175,000 commencing March 31, 1998. The pro forma weighted average borrowings outstanding under the Term C facility were: $69.2 million for the twelve months ended September 30, 1999; $69.7 million for the twelve months ended December 31, 1998; $69.8 million for the nine months ended September 30, 1998; and $69.1 million for the nine months ended September 30, 1999. (g) Reflects Term D facility borrowings of $40.0 million for our Infinity acquisition and to repay then existing acquisition related revolving credit facility borrowings as of January 1, 1998, reduced by quarterly principal payments of $100,000 commencing March 31, 1998. The pro forma weighted average borrowings outstanding under the Term C facility were: $39.6 million for the twelve months ended September 30, 1999; $39.9 million for the twelve months ended December 31, 1998; $39.9 million for the nine months ended September 30, 1998; and $39.5 million for the nine months ended September 30, 1999. (h) Reflects a $5.0 million customer advance related to our PATS acquisition, pro forma as of January 1, 1998, reduced by principal payments of $975,000 on November 30, 1998 and $1.2 million on May 31, 1999. The pro forma weighted average advance outstanding was: $3.8 million for the twelve months ended September 30, 1999; $4.9 million for the twelve months ended December 31, 1998; $5.0 million for the nine months ended September 30, 1998; and $3.5 million for the nine months ended September 30, 1999. (i) Reflects historical interest expense related to capital lease obligations and equipment term debt financing. (j) Deferred financing costs are amortized on a straight-line basis over the term of the agreement. (k) Deferred financing costs are amortized using the effective interest method. (l) A 0.125% change in the interest rates charged on variable rate borrowings would change interest expense and income (loss) before extraordinary item by:
NINE MONTHS TWELVE MONTHS YEAR ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------- 1999 1998 1998 1999 ------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Interest expense..................................... $292 $299 $226 $219 Income (loss) before extraordinary item.............. 178 182 137 133
(23) Reflects adjustment for nonrecurring charges associated with a terminated debt offering in June 1998. Such offering was terminated upon initiation of the DLJ acquisition. (24) Represents an increase in the provision for income taxes as a result of a change in pro forma taxable income, a provision for income taxes on the income of Dettmers, PPI, Custom Woodwork, PCI NewCo and Infinity which were taxed as S Corporations or partnerships prior to their acquisitions, and elimination of the $2.6 million one time benefit caused by reversal of our deferred tax valuation allowance. The effective tax rate differs from the U.S. federal statutory rate primarily due to goodwill amortization related to acquisitions not deductible for income tax purposes and state and foreign income taxes. (25) In conjunction with the DLJ acquisition, deferred financing costs of $347,000, net of income tax benefit, were written off as an extraordinary charge as a result of the termination of our prior senior credit facility. In conjunction with the sale of the senior subordinated notes described in the prospectus, deferred financing costs of $1.9 million, net of income tax benefit, were written off as an extraordinary charge as a result of the termination of the bridge notes. These amounts have not been reflected in the unaudited pro forma consolidated statement of operations for the twelve months ended September 30, 1999, the year ended December 31, 1998 and the nine months ended September 30, 1998. P-16 (26) Supplemental pro forma financial information is as follows:
TWELVE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, -------------------- 1999 1998 1998 1999 ------------- ------------ --------- -------- (DOLLARS IN THOUSANDS) Net cash provided by (used for): Operating activities......................... $ 24,799 $ 2,667 $ (3,624) $ 18,508 Investing activities......................... (11,234) (237,409) (235,275) (9,100) Financing activities......................... (15,266) 237,118 237,944 (14,440) EBITDA (a)..................................... 67,051 57,491 39,905 49,465 Depreciation and amortization (b).............. 20,873 20,284 15,066 15,655 Capital expenditures: Paid in cash................................. 7,695 7,212 5,028 5,511 Financed with capital lease obligations...... 1,515 224 176 1,467 Cash interest expense.......................... 31,516 33,239 25,175 23,452 Ratio of earnings to fixed charges (c)......... 1.3x -- -- 1.3x
- ------------------------ (a) EBITDA equals operating income plus depreciation, amortization, parent company management fees and certain non-cash and other acquisition related costs. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of our operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. The funds depicted by EBITDA are not available for our discretionary use due to funding requirements for working capital, capital expenditures, debt service, income taxes and other commitments and contingencies. We believe that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method, and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (b) Reflects depreciation and amortization of plant and equipment, goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts, which are classified as a component of interest expense. (c) For purposes of calculating the ratio of earnings to fixed charges, earnings represent net income before income taxes, minority interest in the income of majority-owned subsidiaries, extraordinary items and fixed charges. Fixed charges consist of: - interest, whether expensed or capitalized; - amortization of debt expense and discount relating to any indebtedness, whether expensed or capitalized; and - one-third of rental expense under operating leases which is considered to be a reasonable approximation of the interest portion of such expense. There were deficiencies of earnings to fixed charges of $4.9 million for the year ended December 31, 1998 and $8.4 million for the nine months ended September 30, 1998. P-17 INDEX TO FINANCIAL STATEMENTS
PAGE -------- DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES AUDITED FINANCIAL STATEMENTS Report of Independent Accountants......................... F-3 Consolidated Balance Sheets as of December 31, 1997 and 1998.................................................... F-4 Consolidated Statements of Operations for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998.................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998....................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998.................................................... F-8 Notes to Consolidated Financial Statements................ F-9 UNAUDITED FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited).......................... F-41 Consolidated Statements of Operations for the eight months ended August 31, 1998, the one month ended September 30, 1998 (unaudited) and the nine months ended September 30, 1999 (unaudited)........................................ F-42 Consolidated Statements of Stockholder's Equity for the nine months ended September 30, 1999 (unaudited)........ F-43 Consolidated Statements of Cash Flows for the eight months ended August 31, 1998, the one month ended September 30, 1998 (unaudited) and the nine months ended September 30, 1999 (unaudited)........................................ F-44 Condensed Notes to Consolidated Financial Statements (unaudited)............................................. F-45 FINANCIAL STATEMENTS OF COMPANIES ACQUIRED AVTECH CORPORATION Report of Independent Accountants......................... F-59 Balance Sheets as of September 30, 1996 and 1997 and June 25, 1998 (unaudited)............................... F-60 Statements of Income for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and June 25, 1998 (unaudited)...................... F-61 Statements of Stockholders' Equity for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 25, 1998 (unaudited)......................... F-62 Statements of Cash Flows for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and June 25, 1998 (unaudited)....... F-63 Notes to Financial Statements............................. F-64 PATS, INC. AND SUBSIDIARIES Report of Independent Accountants......................... F-70 Consolidated Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited)....................... F-71 Consolidated Statements of Operations for the years ended June 30, 1997 and 1998 and the six months ended December 31, 1997 and 1998 (unaudited).................. F-72 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and the six months ended December 31, 1998 (unaudited)..................... F-73 Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 1998 and the six months ended December 31, 1997 and 1998 (unaudited).................. F-74 Notes to Consolidated Financial Statements................ F-75
F-1
PAGE -------- PPI HOLDINGS, INC. AND SUBSIDIARY Report of Independent Accountants......................... F-80 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited) F-81 Consolidated Statements of Income for the year ended December 31, 1996, the period from January 1, 1997 to June 11, 1997, the period from June 12, 1997 to December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999 (unaudited)........ F-82 Consolidated Statements of Stockholders' Equity for the year ended December 31, 1996, the period from January 1, 1997 to June 11, 1997, the period from June 12, 1997 to December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited)....... F-83 Consolidated Statements of Cash Flows for the year ended December 31, 1996, the period from January 1, 1997 to June 11, 1997, the period from June 12, 1997 to December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1998 and 1999 (unaudited)........ F-84 Note to Consolidated Financial Statements................. F-85 CUSTOM WOODWORK & PLASTICS, INC. Report of Independent Accountants......................... F-89 Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited).................................... F-90 Statements of Income for the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999 (unaudited)............................................. F-91 Statements of Stockholders' Equity for years ended December 31, 1997 and 1998 and the six months ended June 30, 1999 (unaudited).................................... F-92 Statements of Cash Flows for the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999 (unaudited)........................................ F-93 Notes to the Financial Statements......................... F-94 PCI NEWCO, INC. Report of Independent Accountants......................... F-97 Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999 (unaudited).......................... F-98 Statements of Income for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 (unaudited).................................... F-99 Statements of Stockholders' Equity for years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999 (unaudited).......................... F-100 Statements of Cash Flows for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 (unaudited)............................... F-101 Notes to the Financial Statements......................... F-102 THE INFINITY PARTNERS, LTD. Report of Independent Accountants......................... F-106 Balance Sheets as of December 31, 1998 and September 30, 1999.................................................... F-107 Statements of Income for the year ended December 31, 1998, the nine months ended September 30, 1998 (unaudited) and the nine months ended September 30, 1999...................................... F-108 Statements of Partners' Equity for year ended December 31, 1998 and the nine months ended September 30, 1999....... F-109 Statements of Cash Flows for the year ended December 31, 1998, the nine months ended September 30, 1998 (unaudited) and the nine months ended September 30, 1999...................................... F-110 Notes to the Financial Statements......................... F-111
F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DeCrane Aircraft Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1997 and 1998 and the results of their operations and their cash flows for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California February 19, 1999 F-3 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-4 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
EIGHT YEAR ENDED MONTHS FOUR MONTHS DECEMBER 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-5 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-6 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-7 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED EIGHT MONTHS FOUR MONTHS DECEMBER 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1998 1998 1996 1997 (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) --------- --------- --------- ---------- Cash flows from operating activities Net income (loss)..................................................... $ (817) $ 3,176 $ 3,189 $ (2,553) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization..................................... 4,343 5,372 4,454 4,983 Extraordinary loss from debt refinancing.......................... -- 2,078 -- 2,229 Deferred income taxes............................................. 88 (1,281) (2,339) (5,072) Other, net........................................................ 188 654 (360) (97) Changes in assets and liabilities Accounts receivable........................................... (3,069) (3,159) (3,621) (2,929) Inventories................................................... (2,665) (4,956) (2,017) 4,313 Prepaid expenses and other assets............................. (3) (136) (58) (562) Accounts payable.............................................. 1,891 (361) (1,127) (1,754) Accrued expenses.............................................. 2,477 (1,041) 3,519 2,342 Income taxes payable.......................................... 525 4,295 1,374 108 --------- --------- --------- ---------- Net cash provided by operating activities................. 2,958 4,641 3,014 1,008 --------- --------- --------- ---------- Cash flows from investing activities Cash paid for acquisitions, net of cash acquired...................... (18,200) (23,597) (85,808) -- Capital expenditures.................................................. (5,821) (3,842) (1,745) (1,813) Other, net............................................................ 5 (370) 175 -- --------- --------- --------- ---------- Net cash used for investing activities.................... (24,016) (27,809) (87,378) (1,813) --------- --------- --------- ---------- Cash flows from financing activities Acquisition of Predecessor Proceeds from senior credit facility and bridge notes............... -- -- -- 191,722 Proceeds from sale of common stock.................................. -- -- -- 99,000 Proceeds from stock options exercised............................... -- -- -- 4,314 Purchase of shares outstanding...................................... -- -- -- (186,310) Repayment of existing senior credit facility........................ -- -- -- (93,000) Transaction fees and expenses....................................... -- -- -- (15,726) Common stock offerings and application of the net proceeds Net proceeds from sale of common stock.............................. -- 28,933 34,815 -- Borrowings under credit facility.................................... -- 12,312 -- -- Repayment of debt................................................... -- (42,160) (34,815) -- Financing of acquisitions Revolving line of credit borrowings................................. 6,399 23,597 85,808 -- Proceeds from issuance of cumulative convertible preferred stock and mandatorily redeemable common stock warrants, net................. 8,805 -- -- -- Senior term loan borrowings......................................... 5,000 -- -- -- Convertible subordinated note borrowings from related parties....... 3,000 -- -- -- Promissory note principal payments.................................. -- (1,095) -- -- Net borrowings under revolving line of credit agreements.............. 1,191 2,906 5,453 (1,103) Principal payments on capitalized lease and other long-term obligations......................................................... (2,001) (1,675) (1,317) (458) Other, net............................................................ (1,343) 139 (73) (36) --------- --------- --------- ---------- Net cash provided by (used for) financing activities...... 21,051 22,957 89,871 (1,597) --------- --------- --------- ---------- Effect of foreign currency translation on cash.......................... 22 97 26 181 --------- --------- --------- ---------- Net increase (decrease) in cash and cash equivalents.................... 15 (114) 5,533 (2,221) Cash and cash equivalents at beginning of period........................ 305 320 206 5,739 --------- --------- --------- ---------- Cash and cash equivalents at end of period.............................. $ 320 $ 206 $ 5,739 $ 3,518 ========= ========= ========= ==========
The accompanying notes are an integral part of the consolidated financial statements. F-8 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company") manufactures avionics components and provides avionics systems integration services in certain niche markets of the commercial, regional and high-end corporate jet aircraft industries. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. As a result of the DLJ Acquisition (Note 2) in August 1998, the Company has presented its financial position, results of operations, changes in stockholders' equity and cash flows on a predecessor/successor basis. Preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. INVENTORIES Inventories are stated at the lower of cost, as determined under the first-in, first-out ("FIFO") method, or market. Costs include materials, labor and manufacturing overhead. PROPERTY AND EQUIPMENT Property and equipment are stated at the Company's allocated fair value for assets acquired through purchase acquisitions and at cost for all new additions, and are depreciated using the straight-line method over their estimated useful lives. Useful lives for machinery and equipment range from two to twenty years. Building and building improvements are depreciated using the straight-line method over their estimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or remaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred. The costs for improvements are capitalized. Upon retirement or disposal, the cost and accumulated depreciation of property and equipment are reduced and any gain or loss is recorded in income or expense. OTHER ASSETS Goodwill is amortized on a straight-line basis over thirty years. Other intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from five to fifteen years. Deferred financing costs are amortized using either a straight-line or effective interest method, over the term of the related debt. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. The Company has recognized no such losses. F-9 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCRUED WARRANTIES Two of the Company's subsidiaries sell a majority of their products to customers with various repair or replacement warranties. The terms of the warranties vary according to the customer and/or the product involved. The most common warranty period is the earlier of; (a) 12 to 60 months from the date of delivery to the operator; or (b) 42 months from the date of manufacture. Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product and such costs have been within management's expectations. Classification between short and long-term warranty obligations is estimated based on historical trends. DERIVATIVES Market value gains and losses on forward foreign exchange contracts are recognized currently in the consolidated statements of operations. INCOME TAXES Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes. If necessary, valuation allowances are established to reduce deferred tax assets to the amount expected to be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS All financial instruments are held for purposes other than trading. The estimated fair values of all nonderivative financial instruments approximate their carrying amounts at December 31, 1997 and 1998 either because of the short maturity of the instrument, or based on their effective interest rates compared to current market rates for similar long-term obligations. The estimated fair value of the Company's long-term obligations is based on either quoted market prices or current rates for similar issues for debt of the same remaining maturities. The estimated fair value of foreign currency forward exchange contracts is based on quotes obtained from various financial institutions that deal in this type of instrument. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The financial statements of the Company's U.K. and Swiss subsidiaries have been translated into U.S. dollars from their functional currencies, pounds sterling and Swiss francs, respectively, in the consolidated financial statements. Assets and liabilities have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is reflected as a component of accumulated comprehensive income or loss within stockholders' equity. Realized foreign currency exchange gains (losses) included in other expenses (income) in the consolidated statements of operations were $71,000, $(72,000), $(411,000) and $(262,000) for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. Such costs were $1,195,000 and $832,000 for the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. Research and development costs were not significant for the years ended December 31, 1996 and 1997. F-10 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK OPTION PLAN As permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Refer to Note 14 for information concerning the pro forma effect on results of operations assuming the fair value method of measuring compensation expense was utilized. REVENUE RECOGNITION Revenues from the sale of manufactured products, except for products manufactured under long-term contracts, are recorded when products are shipped. Revenues on long-term contracts are recognized using the percentage-of-completion method based on costs incurred to date compared with total estimated costs at completion. Reimbursements for nonrecurring engineering costs, which are expensed as incurred, are included in revenues at the time a negotiated settlement is reached with the customer. Unbilled accounts receivable were $654,000 and $4,156,000 at December 31, 1997 and 1998, respectively. Unbilled accounts receivable are expected to be billed and collected during the succeeding twelve-month period. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, cash equivalents include short-term, highly liquid investments with original maturities of three months or less. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss and the change in the foreign currency translation adjustment during a period. The Company adopted SFAS 130 for the period ended December 31, 1998 and has reclassified earlier periods to reflect application of the statement. In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to an entity's operating segments must be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. The Company adopted SFAS 131 for the period ended December 31, 1998 and has restated disclosure information in earlier periods to reflect application of the statement (Note 17). In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning January 1, 2000. Management believes the adoption of SFAS No. 133 will not have a material impact on the Company's consolidated financial position or results of operations. NOTE 2 - THE DLJ ACQUISITION In July 1998, a newly incorporated entity, DeCrane Holdings Co., and two other holding companies were organized by DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities to carry out a tender offer for all the shares of the Company's common stock, including options to purchase shares which F-11 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - THE DLJ ACQUISITION (CONTINUED) became immediately vested, for $23.00 per share. At the completion of the tender offer in August 1998, the two other holding companies merged with the Company. All of the Company's old outstanding shares which were tendered were cancelled, non-tendering shareholders were paid out, and as a result the Company became a wholly-owned subsidiary of DeCrane Holdings. This transaction, referred to herein as the DLJ Acquisition, resulted in a predecessor entity and a successor entity for purposes of reporting the financial results included in the accompanying financial statements. As a result of the tender offer, the Company terminated a debt offering which was in process at that time and recorded a $0.6 million pre-tax charge for the eight months ended August 31, 1998 for the estimated costs incurred. The gross purchase price for the Company's shares and options was $186.3 million. Assets acquired and liabilities assumed have been recorded at their estimated fair values based on an independent appraisal and, accordingly, historical values were increased as follows: (a) $4.4 million to inventory; (b) $2.6 million to fixed assets; and (c) $50.0 million to certain identifiable intangible assets. The excess of the purchase price over the fair value of the net assets acquired totalling $70.0 million was allocated to goodwill. The increase in inventory value was expensed as the inventory was sold during the four months ended December 31, 1998. The intangible assets, other than goodwill, are being amortized on a straight-line basis over periods between five and fifteen years. Goodwill is being amortized on a straight-line basis over a period of thirty years. At the completion of the tender offer, the Company was required to repay all of its borrowings under its previous credit facility (Note 10). In order to fund the purchase of the shares in the tender offer, repay the credit facility and pay expenses incurred in connection therewith, the Company: (a) issued $100.0 million of senior subordinated increasing rate notes (the Bridge Notes) which were subsequently replaced by $100.0 million of 12% Senior Subordinated Notes due 2008 (the Notes) from the Company's "Units" offering (Note 10); (b) entered into a new syndicated senior secured loan facility; and (c) received a $99.0 million equity contribution from DeCrane Holdings. In conjunction with the debt repayment and refinancing of the Bridge Notes, the Company incurred a $2.2 million extraordinary charge, net of income tax benefit of $1.5 million for the four months ended December 31, 1998. The Bridge Notes were purchased by an affiliate of DLJ and accrued interest at 10%. The terms of the issue called for floating rate increases to the prime rates plus 2.5% after six months, and increases of 0.5% every three months subject to a 17.0% maximum, as long as the Bridge Notes remained outstanding. The Bridge Notes were to mature on August 28, 1999, but were refinanced in October 1998 (Note 10). The equity contribution from DeCrane Holdings represents DeCrane Holdings' net proceeds from the sale of all of the shares of its common stock for $65.0 million and shares of its senior redeemable exchangeable preferred stock due 2009 for $34.0 million, along with warrants to purchase 150,000 common shares, to the DLJ funds. Preferred stock dividends are payable quarterly at a rate of 14% per annum. Prior to September 30, 2003, dividends are not paid in cash but instead accrete in liquidation value which, in turn, increases the redemption obligation. On or after September 30, 2003, preferred stock dividends are paid in cash. Since the Company is DeCrane Holdings' only operating subsidiary and source of cash, the Company may be required to fund DeCrane Holdings' preferred stock dividend and redemption requirements in the future. The Company incurred non-recurring charges totaling approximately $3.6 million (pre-tax) during the eight months ended August 31, 1998 in conjunction with the DLJ Acquisition. NOTE 3 - ACQUISITIONS AVTECH On June 26, 1998, the Company purchased substantially all of the common stock of Avtech Corporation. Avtech is a manufacturer of avionics components and an avionics systems integrator for the commercial and high-end corporate jet aircraft industries. F-12 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) The total purchase price was $84,693,000 in cash at closing, including $1,250,000 of acquisition related costs. The acquisition was financed with borrowings under the Company's credit facility. The acquisition was accounted for as a purchase and the $57,911,000 difference between the purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The consolidated results of operations for the eight months ended August 31, 1998 and the four months ended December 31, 1998 include the operating results of Avtech subsequent to June 25, 1998. DETTMERS On June 30, 1998, the Company purchased certain assets, subject to certain liabilities assumed, of Dettmers Industries Inc. Dettmers is a manufacturer of seats for high-end corporate jet aircraft. The total purchase price was $2,314,000 in cash at closing, including $205,000 of acquisition related costs, plus contingent consideration aggregating a maximum of $2,000,000 payable over four years based on future attainment of defined performance criteria during each of the years in the four-year period ending December 31, 2002. The acquisition was financed with borrowings under the Company's credit facility. The acquisition was accounted for as a purchase and the $2,068,000 difference between the purchase price, excluding the contingent consideration, and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial 30-year term. The consolidated results of operations for the eight months ended August 31, 1998 and the four months ended December 31, 1998 include the operating results of Dettmers subsequent to June 29, 1998. AUDIO INTERNATIONAL On November 14, 1997, the Company purchased all of the outstanding stock of Audio International, Inc. Audio International provides premium, customized aircraft entertainment and cabin management products and systems for the high-end corporate jet market. The total purchase price was $24,726,000 in cash at closing, including $726,000 in acquisition related costs, plus contingent consideration aggregating a maximum of $6,000,000 payable over two years based on future attainment of defined performance criteria. During 1998, Audio International attained the required performance criteria and the Company increased the purchase price by $3,000,000, resulting in a corresponding increase to goodwill. The acquisition was funded with borrowings under the Company's revolving line of credit facility. The acquisition was accounted for as a purchase and the $20,110,000 difference between the purchase price, excluding the contingent consideration, and the fair value of the net assets acquired was recorded as goodwill and is being amortized over 30 years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial 30-year term. The consolidated results of operations for the year ended December 31, 1997 include the operating results of Audio International subsequent to November 13, 1997. MINORITY STOCKHOLDER'S 25% INTEREST On February 20, 1996, the Company purchased the remaining 25% of a subsidiary's stock it did not already own from the subsidiary's minority stockholder for a total purchase price of $5,748,000, including $334,000 of acquisition related costs and expenses. The purchase price consisted of $4,873,000 paid in cash at closing and a $600,000 non-interest bearing obligation payable to the minority stockholder. The cash portion F-13 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) of the purchase price was funded with the proceeds from the sale of preferred stock and redeemable warrants. The acquisition was accounted for as a purchase and the $5,498,000 difference between the purchase price and 25% of the fair value of the net assets acquired was recorded as goodwill and is being amortized over 26 years, representing the remaining useful life of the goodwill recorded upon the initial 75% acquisition in October 1991. The consolidated results of operations for the year ended December 31, 1996 include 100% of the operating results of the subsidiary subsequent to February 20, 1996. For the periods prior to February 20, 1996, the consolidated results of operations include a charge for the minority stockholder's 25% ownership interest. AEROSPACE DISPLAY SYSTEMS On September 18, 1996, the Company purchased for cash substantially all of the assets, subject to certain liabilities assumed, of the Aerospace Display Systems division of Allard Industries, Inc. The total purchase price was $13,395,000, including $402,000 in acquisition related costs. ADS develops and manufactures dichroic liquid crystal displays and modules for commercial and military avionics systems. The acquisition was funded with the proceeds from the sale of preferred stock, convertible subordinated notes and redeemable warrants, borrowings under the Company's revolving line of credit and a $2,000,000 non-interest bearing obligation payable to certain Allard stockholders. The acquisition was accounted for as a purchase and the $7,425,000 difference between the purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized over 30 years. The consolidated results of operations for the year ended December 31, 1996 include the operating results of ADS subsequent to September 18, 1996. ELSINORE On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc. and the Elsinore Engineering Services Division of Elsinore, L.P., collectively referred to as Elsinore. Elsinore provides engineering services to the commercial aircraft industry. The total purchase price was $2,443,000, including $300,000 of acquisition related costs. The purchase price consisted of $1,000,000 paid in cash at closing and a $1,250,000 15% promissory note payable to the sellers. The purchase agreement provided for an adjustment of the purchase price should the amount of working capital decline as of the closing date. The purchase price was allocated to the assets acquired and liabilities assumed using estimated fair values and $2,585,000 was assigned to goodwill, subject to final determination of the purchase price. During 1997, the Company and the sellers agreed to reduce the purchase price by $155,000 to reflect the decline in working capital as of the closing date and, as a result, goodwill was decreased by a corresponding amount during 1997. PATS In January 1999, the Company acquired all of the outstanding stock of PATS, Inc. for a purchase price of $41.5 million (including the assumption of debt) subject to adjustments for changes to its net working capital, and reserves for environmental and other indemnities made by the shareholders. PATS is a Maryland-based designer, manufacturer and installer of aircraft and avionics systems. Among other things, PATS is the principal supplier of auxiliary fuel tank systems to the Boeing Business Jet program. The transaction will be accounted for as a purchase and the difference between the purchase price and the fair value of the net assets acquired will be recorded as goodwill and amortized on a straight-line basis over thirty years. F-14 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS Unaudited pro forma consolidated results of operations are presented in the table below for the years ended December 31, 1997 and 1998 and are pro forma for the DLJ and other acquisitions, excluding the 1999 PATS acquisition, as if they were consummated at the beginning of each year.
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. SIGNIFICANT CUSTOMERS Two customers each accounted for more than 10% of the Company's consolidated revenues, as follows:
YEAR ENDED FOUR MONTHS DECEMBER 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. F-15 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - INVENTORIES Inventories are comprised of the following as of December 31, 1997 and 1998 (amounts in thousands):
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 ========= =========
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. F-16 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - OTHER ASSETS Other assets includes the following as of December 31, 1997 and 1998 and is net of accumulated amortization for the respective periods as parenthetically noted (amounts in thousands):
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% 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 ========= =========
F-17 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - BORROWINGS (CONTINUED) PREDECESSOR CREDIT FACILITY Prior to August 31, 1998, the Company had a credit facility with a group of banks for a $105 million senior revolving line of credit. Borrowings under the credit facility were secured by the Company's assets. The Company, at its option, could elect to pay interest on the credit facility borrowings based on either the prime rate or interbank offered rate ("IBOR") plus defined margins. The Company was required to pay a commitment fee, up to a maximum 0.375%, on the unused portion of the credit facility. The weighted-average interest rate on borrowings outstanding was 7.03% as of December 31, 1997. SUCCESSOR CREDIT FACILITY In connection with the DLJ Acquisition, the Company was required to repay all of its borrowings under the predecessor credit facility and entered into a new credit facility. The new credit facility provides for term loan borrowings in the aggregate principal amount of $80.0 million and revolving loan borrowings up to an aggregate principal amount of $50.0 million. Principal payments under the term loan borrowings are due in increasing amounts over the next seven years and all borrowings under the revolving loan facility must be repaid within six years. Loans under the new credit facility generally bear interest based on a margin over, at the Company's option, the prime rate or the Euro-Dollar rate. Currently, the applicable margins are 1.50%-1.75% for prime rate borrowings and 2.75%-3.00% for Euro-Dollar borrowings. Borrowings under the new credit facility are secured by substantially all of the assets of the Company. The Company is subject to certain commitment fees under the facility as well as the maintenance of certain financial ratios, cash flow results and other restrictive covenants. In January 1999, term loan borrowings were increased to $99.9 million to fund the acquisition of PATS, Inc. (Note 3). 12% SENIOR SUBORDINATED NOTES On October 5, 1998 (subsequent to the DLJ Acquisition and financing), the Bridge Notes were repaid with the net proceeds from the Units offering. Each Unit consists of $1,000 principal amount of the Notes and one warrant (collectively, the "Warrants") to purchase shares of common stock of DeCrane Holdings ("Holdings Common Stock"). The Notes will mature on September 30, 2008. Interest on the Notes is payable semi-annually on March 30 and September 30 of each year, commencing on March 30, 1999. The Notes are unsecured general obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness of the Company, including indebtedness pursuant to the credit facility. Prior to the Notes maturing, the Company may redeem all or some of the Notes at a redemption price which may include a premium. In the event of a change in control, the holders may require the Company to repurchase the Notes for a redemption price which may also include a premium. Each Warrant entitles the holder thereof, subject to certain conditions, to purchase 1.55 shares of Holdings Common Stock at an exercise price of $23.00 per share. The Warrants, valued at $1,200,000, will be exercisable at the time they are registered and, unless earlier exercised, will expire on September 30, 2008. F-18 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - BORROWINGS (CONTINUED) AGGREGATE MATURITIES The aggregate maturities of long-term obligations are as follows as of December 31, 1998 (amounts in thousands):
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 EIGHT MONTHS FOUR MONTHS DECEMBER 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) ========= ========= ========= =========
The provisions for income taxes (benefit) are as follows (amounts in thousands):
YEAR ENDED EIGHT MONTHS FOUR MONTHS DECEMBER 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) ========= ========= ========= =========
F-19 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - INCOME TAXES (CONTINUED) The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes and extraordinary item as a result of the following differences (amounts in thousands):
YEAR ENDED EIGHT MONTHS FOUR MONTHS DECEMBER 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1998 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) ========= ========= ========= =========
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 ========= =========
F-20 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - INCOME TAXES (CONTINUED) The balance sheet classification of the net deferred tax liabilities as of December 31, 1997 and 1998 are as follows (amounts in thousands):
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. The Company has approximately $17,400,000 and $600,000 of total loss carryforwards, which include net operating losses acquired in the Avtech aquisition, available for federal and state income tax purposes, respectively. In conjunction with the Avtech acquisition, the Company acquired federal loss carryforwards of $13,700,000 that are subject to separate return limitation rules, as defined in the Internal Revenue Code, and expire in 2018. The remaining federal and state carryforwards expire in varying amounts through 2010 and 2018, respectively. The amount of federal loss carryforwards that may be utilized in the future are subject to limitations because of the occurrence of changes in control, as defined in the Internal Revenue Code. Undistributed earnings of foreign subsidiaries are not material to the consolidated financial statements. As such, foreign taxes that may be due, net of U.S. foreign tax credits, have not been provided. NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use derivative financial instruments for trading purposes but only to manage well-defined foreign exchange rate risks. The Company enters into Swiss franc ("CHF") forward exchange contracts to purchase Swiss francs as a general economic hedge against foreign inventory procurement and manufacturing costs. Market value gains and losses on forward foreign exchange contracts are recognized in the consolidated statements of operations and aggregated a realized net gain (loss) of ($316,000), ($487,000), $323,000 and $146,000 for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. At December 31, 1998, the Company had no open forward exchange contracts. The Company believes exposure to derivative credit losses is minimal in the event of nonperformance by the senior lender because any amounts due, but not paid, to the Company by the senior lender could be offset against the Company's principal and interest payments to the lender. F-21 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 - SUCCESSOR CAPITAL STRUCTURE In connection with the DLJ Acquisition, all of the Company's old outstanding shares which were tendered were cancelled and non-tendering shareholders were paid out. The Company was authorized to issue 100 new common shares ($.01 par value) all of which are issued and outstanding at December 31, 1998. NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS REORGANIZATION AND REVERSE STOCK SPLIT On February 19, 1997, the Company reorganized as a Delaware corporation. In conjunction with the reorganization, the Company established a $.01 par value for its cumulative convertible preferred stock and common stock and increased the number of common shares and preferred shares authorized to 9,924,950 and 18,314,018 shares (which includes 10,000,000 shares of a newly designated series of preferred stock), respectively. Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock split. All common share information set forth in the consolidated financial statements and notes thereto has been restated to reflect the reverse stock split. RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING In January and March 1997, the holders of certain securities agreed to a plan for the recapitalization of the Company. Completion of the recapitalization was a condition to the consummation of the Company's initial public offering (the "IPO") and, was effective concurrent therewith. The IPO was consummated on April 16, 1997. The recapitalization provided for: (i) the conversion of all 6,847,705 shares of issued and outstanding cumulative convertible preferred stock into 1,941,804 shares of common stock; (ii) the cashless exercise and conversion of all 52,784 and 9,355 issued and outstanding preferred stock warrants and common stock warrants, respectively, into a total of 16,585 shares of common stock; (iii) the cashless exercise of 508,497 mandatorily redeemable common stock warrants (the "Redeemable Warrants") into a total of 507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable Warrants. Redeemable Warrants exercisable into 208,968 common shares remained after the recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled upon the consummation of the IPO and repayment of the Company's senior subordinated debt and convertible notes in accordance with the terms of the respective warrant agreements. Redeemable Warrants exercisable into 70,893 common shares remained after the recapitalization and the IPO and application of the net proceeds therefrom. Concurrent with the consummation of the IPO, the mandatory redemption feature of these warrants was terminated and, as a result, the value ascribed thereto was reclassified to stockholders' equity as additional paid-in capital. On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net of $2,268,000 for underwriting discounts and commissions, together with approximately $12,775,000 of proceeds from borrowings under a new credit facility were used to repay amounts due under the Company's senior revolving line of credit, senior term notes, senior subordinated notes and convertible notes. FOLLOW-ON EQUITY OFFERING In April 1998, the Company sold 2,206,177 shares of common stock for $17.00 per share. Net proceeds from the offering of $34,815,000 were used to partially repay borrowings outstanding under the Company's senior credit facility. F-22 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) DEBT REPAID WITH IPO PROCEEDS In April 1997, the Company used the net proceeds from the IPO, together with approximately $12,775,000 of proceeds from borrowings under a credit facility, to repay the following: (i) senior revolving line of credit borrowings of $15,356,000; (ii) senior term notes aggregating $16,531,000; (iii) senior subordinated notes payable to related parties aggregating $7,000,000; and (iv) convertible notes payable to related parties aggregating $3,000,000. In conjunction with the debt repayment, the Company incurred a $3,436,000 extraordinary charge, before an income tax benefit of $1,358,000, which is comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a $1,149,000 write-off of unamortized original issued discounts; and (iii) a $344,000 charge for a prepayment penalty and other related expenses. MANDATORILY REDEEMABLE COMMON STOCK WARRANTS The table below summarizes Redeemable Warrant transactions during the years ended December 31, 1996, and 1997 (amounts in thousands, except share data).
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 F-23 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) recapitalization also provided for the cashless exercise and conversion of all preferred stock warrants into 10,206 common shares. There were no shares of preferred stock or warrants to purchase preferred stock outstanding as of December 31, 1997. On February 9, 1996, certain members of Company management purchased for $112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable Warrants to purchase 194,618 common shares to a related party (Note 19). Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable Warrants to reflect their estimated fair market value on the issuance date. The proceeds from the sale, net of issuance costs of $558,000, were used to fund the Minority Interest Acquisition. On September 18, 1996, the Company sold 750,000 preferred shares at $4.00 per share and issued Redeemable Warrants to purchase 49,079 common shares to related parties (Note 19). Proceeds from the sale aggregating $124,000 were ascribed to the Redeemable Warrants to reflect their estimated fair market value on the issuance date. The proceeds from the sale, net of issuance costs of $137,000, were used to fund the ADS acquisition. COMMON STOCK On February 19, 1997, in conjunction with reorganizing as a Delaware corporation, the Company established a $.01 par value for its common stock and increased to 9,924,950 the number of common shares authorized. As of December 31, 1997, a total of 527,156 common shares were reserved for issuance upon exercise of stock options outstanding under the Company's stock option plan. As part of the recapitalization, the holders of the non-redeemable warrants agreed to the cashless exercise and conversion of all warrants outstanding into 6,379 common shares. Redeemable Warrants to purchase 70,893 common shares at an exercise price of $14.11 per share remained after the recapitalization. Concurrent with the consummation of the IPO, the mandatory redemption feature of these warrants was terminated and, consequently, became non-redeemable warrants. In December 1997, the holders of these warrants elected to exercise all of the warrants on a cashless basis and convert the warrants into 16,130 common shares. No non-redeemable warrants were outstanding as of December 31, 1997. During 1998 in connection with the DLJ Acquisition all stock options became 100% vested and were either exercised or cancelled as of August 31, 1998. The following table summarizes the status of the Company's stock option plan at December 31, 1996, 1997, and 1998 and the activity for the years ended December 31, 1996 and 1997, and the eight months ended August 31, 1998:
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 F-24 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED) January 1997 were deemed to be below the fair market value of the underlying common stock on the grant date and such difference is being recognized as additional compensation expense in the consolidated financial statements on a straight line basis over the vesting period of the underlying options. Compensation expense recognized was $158,000, $240,000 and $332,000 for the years ended December 31, 1996 and 1997 and the eight months ended August 31, 1998, respectively. The Company measures compensation expense related to its employee stock option plan using the intrinsic value method as prescribed by APB Opinion No. 25. Had compensation cost for the Company's stock option plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net income (loss) would have been as follows (amounts in thousands):
EIGHT MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------ AUGUST 31, 1996 1997 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%; expected life of 2.5 years; and expected stock price volatility of 39.9%. The fair value for options granted prior to the IPO was estimated on the dates of grant using a minimum value method, assuming a risk-free interest rate of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option pricing models, the minimum value method excludes stock price volatility, which could not be reasonably estimated for the Company prior to the IPO. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models, as well as the minimum value method, do not necessarily provide a reliable single measure of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options granted in fiscal years after December 31, 1994 is amortized to expense over the options' vesting period. The effects of applying SFAS 123 in providing the pro forma disclosures are not likely to be representative of the effects on the reported consolidated financial statements in future years. NOTE 15 - COMMITMENTS AND CONTINGENCIES LITIGATION Certain subsidiaries of the Company have recently been served in an action filed in federal court by American International Airways, Inc., relating to the conversion and modification of two Boeing 747 aircraft from passenger to freighter configuration. No specific amount of damages is sought. The events in question occurred prior to the Company's purchase of the relevant businesses from its prior owner; the Company F-25 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) intends to deny any liability, and further believes that it is indemnified with respect to any such liabilities. The Company and two of its subsidiaries have confirmed that they are indemnified for any liability in the action filed by American International Airways; and for the further cost of defense of the action. A third subsidiary was named as a defendant but has been dismissed from the case without prejudice. On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware Chancery Court on behalf of a purported class of stockholders of the Company against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and certain of its affiliates ("DLJ"), alleging, among other things, that the directors had breached their fiduciary duties by entering into the merger agreement related to the DLJ Acquisition without engaging in an auction or "active market check" and, therefore, agreed to terms that were unfair and inadequate from the standpoint of the Company's stockholders. On July 24, 1998, the plaintiffs amended the complaint by repeating the allegations in the initial complaint and adding allegations that: (i) the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "14D-9") contained material misstatements or omissions; (ii) the termination fees were unreasonable; and (iii) the directors who approved the DLJ Acquisition had conflicts of interest. The complaint sought a preliminary and permanent injunction barring defendants from proceeding with the transaction or, if the transaction is consummated, an order rescinding it or awarding damages, together with interest, and an award of attorneys' fees and litigation expenses. Without admitting any wrongdoing in the action, in order to avoid the burden and expense of further litigation, the Company, DLJ, and the individual defendants reached an agreement in principle with the plaintiffs which contemplates settlement of the action. The Company, DLJ and the individual defendants and the plaintiffs entered into a memorandum of understanding (the "Memorandum of Understanding"), pursuant to which the parties would, subject to certain facts being confirmed through discovery which has not been completed, enter into a settlement agreement which would be subject to approval by the Court of Chancery. The Memorandum of Understanding required the Company to provide additional disclosures in an amendment to the 14D-9 which has occurred, and for a complete release and settlement of all claims, whether asserted directly, derivatively or otherwise, against defendants, or any of their affiliates, directors, officers, employees or agents arising out of the facts set forth in the complaint. The Memorandum of Understanding contemplates that, in connection with the benefit conferred, plaintiffs' counsel will apply to the Court of Chancery for an award of attorney's fees and litigation expenses in an amount not exceeding $375,000, which application, the defendants have agreed not to oppose. On August 5, 1998, the Company and its chief executive officer were served in an action filed in state court in California by the Company's chief financial officer and secretary claiming that he is due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith. On September 22, 1998, the plaintiff amended the compliant by repeating the allegations in the initial compliant and adding allegations of fraudulent misrepresentation in violation of certain provisions of the California Labor Code (for which doubled damages are sought), promissory estoppel, and wrongful discharge as a violation of public policy (as a result of allegations made by the plaintiff of improprieties in connection with the fairness opinion with respect to the DLJ Acquisition). The action seeks not less than $1.5 million plus punitive damages and costs. Discovery has not been completed. The Company intends to vigorously defend against such claim. The plaintiff's employment with the Company was terminated. The Canadian Transportation Safety Board has notified the Company that as part of its investigation of the crash of Swissair Flight 111 on September 2, 1998, burned wire was found which was attached to the in-flight entertainment system installed on certain Swissair aircraft by a subsidiary of the Company. The Canadian Transportation Safety Board has advised the Company that it does not have evidence that the system the Company installed malfunctioned or failed during the flight. The Company has been requested by attorneys for families of persons who died aboard the flight to put its insurance carrier on notice of a potential claim by such families. The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of these matters, F-26 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) as well as the matters discussed in the preceding paragraphs, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. LEASE COMMITMENTS The Company leases certain facilities and equipment under various capital and operating leases. Certain leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 1998 (amounts in thousands):
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. 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):
EIGHT MONTHS FOUR MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ---------------------------- AUGUST 31, DECEMBER 31, 1996 1997 1998 1998 (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) ---------------------------- ------------- ----------- Interest......................................... $ 2,983 $ 2,842 $ 2,227 $ 3,706 Income taxes..................................... 132 300 4,825 1,328
F-27 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES Certain noncash investing and financing transactions occurred as follows (amounts in thousands):
EIGHT YEAR ENDED MONTHS FOUR MONTHS DECEMBER 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1996 1997 1998 1998 (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) -------------------- ----------- ----------- Refinancing of Bridge Notes with proceeds from Units offering.............................................. $ -- $ -- $ -- $ 100,000 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 -- ========= ========= ========= =========
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 MONTHS FOUR MONTHS DECEMBER 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1996 1997 1998 1998 --------- --------- ----------- ----------- (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) 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 F-28 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17 - FOREIGN OPERATIONS AND EXPORT REVENUES (CONTINUED) Company believes would be equivalent to unaffiliated customer sales. Interarea transfers and eliminations reflect the shipment of raw component parts between areas. Long-lived assets consists of the Company's property and equipment. Corporate long-lived assets are included with United States assets. EXPORT REVENUES Consolidated revenues include export revenues of $6,484,000, $12,430,000, $11,804,000 and $9,983,000 for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. Export revenues are primarily derived from sales to customers located in Western Europe, the Far East and Canada. NOTE 18 - EMPLOYEE BENEFIT PLANS The Company's Swiss subsidiary sponsors a defined contribution pension plan covering substantially all of its employees as required by Swiss law. Contributions and costs, which are shared equally by the Company and the employees, are determined as a percentage of each covered employees' salary. Company contributions and costs associated with the plan were $151,000, $157,000, $102,000 and $51,000 for the years ended December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. Substantially all of the Company's domestic employees are eligible to participate in a 401(k) defined contribution plan (the "Plan"). Participation in the Plan is at the discretion of each individual employee who is eligible to participate. Each participating employee is permitted to contribute up to a maximum amount defined in the Plan. The Company and its subsidiaries may make periodic discretionary matching contributions to the Plan. The Company made matching contributions of $41,000, $128,000 and $95,000 during the year ended December 31, 1997, the eight months ended August 31, 1998 and the four months ended December 31, 1998, respectively. No matching contributions were made to the plan during the year ended December 31, 1996. The costs associated with administering the plan were not significant for any period presented. F-29 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 EIGHT MONTHS FOUR MONTHS DECEMBER 31, ENDED ENDED -------------------- AUGUST 31, DECEMBER 31, 1996 1997 1998 1998 --------- --------- ------------- ----------- (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) 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 and preferred stock of DeCrane Holdings. The Company loaned half of the purchase price for such shares to GTP at an interest rate equal to the interest rate on the longest maturity senior bank debt of the Company in effect from time to time, plus 1.0%. The loans are repayable out of the proceeds from the sale of such stock, are secured by such stock, and are included in other long-term assets. Upon collection of the notes, funds will be advanced to Holdings. F-30 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED) Senior Subordinated Lenders - Own 8.9% of the Company's issued and outstanding common stock at December 31, 1997, were represented on the Company's Board of Directors in 1995 and 1996, and provided a portion of the Company's Convertible Notes financing and the Subordinated Debt (Notes 10 and 14). The ownership percentage reflects the cashless exercise and conversion of all Preferred Stock, Preferred Stock warrants, common stock warrants and Redeemable Warrants into 451,370 common shares in conjunction with the Recapitalization (Note 14). Investors - Own 16.4% of the Company's issued and outstanding common stock at December 31, 1997, are represented on the Company's Board of Directors, and provided a portion of the Company's Convertible Notes and Preferred Stock financing (Notes 10 and 14). The ownership percentage reflects the cashless exercise and conversion of all Preferred Stock and Redeemable Warrants into 840,808 common shares in conjunction with the Recapitalization (Note 14). NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) In conjunction with the Notes, Bridge Notes and credit facility described in Note 2, the following summarized condensed consolidating financial information is presented for the Company, segregating guarantor subsidiaries and non-guarantor subsidiaries. The accompanying financial information in the "Guarantor Subsidiaries" column reflects the financial position, results of operations and cash flows for those subsidiaries which guarantee the Notes and credit facility. The guarantor subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are full, unconditional, and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors. Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following: (1) Elimination of investments in subsidiaries. (2) Elimination of intercompany accounts. (3) Elimination of intercompany sales between guarantor and non-guarantor subsidiaries. (4) Elimination of equity in earnings of subsidiaries. F-31 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-32 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-33 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-34 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-35 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR) -------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------- --------- ---------- --------- ---------- Cash flows from operating activities Net income (loss)............................ $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817) Adjustments to net income (loss) Non-cash adjustments to net income (loss)................................... 1,093 2,623 903 -- 4,619 Equity in earnings of subsidiaries......... (2,820) (594) -- 3,414 (4) -- Changes in working capital................. (864) 1,525 (1,505) -- (844) ---------- --------- ---------- --------- ---------- Net cash provided by (used for) operating activities............................. (3,408) 5,946 420 -- 2,958 ---------- --------- ---------- --------- ---------- Cash flows from investing activities Acquisition of companies, net of cash acquired................................... (18,200) -- -- -- (18,200) Capital expenditures and other............... (97) (5,353) (366) -- (5,816) ---------- --------- ---------- --------- ---------- Net cash used for investing activities... (18,297) (5,353) (366) -- (24,016) ---------- --------- ---------- --------- ---------- Cash flows from financing activities Net proceeds from sale of equity............. 8,240 -- -- -- 8,240 Debt financing for acquisitions.............. 13,548 -- -- -- 13,548 Principal payments on long-term debt and leases..................................... (1,500) (438) (63) -- (2,001) Line of credit borrowings (repayments)....... 1,280 -- (89) -- 1,191 Other, net................................... 158 (85) -- -- 73 ---------- --------- ---------- --------- ---------- Net cash provided by (used for) financing activities............................. 21,726 (523) (152) -- 21,051 ---------- --------- ---------- --------- ---------- Effect of foreign currency translation on cash......................................... -- -- 22 -- 22 ---------- --------- ---------- --------- ---------- Net increase (decrease) in cash and equivalents.................................. 21 70 (76) -- 15 Cash and equivalents at beginning of period.... 16 17 272 -- 305 ---------- --------- ---------- --------- ---------- Cash and equivalents at end of period.......... $ 37 $ 87 $ 196 $ -- $ 320 ========== ========= ========== ========= ==========
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 CASH FLOWS (CONTINUED)
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR) -------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------- --------- ---------- --------- ---------- Cash flows from operating activities Net income................................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176 Adjustments to net income Non-cash adjustments to net income......... 1,307 4,687 829 -- 6,823 Equity in earnings of subsidiaries......... (6,392) (999) -- 7,391 (4) -- Changes in working capital................. 1,374 (4,530) (2,202) -- (5,358) ---------- --------- ---------- --------- ---------- Net cash provided by (used for) operating activities............................. (535) 5,093 83 -- 4,641 ---------- --------- ---------- --------- ---------- Cash flows from investing activities Acquisition of companies, net of cash acquired................................... (23,597) -- -- -- (23,597) Capital expenditures and other............... (244) (3,823) (145) -- (4,212) ---------- --------- ---------- --------- ---------- Net cash used for investing activities... (23,841) (3,823) (145) -- (27,809) ---------- --------- ---------- --------- ---------- Cash flows from financing activities Net proceeds from sale of equity............. 28,933 -- -- -- 28,933 Net debt repaid with equity offering proceeds................................... (29,848) -- -- -- (29,848) Debt financing for acquisitions.............. 23,597 -- -- -- 23,597 Principal payments on long-term debt and leases..................................... (474) (1,147) (54) -- (1,675) Line of credit borrowings (repayments)....... 1,907 -- (96) -- 1,811 Other, net................................... 240 (101) -- -- 139 ---------- --------- ---------- --------- ---------- Net cash provided by (used for) financing activities............................. 24,355 (1,248) (150) -- 22,957 ---------- --------- ---------- --------- ---------- Effect of foreign currency translation on cash......................................... -- -- 97 -- 97 ---------- --------- ---------- --------- ---------- Net increase (decrease) in cash and equivalents.................................. (21) 22 (115) -- (114) Cash and equivalents at beginning of period.... 37 87 196 -- 320 ---------- --------- ---------- --------- ---------- Cash and equivalents at end of period.......... $ 16 $ 109 $ 81 $ -- $ 206 ========== ========= ========== ========= ==========
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)
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) --------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------- --------- --------- --------- ---------- Cash flows from operating activities Net income................................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189 Adjustments to net income Non-cash adjustments to net income......... (2,222) 3,420 557 -- 1,755 Equity in earnings of subsidiaries......... (6,824) (489) -- 7,313(4) -- Changes in working capital................. 5,492 (7,393) (29) -- (1,930) ---------- --------- --------- --------- ---------- Net cash provided by (used for) operating activities............................. (365) 2,362 1,017 -- 3,014 ---------- --------- --------- --------- ---------- Cash flows from investing activities Acquisition of companies, net of cash acquired................................... (87,071) 1,263 -- -- (85,808) Capital expenditures and other............... (44) (1,306) (220) -- (1,570) ---------- --------- --------- --------- ---------- Net cash used for investing activities... (87,115) (43) (220) -- (87,378) ---------- --------- --------- --------- ---------- Cash flows from financing activities Net proceeds from sale of equity............. 34,815 -- -- -- 34,815 Net debt repaid with equity offering proceeds................................... (34,815) -- -- -- (34,815) Debt financing for acquisitions.............. 85,808 -- -- -- 85,808 Principal payments on long-term debt and leases..................................... (3) (1,280) (34) -- (1,317) Line of credit borrowings (repayments)....... 6,007 -- (554) -- 5,453 Other, net................................... 23 (96) -- -- (73) ---------- --------- --------- --------- ---------- Net cash provided by (used for) financing activities............................. 91,835 (1,376) (588) -- 89,871 ---------- --------- --------- --------- ---------- Effect of foreign currency translation on cash......................................... -- -- 26 -- 26 ---------- --------- --------- --------- ---------- Net increase in cash and equivalents........... 4,355 943 235 -- 5,533 Cash and equivalents at beginning of period.... 16 109 81 -- 206 ---------- --------- --------- --------- ---------- Cash and equivalents at end of period.......... 4,371 $ 1,052 $ 316 $ -- $ 5,739 ========== ========= ========= ========= ==========
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)
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR) --------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------- --------- --------- --------- ---------- Cash flows from operating activities Net income...................................... $ (2,553) $ 7,753 $ 506 $ (8,259) $ (2,553) Adjustments to net income Non-cash adjustments to net income............ (2,647) 4,964 (274) -- 2,043 Equity in earnings of subsidiaries............ (7,753) (506) -- 8,259(4) -- Changes in working capital.................... 12,408 (10,272) (618) -- 1,518 ---------- --------- --------- --------- ---------- Net cash provided by (used for) operating activities................................ (545) 1,939 (386) -- 1,008 ---------- --------- --------- --------- ---------- Cash flows from investing activities Acquisition of companies, net of cash acquired...................................... -- -- -- -- -- Capital expenditures and other.................. -- (1,746) (67) -- (1,813) ---------- --------- --------- --------- ---------- Net cash used for investing activities...... -- (1,746) (67) -- (1,813) ---------- --------- --------- --------- ---------- Cash flows from financing activities Acquisition of Predecessor, net................. -- -- -- -- -- Net proceeds from sale of equity................ -- -- -- -- -- Net debt repaid with equity offering proceeds... -- -- -- -- -- Debt financing for acquisitions................. -- -- -- -- -- Principal payments on long-term debt and leases........................................ (1) (447) (10) -- (458) Line of credit borrowings (repayments).......... (1,367) -- 264 -- (1,103) Other, net...................................... -- (36) -- -- (36) ---------- --------- --------- --------- ---------- Net cash provided by (used for) financing activities................................ (1,368) (483) 254 -- (1,597) ---------- --------- --------- --------- ---------- Effect of foreign currency translation on cash.... -- -- 181 -- 181 ---------- --------- --------- --------- ---------- Net increase (decrease) in cash and equivalents... (1,913) (290) (18) -- (2,221) Cash and equivalents at beginning of period....... 4,371 1,052 316 -- 5,739 ---------- --------- --------- --------- ---------- Cash and equivalents at end of period............. $ 2,458 $ 762 $ 298 $ -- $ 3,518 ========== ========= ========= ========= ==========
F-39 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 21 - EVENT SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS REPORT (UNAUDITED) In April 1999, the Company purchased all of the outstanding stock of PPI Holdings, Inc. PPI is a manufacturer of interior furniture components primarily for middle- and high-end corporate aircraft. The purchase price was $60.2 million, less debt acquired, in cash at closing and is subject to adjustment for changes in working capital. Additional contingent consideration totaling $19.5 million is payable over two years based on future attainment of defined performance criteria. The acquisition will be accounted for as a purchase and the difference between the purchase price and the fair value of the net assets acquired will be recorded as goodwill and amortized on a straight-line basis over thirty years. NOTE 22 - CONDENSED QUARTERLY DATA FOR 1997 AND 1998 (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998 -------------------------------------------- ------------------------------------------------ (SUCCESSOR) (PREDECESSOR) (TWO MONTHS (ONE MONTH ENDED ENDED AUGUST 31, SEPTEMBER 30, 1998) 1998) 1ST 2ND 3RD 4TH 1ST 2ND 3RD 3RD --------- --------- --------- --------- --------- --------- --------- --------- Revenues................. $ 26,118 $ 28,130 $ 26,639 $ 28,016 $ 29,128 $ 29,854 $ 31,095 $ 16,012 Gross profit............. 6,011 7,214 6,998 8,433 8,987 9,720 11,269 4,932 Income (loss) before extraordinary item...... 629 1,454 1,481 1,690 1,688 1,672 (171) (480) Extraordinary loss from debt refinancing........ -- (2,078) -- -- -- -- -- (296) Net income (loss)........ 629 (624) 1,481 1,690 1,688 1,672 (171) (776) 4TH --------- Revenues................. $ 44,344 Gross profit............. 12,685 Income (loss) before extraordinary item...... 156 Extraordinary loss from debt refinancing........ (1,933) Net income (loss)........ (1,777)
F-40 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(SUCCESSOR) --------------------------- DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents............................................................... $ 3,518 $ 3,139 Accounts receivable, net................................................................ 30,441 40,074 Inventories............................................................................. 34,281 51,290 Deferred income taxes................................................................... 4,300 2,916 Prepaid expenses and other current assets............................................... 3,897 2,847 ---------- ----------- Total current assets.................................................................. 76,437 100,266 Property and equipment, net............................................................... 28,160 36,531 Other assets, principally intangibles, net................................................ 226,330 321,966 ---------- ----------- Total assets........................................................................ $ 330,927 $ 458,763 ========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings................................................................... $ 283 $ 401 Current portion of long-term obligations................................................ 1,529 3,682 Accounts payable........................................................................ 6,383 8,749 Accrued expenses........................................................................ 18,466 23,740 Income taxes payable.................................................................... 3,743 4,638 ---------- ----------- Total current liabilities............................................................. 30,404 41,210 ---------- ----------- Long-term obligations..................................................................... 184,953 281,094 Deferred income taxes..................................................................... 16,990 21,522 Other long-term liabilities............................................................... 659 4,904 ---------- ----------- Commitments and contingencies (Note 7) Stockholder's equity Cumulative convertible preferred stock, $.01 par value, 8,314,018 shares authorized; none issued and outstanding as of December 31, 1998 and September 30, 1999............ -- -- Undesignated preferred stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding as of December 31, 1998 and September 30, 1999........................ -- -- Common stock, $.01 par value, 9,924,950 shares authorized; 100 shares issued and outstanding as of December 31, 1998 and September 30, 1999............................ -- -- Additional paid-in capital.............................................................. 100,200 112,700 Accumulated deficit..................................................................... (2,553) (2,053) Accumulated other comprehensive income (loss)........................................... 274 (614) ---------- ----------- Total stockholder's equity............................................................ 97,921 110,033 ---------- ----------- Total liabilities and stockholder's equity.......................................... $ 330,927 $ 458,763 ========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-41 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1998 -------------------------- EIGHT MONTHS ENDED ONE MONTH ENDED AUGUST 31 SEPTEMBER 30 (SUCCESSOR) 1999 (PREDECESSOR) (SUCCESSOR) ------------ ------------ ----------- (UNAUDITED) (UNAUDITED) Revenues..................................................................... $ 90,077 $ 16,012 $ 177,836 Cost of sales................................................................ 60,101 11,080 118,081 ---------- ---------- --------- Gross profit............................................................. 29,976 4,932 59,755 ---------- ---------- --------- Operating expenses Selling, general and administrative expenses............................... 15,719 3,170 27,507 Nonrecurring charges....................................................... 3,632 -- -- Amortization of intangible assets.......................................... 1,347 802 9,506 ---------- ---------- --------- Total operating expenses................................................. 20,698 3,972 37,013 ---------- ---------- --------- Income from operations....................................................... 9,278 960 22,742 Other expenses (income) Interest expense........................................................... 2,350 1,765 19,884 Terminated debt offering expenses.......................................... 600 -- -- Other expenses (income).................................................... 247 181 (311) ---------- ---------- --------- Income (loss) before provision for income taxes and extraordinary item....... 6,081 (986) 3,169 Provision (benefit) for income taxes......................................... 2,892 (506) 2,669 ---------- ---------- --------- Income (loss) before extraordinary item...................................... 3,189 (480) 500 Extraordinary loss from debt refinancing, net of income tax benefit.......... -- 296 -- ---------- ---------- --------- Net income (loss)............................................................ $ 3,189 $ (776) $ 500 ========== ========== =========
The accompanying notes are an integral part of the consolidated financial statements. F-42 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ------------------------ ------------------------ NUMBER NUMBER ADDITIONAL OF OF PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ----------- ----------- ----------- ----------- ----------- ------------- Balance, December 31, 1998................ -- $ -- 100 $ -- $ 100,200 $ (2,553) Comprehensive income (loss) Net income.............................. -- -- -- -- -- 500 Translation adjustment.................. -- -- -- -- -- -- Capital contribution...................... -- -- -- -- 12,500 -- --------- --------- --------- --------- --------- --------- Balance, September 30, 1999 (Unaudited)............................. -- $ -- 100 $ -- $ 112,700 $ (2,053) ========= ========= ========= ========= ========= ========= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TOTAL --------------- --------- Balance, December 31, 1998................ $ 274 $ 97,921 Comprehensive income (loss) Net income.............................. -- 500 Translation adjustment.................. (888) (888) --------- (388) --------- Capital contribution...................... -- 12,500 --------- --------- Balance, September 30, 1999 (Unaudited)............................. $ (614) $ 110,033 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-43 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1998 --------------------------- EIGHT MONTHS ONE MONTH ENDED ENDED AUGUST 31 SEPTEMBER 30 (PREDECESSOR) (SUCCESSOR) 1999 (SUCCESSOR) ------------- ------------ ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................................................... $ 3,189 $ (776) $ 500 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization............................................ 4,454 1,252 14,875 Deferred income taxes.................................................... (2,339) 345 462 Extraordinary loss from debt refinancing................................. -- 296 -- Other, net............................................................... (360) (61) 176 Changes in assets and liabilities, net of effect from acquisitions Accounts receivable.................................................... (3,621) (975) (2,598) Inventories............................................................ (2,017) 1,492 1,423 Prepaid expenses and other assets...................................... (58) (650) (1,276) Accounts payable....................................................... (1,127) 1,514 (1,967) Accrued expenses....................................................... 3,519 (1,525) (3,792) Income taxes payable................................................... 1,374 (2,418) 2,342 Other long-term liabilities............................................ -- -- 77 ----------- ---------- --------- Net cash provided by (used for) operating activities................. 3,014 (1,506) 10,222 ----------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for acquisition, net of cash acquired............................ (85,808) -- (116,790) Capital expenditures....................................................... (1,745) (307) (4,752) Other, net................................................................. 175 -- 111 ----------- ---------- --------- Net cash used for investing activities............................... (87,378) (307) (121,431) ----------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Term debt borrowings....................................................... -- -- 90,000 Net borrowings (repayments) under revolving line of credit agreements...... 56,446 (1,519) 7,700 Net proceeds from the sale of common stock................................. 34,815 -- -- Capital contribution....................................................... -- -- 12,500 Customer advance........................................................... -- -- 5,000 Other long-term borrowings................................................. -- -- 636 Deferred financing costs................................................... -- -- (3,062) Principal payments on term debt, capitalized leases and other obligations.............................................................. (1,317) (129) (1,824) Acquisition of Predecessor Proceeds from senior credit facility and bridge notes.................... -- 185,400 -- Proceeds from sale of common equity...................................... -- 99,000 -- Proceeds from stock options exercised.................................... -- 4,314 -- Purchase of shares outstanding........................................... -- (186,310) -- Repayment of existing credit facility.................................... -- (93,000) -- Transaction fees and expenses............................................ -- (7,398) -- Other, net................................................................. (73) -- (21) ----------- ---------- --------- Net cash provided by financing activities............................ 89,871 358 110,929 ----------- ---------- --------- Effect of foreign currency translation on cash............................... 26 (17) (99) ----------- ---------- --------- Net increase (decrease) in cash and cash equivalents......................... 5,533 (1,472) (379) Cash and cash equivalents at beginning of period............................. 206 5,739 3,518 ----------- ---------- --------- Cash and cash equivalents at end of period................................... $ 5,739 $ 4,267 $ 3,139 =========== ========== =========
The accompanying notes are an integral part of the consolidated financial statements. F-44 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS The consolidated interim financial statements included in this report are unaudited. The Company believes the interim financial statements are presented on a basis consistent with the audited financial statements. The Company also believes that the interim financial statements contain all adjustments necessary for a fair presentation of the results for such interim periods. All of these adjustments are normal recurring adjustments. The results of operations for interim periods do not necessarily predict the operating results for the full year. The consolidated balance sheet as of December 31, 1998 and the consolidated statements of operations and cash flows for the eight months ended August 31, 1998 have been derived from audited financial statements but do not include all disclosures required by generally accepted accounting principles as permitted by interim reporting requirements. The information included in this report should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the 1998 audited financial statements and related notes included elsewhere in this prospectus. The Company has made some reclassifications to prior periods' financial statements to conform to the 1999 presentation. NOTE 2 - ACQUISITIONS ACQUIRED PRIOR TO SEPTEMBER 30, 1999 During the nine months ended September 30, 1999, the Company acquired: - all of the common stock of PATS, Inc., a Maryland-based designer, manufacturer and installer of auxiliary fuel tank systems and a manufacturer of aircraft auxiliary power units, on January 22, 1999; - all of the common stock of PPI Holdings, Inc., a Kansas-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on April 23, 1999; and - substantially all of the assets of Custom Woodwork & Plastics, Inc., a Georgia-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on August 5, 1999. The total purchase price was $116,035,000, plus contingent consideration totaling a maximum of $19,250,000 payable over two years based on future attainment of defined performance criteria as follows: 2000 - $10,625,000; and 2001 - $8,625,000. The total purchase price includes an estimated $3,080,000 of acquisition related costs. The acquisitions were accounted for as purchases and the assets acquired and liabilities assumed have been recorded at their estimated fair values. As a result: - the historical value of inventory acquired was increased by $1,606,000; - identifiable intangible assets totaling $15,229,000 were recorded; and - the $85,883,000 difference between the total purchase price and the fair value of the net assets acquired was recorded as goodwill. The purchase price allocations are preliminary and may change upon the completion of the final valuations of the net assets acquired. The increase in inventory value was charged to operations as the inventory was sold during the nine months ended September 30, 1999. Identifiable intangible assets are being amortized on a straight-line basis over their estimated useful lives, ranging from seven and fifteen years. Goodwill is being amortized on a straight-line basis over thirty years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial thirty-year term. The consolidated balance sheet as of September 30, 1999 reflects the financial position of the companies acquired and the consolidated statements of operations for the three months and nine months ended September 30, 1999 includes their operating results subsequent to their respective acquisition dates. F-45 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 2 - ACQUISITIONS (CONTINUED) The acquisitions were funded with borrowings under the Company's senior credit facility as described in Note 5, a $12,500,000 equity contribution from DeCrane Holdings and a $5,000,000 customer advance to be offset against amounts receivable from future product deliveries. ACQUIRED SUBSEQUENT TO SEPTEMBER 30, 1999 Subsequent to September 30, 1999, the Company acquired: - substantially all of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of composite material and components for middle- and high-end corporate aircraft, on October 6, 1999; - all of the common stock of International Custom Interiors, Inc., a Florida-based provider of upholstery services and manufacturer of furniture for middle- and high-end corporate aircraft, on October 8, 1999; and - substantially all of the assets of The Infinity Partners, Ltd., a Texas-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on December 17, 1999. The total purchase price was $29,591,000, plus contingent consideration totaling a maximum of $29,700,000 payable over five years based on future attainment of defined performance criteria as follows: 2000--$15,700,000; 2001--$11,750,000; and 2002 through 2004--$750,000 per year. The total purchase price includes an estimated $1,500,000 of acquisition related costs. The acquisitions will be accounted for as purchases and the assets acquired and liabilities assumed will be recorded at their estimated fair values. The consolidated financial statements will reflect the financial position and results of operations of the companies acquired for periods subsequent to their respective acquisition dates. The acquisitions were funded with borrowings under the Company's senior credit facility as described in Note 5. NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS Unaudited pro forma consolidated results of operations are presented in the table below for nine months ended September 30, 1999 and 1998. The results of operations reflect the Company's purchase by DLJ and other 1998 acquisitions described in the Company's 1998 audited financial statements and the 1999 PATS, PPI and Custom Woodwork acquisitions as if all of these transactions were consummated as of January 1, 1998. The pro forma results exclude the effect of the PCI NewCo, International Custom Interiors and Infinity acquisitions, which were completed subsequent to September 30, 1999.
PRO FORMA FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1998 1999 ---------- ---------- (IN THOUSANDS) Revenues.................................................... $183,214 $196,016 Income (loss) before extraordinary item..................... (5,618) 2,140
The pro forma results of operations do not purport to represent what actual results would have been if the transactions described above occurred on such dates or to project the results of operations for any future period. The above information reflects adjustments for inventory, depreciation, amortization, general and administrative expenses and interest expense based on the new cost basis and debt structure of the Company following the acquisitions. In 1998, income excludes the effect of a $2,229,000 extraordinary loss incurred in connection with debt refinancings of which $296,000 was incurred during the nine months ended September 30, 1998. F-46 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS (CONTINUED) One customer, the Boeing Company, accounted for more than 10% of the Company's 1998 consolidated revenues. If the Company had completed its 1998 and 1999 acquisitions at the beginning of 1998, three customers would have accounted for 10% or more of the Company's consolidated revenues as follows:
PRO FORMA FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1998 1999 -------- -------- Boeing...................................................... 24.1% 18.6% Textron..................................................... 11.0% 17.2% Bombardier.................................................. 3.8% 13.2%
Complete loss of any of these customers could have a significant adverse impact on the results of operations expected in future periods. NOTE 4 - INVENTORIES Inventories are comprised of the following (amounts in thousands):
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Raw material................................................ $19,221 $26,219 Work-in process............................................. 7,231 18,658 Finished goods.............................................. 7,829 6,413 ------- ------- Total inventories......................................... $34,281 $51,290 ======= =======
NOTE 5 - BORROWINGS Long-term obligations include the following amounts (amounts in thousands):
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Senior credit facility $25 million working capital revolving line of credit...... $ 5,800 $ -- $25 million acquisition revolving line of credit.......... -- 13,500 Term loans................................................ 79,888 169,050 12% senior subordinated notes............................... 100,000 100,000 Capital lease obligations and equipment term financing...... 367 1,776 Other....................................................... 427 450 -------- -------- Total long-term obligations 186,482 284,776 Less current portion...................................... (1,529) (3,682) -------- -------- Long-term obligations, less current portion............. $184,953 $281,094 ======== ========
In conjunction with the January 1999 PATS acquisition, the Company borrowed $14,918,000 under its acquisition revolving credit facility and amended its term loan facility to provide for an additional $20,000,000 of term loan borrowings. The interest rate margins, the rates charged above the current prime or Euro-Dollar rates, were increased by 0.50% for all senior credit facility borrowings. The amended interest F-47 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5 - BORROWINGS (CONTINUED) rate margins range between 1.50% to 1.75% for prime rate borrowings and 2.75% to 3.00% for Euro-Dollar borrowings, depending on the type of borrowing. In April 1999, the term loan facility was further amended to provide for an additional $70,000,000 of term loan borrowings. The Company used $50,000,000 of the proceeds to fund the PPI acquisition and $20,000,000 to repay borrowings under its acquisition and working capital revolving credit facilities. The interest rate margins applicable to the $70,000,000 incremental term loan borrowings are 2.00% for prime rate borrowings or 3.25% for Euro-Dollar borrowings. In conjunction with the August 1999 Custom Woodwork acquisition, the Company borrowed $13,500,000 under its acquisition revolving credit facility. SUBSEQUENT TO SEPTEMBER 30, 1999 Subsequent to September 30, 1999, the Company: - borrowed $11,500,000 under its acquisition revolving credit facility in conjunction with the October 1999 PCI NewCo and International Custom Interiors acquisitions; - further amended its term loan facility in December 1999 to provide for an additional $45,000,000 of term loan borrowings; the interest rate margins applicable to the incremental term loan borrowings are 2.50% for prime rate borrowings or 3.75% for Euro-Dollar borrowings; and - used the term loan proceeds to fund the Infinity acquisition and repay $28,000,000 of acquisition and working capital revolving credit facility borrowings. NOTE 6 - INCOME TAXES The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of higher goodwill amortization. NOTE 7 -- LITIGATION As part of its investigation of the crash off the Canadian coast on September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety Board notified the Company that they recovered burned wire which had been attached to the in-flight entertainment system installed on some of Swissair's aircraft by a subsidiary of the Company. At the request of the attorneys for families of persons who died aboard the flight, the Company put its insurance carrier on notice of a potential claim by those families. The Transportation Safety Board has advised the Company that it has no evidence that the system installed by the Company's subsidiary malfunctioned or failed during the flight. The Company is fully cooperating with the investigation. Families of persons who died aboard the flight have filed actions in federal and state courts against the Company, our subsidiary, and many other parties unaffiliated with the Company, including Swissair and Boeing. The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system. The actions seek compensatory and punitive damages and costs in an unstated amount. The Company intends to vigorously defend against the claims. In August 1998, the Company and its chief executive officer were served in an action filed in state court in California by the Company's chief financial officer claiming that he was due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith, fraudulent misrepresentation in violation of provisions of the California Labor Code for which doubled damages are sought, promissory estoppel, and wrongful discharge in violation of public policy F-48 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7 -- LITIGATION (CONTINUED) as a result of his allegations of improprieties in connection with the DLJ acquisition transactions. The plaintiff later amended his complaint to allege breach of an implied contract as well. The action seeks not less than $1,500,000 plus punitive damages and costs. The Company intends to vigorously defend against the claims. The plaintiff's employment with the Company was terminated. The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of all of the foregoing matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 8 -- CONSOLIDATED STATEMENTS OF CASH FLOWS Assets acquired and liabilities assumed in connection with acquisitions are as follows (amounts in thousands): NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1998 ----------------------- EIGHT ONE MONTH MONTHS ENDED ENDED AUGUST 31 SEPTEMBER 30 1999 (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) ---------- ---------- --------- (UNAUDITED) (UNAUDITED) 1999 and 1998 acquisitions Fair value of assets acquired............................. $91,640 $ -- $136,359 Liabilities assumed....................................... (4,569) -- (20,324) ------- ------- -------- Cash paid............................................... 87,071 -- 116,035 Less cash acquired...................................... (1,263) -- (2,245) ------- ------- -------- Net cash paid for 1999 and 1998 acquisitions.......... 85,808 -- 113,790 Contingent consideration paid in conjunction with the 1997 Audio International acquisition........................... -- -- 3,000 ------- ------- -------- Net cash paid for acquisitions $85,808 $ -- $116,790 ======= ======= ========
NOTE 9 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Adoption of SFAS No. 133, as amended by SFAS No. 137 in June 1999, is required for the fiscal year beginning January 1, 2001. Management believes the adoption of SFAS No. 133 will not have a material impact on the Company's consolidated financial position or results of operations. NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION In conjunction with the senior credit facility and 12% senior subordinated notes described in Note 5, the following condensed consolidating financial information is presented for the Company, segregating guarantor and non-guarantor subsidiaries. The accompanying financial information in the "Guarantor Subsidiaries" column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes. The guarantor subsidiaries are wholly-owned subsidiaries of the F-49 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) Company and their guarantees are full and unconditional on a joint and several basis. There are no restrictions on the ability of the guarantor subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances. Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors. Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following: (1) Elimination of investments in subsidiaries. (2) Elimination of intercompany accounts. (3) Elimination of intercompany sales between guarantor and non-guarantor subsidiaries. (4) Elimination of equity in earnings of subsidiaries. F-50 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) BALANCE SHEETS
DECEMBER 31, 1998 (UNAUDITED) ------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ -------------- ------------- ------------ (IN THOUSANDS) ASSETS Current assets Cash and cash equivalents....... $ 2,458 $ 762 $ 298 $ -- $ 3,518 Accounts receivable, net........ -- 28,917 1,524 -- 30,441 Inventories..................... -- 32,624 1,657 -- 34,281 Other current assets............ 7,066 894 237 -- 8,197 -------- -------- -------- --------- -------- Total current assets.......... 9,524 63,197 3,716 -- 76,437 Property and equipment, net....... 272 26,170 1,718 -- 28,160 Other assets, principally intangibles, net................ 12,105 200,383 13,842 -- 226,330 Investments in subsidiaries....... 250,366 20,114 -- (270,480)(1) -- Intercompany receivables.......... 39,012 2,091 3,622 (44,725)(2) -- -------- -------- -------- --------- -------- Total assets................ $311,279 $311,955 $ 22,898 $(315,205) $330,927 ======== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term obligations.......... $ 892 $ 628 $ 292 $ -- $ 1,812 Other current liabilities....... 10,767 16,651 1,174 -- 28,592 -------- -------- -------- --------- -------- Total current liabilities..... 11,659 17,279 1,466 -- 30,404 -------- -------- -------- --------- -------- Long-term obligations............. 184,822 131 -- -- 184,953 Intercompany payables............. 873 43,521 331 (44,725)(2) -- Other long-term liabilities....... 16,278 658 713 -- 17,649 -------- -------- -------- --------- -------- Stockholder's equity Paid-in capital................... 100,200 210,787 15,440 (226,227)(1) 100,200 Retained earnings (deficit)....... (2,553) 39,579 4,674 (44,253)(1) (2,553) Accumulated other comprehensive income (loss)............... -- -- 274 -- 274 -------- -------- -------- --------- -------- Total stockholder's equity.................... 97,647 250,366 20,388 (270,480) 97,921 -------- -------- -------- --------- -------- Total liabilities and stockholder's equity.... $311,279 $311,955 $ 22,898 $(315,205) $330,927 ======== ======== ======== ========= ========
F-51 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED) ------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ -------------- ------------- ------------ (IN THOUSANDS) ASSETS Current assets Cash and cash equivalents $ 807 $ 2,211 $ 121 $ -- $ 3,139 Accounts receivable, net........... -- 38,818 1,256 -- 40,074 Inventories........................ -- 49,578 1,712 -- 51,290 Other current assets............... 3,532 2,135 96 -- 5,763 -------- -------- -------- --------- -------- Total current assets............. 4,339 92,742 3,185 -- 100,266 Property and equipment, net.......... 1,262 32,853 2,416 -- 36,531 Other assets, principally intangibles, net................... 16,208 292,935 12,823 -- 321,966 Investments in subsidiaries.......... 363,948 20,297 -- (384,245)(1) -- Intercompany receivables............. 38,808 331 3,902 (43,041)(2) -- -------- -------- -------- --------- -------- Total assets................... $424,565 $439,158 $ 22,326 $(427,286) $458,763 ======== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term obligations............. $ 3,490 $ 164 $ 429 -- $ 4,083 Other current liabilities.......... 8,227 27,669 1,231 -- 37,127 -------- -------- -------- --------- -------- Total current liabilities........ 11,717 27,833 1,660 -- 41,210 -------- -------- -------- --------- -------- Long-term obligations.............. 280,416 636 42 -- 281,094 Intercompany payables.............. 873 41,837 331 (43,041)(2) -- Other long-term liabilities........ 20,912 4,904 610 -- 26,426 -------- -------- -------- --------- -------- Stockholder's equity Paid-in capital.................... 112,700 300,450 15,440 (315,890)(1) 112,700 Retained earnings (deficit)........ (2,053) 63,498 4,857 (68,355)(1) (2,053) Accumulated other comprehensive income (loss)........................ -- -- (614) -- (614) -------- -------- -------- --------- -------- Total stockholder's equity......... 110,647 363,948 19,683 (384,245) 110,033 -------- -------- -------- --------- -------- Total liabilities and stockholder's equity........................... $424,565 $439,158 $ 22,326 $(427,286) $458,763 ======== ======== ======== ========= ========
F-52 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF OPERATIONS
EIGHT MONTHS ENDED AUGUST 31, (PREDECESSOR - UNAUDITED) ------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ -------------- ------------- ------------ (IN THOUSANDS) Revenues............................. $ -- $ 87,312 $ 8,503 $ (5,738)(3) $ 90,077 Cost of sales........................ -- 59,252 6,587 (5,738)(3) 60,101 -------- -------- -------- --------- -------- Gross profit......................... -- 28,060 1,916 -- 29,976 Selling, general and administrative expenses........................... 3,949 11,041 729 -- 15,719 Nonrecurring charges................. 3,632 -- -- -- 3,632 Amortization of intangible assets.... -- 1,337 10 -- 1,347 Interest expense..................... 2,343 7 -- -- 2,350 Intercompany charges................. (4,357) 4,229 128 -- -- Equity in earnings of subsidiaries... (6,824) (489) -- 7,313(4) -- Other expenses (income).............. 600 (164) 411 -- 847 Provision (benefit) for income taxes.............................. (2,532) 5,275 149 -- 2,892 -------- -------- -------- --------- -------- Net income........................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189 ======== ======== ======== ========= ========
ONE MONTHS ENDED SEPTEMBER 30, (SUCCESSOR - UNAUDITED) ------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ -------------- ------------- ------------ (IN THOUSANDS) Revenues............................. $ -- $ 15,659 $ 1,096 $ (743)(3) $ 16,012 Cost of sales........................ -- 10,975 848 (743)(3) 11,080 -------- -------- -------- --------- -------- Gross profit......................... -- 4,684 248 -- 4,932 Selling, general and administrative expenses........................... 359 2,714 97 -- 3,170 Amortization of intangible assets.... 9 749 44 -- 802 Interest expense..................... 1,701 64 -- -- 1,765 Intercompany charges................. (576) 559 17 -- -- Equity in (earnings) loss of subsidiaries....................... (2) 62 -- (60)(4) -- Other expenses (income).............. -- (7) 188 -- 181 Provision (benefit) for income taxes.............................. (1,011) 541 (36) -- (506) Extraordinary charge, net of tax..... 296 -- -- -- 296 -------- -------- -------- --------- -------- Net income (loss).................... $ (776) $ 2 $ (62) $ 60 $ (776) ======== ======== ======== ========= ========
F-53 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 (SUCCESSOR - UNAUDITED) ----------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- -------------- ------------- ------------ (IN THOUSANDS) Revenues...................................... $ -- $ 174,583 $ 8,591 $ (5,338)(3) $ 177,836 Cost of sales................................. -- 116,546 6,873 (5,338)(3) 118,081 ----------- --------- ---------- ----------- ---------- Gross profit.................................. -- 58,037 1,718 -- 59,755 Selling, general and administrative expenses.................................... 4,981 21,402 1,124 -- 27,507 Amortization of intangible assets............. 116 9,015 375 -- 9,506 Interest expense.............................. 17,407 2,444 33 -- 19,884 Intercompany charges.......................... (3,603) 3,475 128 -- -- Equity in earnings of subsidiaries............ (11,619) (363) -- 11,982(4) -- Other expenses (income)....................... -- 61 (372) -- (311) Provision (benefit) for income taxes.......... (7,782) 10,384 67 -- 2,669 ----------- --------- ---------- ----------- ---------- Net income.................................... $ 500 $ 11,619 $ 363 $ (11,982) $ 500 =========== ========= ========== =========== ==========
F-54 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR - UNAUDITED) ----------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- -------------- ------------- ------------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................. $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189 Adjustments to net income Non-cash net income adjustments............................. (2,222) 3,420 557 -- 1,755 Equity in earnings of subsidiaries............................ (6,824) (489) -- 7,313(4) -- Changes in working capital 5,492 (7,393) (29) -- (1,930) ----------- --------- ---------- ----------- ---------- Net cash provided by (used for) operating activities.............................. (365) 2,362 1,017 -- 3,014 ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for acquisitions, net of cash acquired.................................. (87,071) 1,263 -- -- (85,808) Capital expenditures and other.............. (44) (1,306) (220) -- (1,570) ----------- --------- ---------- ----------- ---------- Net cash used for investing activities.... (87,115) (43) (220) -- (87,378) ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net revolving line of credit borrowings..... 57,000 -- (554) -- 56,446 Net proceeds from sale of common stock........ 34,815 -- -- -- 34,815 Principal payments on long-term debt and leases.................................... (3) (1,280) (34) -- (1,317) Other, net.................................. 23 (96) -- -- (73) ----------- --------- ---------- ----------- ---------- Net cash provided by (used for) financing activities.................... 91,835 (1,376) (588) -- 89,871 ----------- --------- ---------- ----------- ---------- Effect of foreign currency translation on cash........................................ -- -- 26 -- 26 ----------- --------- ---------- ----------- ---------- Net increase in cash and equivalents.......... 4,355 943 235 -- 5,533 Cash and equivalents at beginning of period... 16 109 81 -- 206 ----------- --------- ---------- ----------- ---------- Cash and equivalents at end of period...................................... $ 4,371 $ 1,052 $ 316 $ -- $ 5,739 =========== ========= ========== =========== ==========
F-55 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED)
ONE MONTH ENDED SEPTEMBER 30, 1998 (SUCCESSOR - UNAUDITED) ----------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- -------------- ------------- ------------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................... $ (776) $ 2 $ (62) $ 60 $ (776) Adjustments to net income (loss) Non-cash net income adjustments........... 750 1,020 62 -- 1,832 Equity in earnings of subsidiaries........ (2) 62 -- (60)(4) -- Changes in working capital.................. (1,681) (711) (170) -- (2,562) ----------- --------- ---------- ----------- ---------- Net cash provided by (used for) operating activities.............................. (1,709) 373 (170) -- (1,506) ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures and other.............. -- (240) (67) -- (307) ----------- --------- ---------- ----------- ---------- Net cash used for investing activities.... -- (240) (67) -- (307) ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Acquisition of Predecessor, net............. 2,006 -- -- -- 2,006 Net revolving line of credit repayments..... (1,600) -- 81 -- (1,519) Principal payments on long-term debt and leases.................................... (1) (118) (10) -- (129) ----------- --------- ---------- ----------- ---------- Net cash provided by (used for) financing activities.................... 405 (118) 71 -- 358 ----------- --------- ---------- ----------- ---------- Effect of foreign currency translation on cash........................................ -- -- (17) -- (17) ----------- --------- ---------- ----------- ---------- Net increase (decrease) in cash and equivalents................................. (1,304) 15 (183) -- (1,472) Cash and equivalents at beginning of period... 4,371 1,052 316 -- 5,739 ----------- --------- ---------- ----------- ---------- Cash and equivalents at end of period......... $ 3,067 $ 1,067 $ 133 $ -- $ 4,267 =========== ========= ========== =========== ==========
F-56 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 (SUCCESSOR - UNAUDITED) ----------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- -------------- ------------- ------------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................. $ 500 $ 11,619 $ 363 $ (11,982) $ 500 Adjustments to net income Non-cash net income adjustments........... 1,851 13,041 621 -- 15,513 Equity in earnings of subsidiaries........ (11,619) (363) -- 11,982(4) -- Changes in working capital.................. 20,073 (25,286) (578) -- (5,791) ----------- --------- ---------- ----------- ---------- Net cash provided by (used for) operating activities.............................. 10,805 (989) 406 -- 10,222 ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for acquisitions, net of cash acquired.................................. (119,035) 2,245 -- -- (116,790) Capital expenditures and other.............. (66) (3,952) (623) -- (4,641) ----------- --------- ---------- ----------- ---------- Net cash used for investing activities.... (119,101) (1,707) (623) -- (121,431) ----------- --------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Term debt borrowings........................ 90,000 -- -- -- 90,000 Capital contribution........................ 12,500 -- -- -- 12,500 Net revolving line of credit borrowings..... 7,700 -- -- -- 7,700 Customer advance............................ -- 5,000 -- -- 5,000 Other long-term borrowings.................. 636 -- -- -- 636 Deferred financing costs.................... (3,062) -- -- -- (3,062) Principal payments on long-term debt and leases.................................... (1,129) (675) (20) -- (1,824) Other, net.................................. -- (180) 159 -- (21) ----------- --------- ---------- ----------- ---------- Net cash provided by financing activities.............................. 106,645 4,145 139 -- 110,929 =========== ========= ========== =========== ========== Effect of foreign currency translation on cash........................................ -- -- (99) -- (99) ----------- --------- ---------- ----------- ---------- Net increase (decrease) in cash and equivalents................................. (1,651) 1,449 (177) -- (379) Cash and equivalents at beginning of period... 2,458 762 298 -- 3,518 ----------- --------- ---------- ----------- ---------- Cash and equivalents at end of period......... $ 807 $ 2,211 $ 121 $ -- $ 3,139 =========== ========= ========== =========== ==========
F-57 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 11 -- OTHER EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999 REORGANIZATION AND RESTRUCTURING CHARGE In December 1999, the Company announced a plan to reorganize and restructure the operations of two of its subsidiaries, Hollingsead and Elsinore Engineering. In conjunction with this restructuring, the Company expects to record a nonrecurring pre-tax charge of approximately $9,500,000 in the fourth quarter of 1999, resulting in a net loss for the quarter and year ending December 31, 1999. MANAGEMENT STOCK PURCHASE In December 1999, our management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3,940,000, of which one-half was paid in cash at closing and one-half was loaned to management by the Company with interest at applicable federal rates. STOCK OPTION PLAN The DeCrane Holdings qualified management incentive stock option plan provides for the granting of options to employees of the Company to purchase 356,257 common shares of DeCrane Holdings and expires in 2009. The options generally vest based upon future attainment of defined performance criteria, although alternate vesting schedules may be authorized. In December 1999, options to purchase 279,662 shares at $23.00 per share were granted, of which options to purchase approximately 28,000 shares immediately vested. DeCrane Holdings' believes the per share exercise price of the options granted approximated the fair market value of the underlying common stock on the grant date. F-58 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Avtech Corporation In our opinion, the accompanying balance sheets and the related statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Avtech Corporation at September 30, 1996 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California June 12, 1998 F-59 AVTECH CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ------------------- JUNE 25, 1996 1997 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-60 AVTECH CORPORATION STATEMENTS OF INCOME (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-61 AVTECH CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
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-62 AVTECH CORPORATION STATEMENTS OF CASH FLOWS (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-63 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE COMPANY Avtech Corporation (the "Company") is a custom design and manufacturing firm established in 1963 to produce high-quality equipment for the aircraft industry. In 1970, the Company began to produce engineered products and has since focused its engineering and product development efforts on responding to specifications from original equipment aircraft manufacturers (OEMs). The Company's products fall into five main categories: 1. Aircraft communication control equipment (including audio control units, multiplexed audio systems and audio amplifiers). 2. Aircraft lighting controls (including ballasts, dimmers and flood lighting). 3. Power systems (including transformer rectifier units, power inverters and battery chargers). 4. Airborne facsimile terminals (AvFax). 5. Special products (including PDX intercoms, liquid-gauging and fill control, and frequency units). FINANCIAL STATEMENT PRESENTATION The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At September 30, 1996 and 1997, the Company maintained $549,000 and $119,000, respectively, of its cash and cash equivalents balances at one bank. At September 30, 1996 and 1997, the Company maintained $503,000 and $4,017,000, respectively, in a money market funds and bankers' acceptances. RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK Accounts receivable from trade customers are generally due within thirty days. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. All of the Company's sales are to businesses directly associated with the aviation industry (airlines, aircraft manufacturers, etc.). Approximately 70% of the Company's sales are to customers based in the United States. PROPERTY AND EQUIPMENT The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed using the straight-line and accelerated methods over the following estimated lives:
YEARS --------- Buildings................................................................................... 20-39 Building improvements....................................................................... 10-39 Machinery and equipment..................................................................... 5 Furniture, computer and other equipment..................................................... 5-7
F-64 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Maintenance and repairs are charged to operations when incurred. Additions and improvements are capitalized. When property, plant and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. INVENTORIES Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Costs of manufactured inventories include all direct materials, labor and an allocation of overhead. Market represents the lower of replacement cost or estimated net realizable value. REVENUE RECOGNITION Revenues from the sale of manufactured products are recorded when shipped. Reimbursements for nonrecurring engineering costs, which are expensed as incurred, are included in revenues at the time a negotiated settlement is reached with the customer. The Company's nonrecurring engineering revenues for the years ended September 30, 1995, 1996 and 1997 were $1,257,000, $4,042,000 and $527,000, respectively. Included within accounts receivable at September 30, 1996 are $3,384,000 of unbilled receivables which were collected in fiscal year 1997. INCOME TAXES Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes. STOCK OPTION PLAN As permitted under Statement of Financial Accounting Standards No., 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees". ACCRUED WARRANTIES The Company sells a majority of its products to customers along with various repair or replacement warranties. The terms of the warranties vary according to the customer and/or the product involved. The most common warranty period is the earlier of: a. 36 months from the date of delivery to the operator, or b. 42 months from the date of manufacture. Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product. Classification between short and long-term warranty obligations is estimated based on historical trends. UNAUDITED INTERIM RESULTS The financial information as of June 25, 1998 and for the nine months ended June 30, 1997 and June 25, 1998 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim period. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. F-65 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - INVENTORIES Inventories at September 30, 1996 and 1997 and June 25, 1998 (unaudited) consist of the following (amounts in thousands):
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 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. F-66 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - DEFINED CONTRIBUTION PLANS (CONTINUED) The Company also sponsors a cash or deferred compensation (401k) plan for the benefit of eligible employees. Under the plan, employees may elect to defer a portion of their compensation (subject to statutory limitations). Discretionary contributions by the Company may be made when authorized by the Board of Directors. No such contributions were made during the years ended September 30, 1995, 1996 and 1997. NOTE 6 - FEDERAL INCOME TAXES The provision (benefit) for federal income taxes is comprised of the following (amounts in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1996 1997 --------- --------- --------- Current...................................................................................... $ 439 $ 987 $ 2,783 Deferred..................................................................................... 54 947 (1,265) --------- --------- --------- $ 493 $ 1,934 $ 1,518 ========= ========= =========
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-67 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 vested shares. Accordingly, the Company has expensed $156,000 during each of the years ended September 30, 1995, 1996 and 1997. These shares, when exercised, cannot be sold until September 30, 2003. The Company has the first right to purchase the shares upon exercise but is not obligated to do so. The accumulated expense resulting from the difference between the exercise prices and fair market values at the respective date of grant has been classified as a long-term liability in deferred compensation. F-68 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - ADDITIONAL CASH FLOW INFORMATION Supplementary cash flow information for the years ended September 30, 1995, 1996 and 1997 is as follows (amounts in thousands):
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-69 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of PATS, Inc. In our opinion, the accompanying consolidated balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of PATS, Inc. and subsidiaries at June 30, 1997 and 1998 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California January 25, 1999 F-70 PATS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, ------------------- ------------- 1997 1998 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-71 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (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-72 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
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-73 PATS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (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-74 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY PATS, Inc. (the "Company"), and its wholly-owned subsidiaries, design, manufacture and service a variety of components for auxiliary power, cooling systems and fuel systems for the corporate aircraft market. The Company primarily operates in the U.S. market and approximately 45% of the Company's sales for fiscal 1998 are to Boeing of Washington. The Company's customers are principally concentrated in the corporate aircraft industry. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized when products are shipped, except for products manufactured under long-term contracts. Further, revenue associated with manufactured products requiring customer acceptance is recognized only upon receipt of such acceptance from the customer. Revenue under long-term contracts is recognized under the percentage of completion method. This method recognizes costs and estimated earnings as work is performed. The basis used is the percentage of incurred costs to estimated total costs after giving effect to management's most recent estimates. When contract estimates indicate a loss, provision is made for the entire estimated loss. Long-term contracts in progress are stated at cost plus estimated earnings but not in excess of net realizable value. INVENTORIES Inventories are valued at the lower of cost or market, cost being determined using the first-in, first-out (FIFO). Provision has been made for any obsolete and/or slow-moving inventory. PROPERTY, PLANT AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are capitalized and ordinary repairs and maintenance are charged against operations in the year incurred. Depreciation is computed using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Estimated useful lives are 40 years for buildings and 3 to 7 years for machinery, equipment and vehicles. Leasehold improvements are depreciated over the lease term or the estimated useful life of the improvement, whichever is shorter. INCOME TAXES The Company follows the practice of providing for income taxes using the asset and liability method specified under Statement of Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements and tax returns. In estimating future tax consequences under SFAS 109, all expected future events other than enactments of changes in the tax laws or rates are generally considered. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash, receivables, accounts payable and debt do not significantly differ from fair values as of June 30, 1997 and 1998. F-75 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. UNAUDITED INTERIM RESULTS The financial information as of December 31, 1998 and for the six months ended December 31, 1997 and 1998 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim period. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following (amounts in thousands):
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 ========= =========
Inventories were pledged to the extent of amounts received as customer advances. NOTE 5 - LONG-TERM CONTRACT During 1998, the Company entered into a long-term contract with Boeing of Washington to produce fuel tanks. The Company's policy is to account for such contracts using the percentage of completion method. F-76 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - LONG-TERM CONTRACT (CONTINUED) Unbilled amounts related to costs and estimated earnings in excess of billings are expected to be billed and collected within one year (amounts in thousands).
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. CREDIT ARRANGEMENTS As of June 30, 1998, the Company had a $3,000,000 borrowing facility with a bank that carried an interest rate of prime rate plus 25 basis points. On October 5, 1998, the Company increased its credit facility by $2,000,000. The facility requires an annual commitment fee of .25%. Certain of the Company's equipment and inventories are pledged as collateral for the outstanding debt of the Company. NOTE 7 - OPERATING LEASES AND RELATED PARTY TRANSACTIONS The Company is a counterparty to a non-cancelable lease of office space and manufacturing facilities in Columbia, Maryland from a partnership in which two stockholders of the Company have a financial interest. F-77 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - OPERATING LEASES AND RELATED PARTY TRANSACTIONS (CONTINUED) The lease extends through June 2007, with an annual base rent amount of $405,000 and a CPI based escalator. The Company is responsible for maintenance, insurance, and real estate tax expense. The Company has a land lease for its facility in Georgetown, Delaware. This non-cancelable lease expires through December 31, 2041, with annual rental approximating $6,000. The lessor is not a related party. The total minimum rental commitment at June 30, 1998, under these leases is $3,903,000 which is due as follows (amounts in thousands):
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. 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 ========= =========
F-78 PATS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - INCOME TAXES (CONTINUED) The effective rate was 39.6% and 3.2% in 1997 and 1998, respectively. A reconciliation of this rate to the U.S. Federal income tax rate is as follows (dollars in thousands):
JUNE 30, ------------------------------------- 1997 1998 % OF PRETAX % OF PRETAX ------------------------ ----------- AMOUNT INCOME AMOUNT --------- --------- --------- Computed expected tax expense..................................................... $ 692 35.0% $ 116 State income taxes, net of Federal income tax benefit............................. 90 4.6 15 Reduction of valuation allowance.................................................. -- 0.0 (120) --------- --------- --------- $ 782 39.6% $ 11 ========= ========= ========= INCOME --------- Computed expected tax expense..................................................... 35.0% State income taxes, net of Federal income tax benefit............................. 4.6 Reduction of valuation allowance.................................................. (36.4) --------- 3.2% =========
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 the plan, employees may elect to contribute up to 15% of their annual compensation to the plan, subject to certain limitations. The Board of Directors may elect to declare a discretionary matching contribution to the Plan of 50% of all contributions made up to 6% of each employee's salary. No matching contributions were made by the Company for 1997 or 1998. NOTE 11 - COMMITMENTS AND CONTINGENCIES Lawsuits and claims are filed from time to time in the ordinary course of business. For all outstanding claims, management, in consultation with legal counsel, is of the opinion that the outcome of such matters will not have a material effect on the financial position of the Company. NOTE 12 - SUBSEQUENT EVENT In January 1999, all of Company's shares outstanding were acquired by DeCrane Aircraft Holdings, Inc. F-79 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of PPI Holdings, Inc. Wichita, Kansas We have audited the accompanying consolidated balance sheets of PPI Holdings, Inc. and Subsidiary as of December 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998. We have also audited the statements of income, stockholders' equity, and cash flows of Precision Pattern, Inc. (the predecessor to PPI Holdings, Inc.) for the year ended December 31, 1996 and the period from January 1, 1997 to June 11, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPI Holdings, Inc. and Subsidiary as of December 31, 1997 and 1998, the results of its operations and its cash flows for the period from June 12, 1997 to December 31, 1997 and the year ended December 31, 1998, and the results of operations and cash flows of Precision Pattern Inc. for the year ended December 31, 1996 and the period from January 1, 1997 to June 11, 1997 in conformity with generally accepted accounting principles. BAIRD, KURTZ & DOBSON Wichita, Kansas January 28, 1999 F-80 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(SUCCESSOR) --------------------------------- DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ASSETS Current assets Cash...................................................... $ 193 $ 1,872 $ 1,396 Accounts receivable, less allowance for doubtful accounts of $54 and $340 as of December 31, 1997 and 1998, respectively, and $340 as of March 31, 1999.................................... 4,847 6,230 5,879 Inventories............................................... 3,203 4,719 4,852 Deposits.................................................. 284 235 175 Prepaid expenses and other................................ 28 12 7 ------- ------- ------- Total current assets.................................... 8,555 13,068 12,309 ------- ------- ------- Property and equipment, net................................. 1,065 1,184 1,178 Goodwill net of accumulated amortization of $69 and $393 as of December 31, 1997 and 1998, respectively, and $474 as of March 31, 1999............................................ 6,332 6,008 5,927 Other intangible assets, net of accumulated amortization of $28 and $77 as of December 31, 1997 and 1998, respectively, and $89 as of March 31, 1999............................................ 219 170 158 ------- ------- ------- Total assets.......................................... $16,171 $20,430 $19,572 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.......................................... $ 1,032 $ 1,157 $ 1,342 Revolving credit agreement................................ 626 -- -- Current maturities of long-term debt...................... 1,050 1,500 1,500 Accrued warranties........................................ 300 300 300 Accrued profit sharing.................................... 348 587 274 Accrued employee compensation............................. 360 271 365 Other accrued liabilities................................. 381 445 515 ------- ------- ------- Total current liabilities............................... 4,097 4,260 4,296 ------- ------- ------- Long-term debt.............................................. 8,850 6,050 5,675 ------- ------- ------- Stockholders' equity Common stock, $1 stated value; authorized 10,000,000 shares; issued and outstanding 1,000,000 shares......... 1,000 1,000 1,000 Retained earnings......................................... 2,224 9,120 8,601 ------- ------- ------- Total stockholders' equity.............................. 3,224 10,120 9,601 ------- ------- ------- Total liabilities and stockholders' equity............ $16,171 $20,430 $19,572 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements F-81 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) (SUCCESSOR) (PREDECESSOR) ------------------------------------------------- ------------------------- PERIOD PERIOD FROM FROM JANUARY 1, JUNE 12, THREE MONTHS ENDED YEAR ENDED 1997 TO 1997 TO YEAR ENDED MARCH 31, DECEMBER 31, JUNE 11, DECEMBER 31, DECEMBER 31, ----------------------- 1996 1997 1997 1998 1998 1999 ---------- ------------ ---------- ---------- ---------- ---------- (UNAUDITED) Net sales.................. $17,665 $10,400 $15,102 $37,714 $7,137 $10,226 Cost of goods sold......... 14,258 7,675 11,143 24,376 5,726 6,781 ------- ------- ------- ------- ------ ------- Gross profit............... 3,407 2,725 3,959 13,338 1,412 3,445 ------- ------- ------- ------- ------ ------- Operating expenses General and administrative......... 1,446 667 821 2,102 504 637 Engineering.............. 322 140 226 489 47 83 Bad debt provision....... 75 -- -- -- -- -- ------- ------- ------- ------- ------ ------- Income from operations..... 1,564 1,918 2,912 10,747 861 2,725 ------- ------- ------- ------- ------ ------- Other income (expense) Interest income.......... 94 50 10 -- -- -- Interest expense......... -- -- (732) (1,051) (219) (158) Other revenue............ 8 -- 39 14 -- -- Gain on sale of asset.... 42 -- 1 -- -- -- Other income (expense)... (13) 8 (6) (19) 3 67 ------- ------- ------- ------- ------ ------- 131 58 (688) (1,056) (216) (91) ------- ------- ------- ------- ------ ------- Net income................. $ 1,695 $ 1,976 $ 2,224 $ 9,691 $ 645 $ 2,634 ======= ======= ======= ======= ====== =======
The accompanying notes are an integral part of the consolidated financial statements. F-82 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 Net income (Unaudited)...................................... -- -- 2,634 2,634 Dividends on common stock $3.15 per share................... -- -- (3,153) (3,153) ------ ---- ------- ------- Balance, March 31, 1999 (Unaudited)......................... $1,000 -- $ 8,601 $ 9,601 ====== ==== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-83 PPI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (PREDECESSOR) (SUCCESSOR) --------------------------- ------------------------------------------------------- PERIOD FROM PERIOD FROM JANUARY 1, JUNE 12, THREE MONTHS ENDED YEAR ENDED 1997 TO 1997 TO YEAR ENDED MARCH 31, DECEMBER 31, JUNE 11, DECEMBER 31, DECEMBER 31, --------------------------- 1996 1997 1997 1998 1998 1999 ----------- ------------- ----------- ----------- ------------ ------------ (UNAUDITED) Cash flows from operating activities Net income................... $ 1,695 $ 1,976 $ 2,224 $ 9,691 $ 645 $ 2,634 Items not requiring (providing) cash: Depreciation and amortization............. 181 79 304 633 130 158 Gain on sale of property and equipment............ (42) -- (1) -- -- -- Changes in: Accounts receivable........ (1,672) 1,048 (2,108) (1,383) (475) 351 Inventories................ (318) (43) (133) (1,515) (503) (134) Prepaid expenses and other.................... 35 51 (359) 65 32 65 Accounts payable and accrued expenses......... 94 (158) 1,020 338 925 38 ------- ------- ------- ------- ----- -------- Net cash provided by (used in) operating activities............. (27) 2,953 947 7,829 754 3,112 ------- ------- ------- ------- ----- -------- Cash flows from investing activities Purchase of property and equipment.................. (151) (251) (96) (379) (47) (59) Proceeds from sale of property and equipment..... 298 -- 17 -- -- -- Payments for organizational costs...................... -- -- (247) -- -- -- Purchase of subsidiary....... -- -- (8,954) -- -- -- ------- ------- ------- ------- ----- -------- Net cash provided by (used in) investing activities............. 147 (251) (9,280) (379) (47) (59) ------- ------- ------- ------- ----- -------- Cash flows from financing activities Net borrowings under revolving credit agreement.................. -- -- 626 (626) (626) -- Proceeds from issuance of long-term debt............. -- -- 7,500 3,000 -- -- Principal payments on long-term debt............. -- -- (600) (5,350) (250) (375) Dividends paid............... (880) (3,450) -- (2,795) -- (3,154) ------- ------- ------- ------- ----- -------- Net cash provided by (used in) financing activities............. (880) (3,450) 7,526 (5,771) (876) (3,529) ------- ------- ------- ------- ----- -------- Increase (decrease) in cash.... (760) (748) (807) 1,679 (169) (476) Cash, beginning of period...... 2,727 1,967 1,000 193 193 1,872 ------- ------- ------- ------- ----- -------- Cash, end of period............ $ 1,967 $ 1,219 $ 193 $ 1,872 $ 24 $ 1,396 ======= ======= ======= ======= ===== ========
The accompanying notes are an integral part of the consolidated financial statements. F-84 PPI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS PPI Holdings, Inc. was incorporated under Kansas law on February 14, 1997, and serves as the holding company for Precision Pattern, Inc. The Company began operation on June 12, 1997, with the purchase of Precision Pattern, Inc. (Note 2) The Company's revenues are predominately earned from sales of aircraft interior components to aircraft manufacturers in Kansas. The Company extends unsecured credit to customers, with credit extended to one customer exceeding 59% and 71% of accounts receivable at December 31, 1997 and 1998 respectively. Over 97% of year end receivables are concentrated among three customers at December 31, 1997 and 1998. PRINCIPALS OF CONSOLIDATION As a result of the business combination (Note 2) on June 11, 1997, the Company has presented its financial position, results of operations, changes in stockholders' equity and cash flows on a predecessor/ successor basis. PPI Holdings, Inc. is a holding company, which has no material operations or assets separate from its investment in Precision Pattern, Inc. The consolidated financial statements as of December 31, 1997 and 1998 and for the period from June 12, 1997 to December 31, 1997 and for the year ended December 31, 1998 include the accounts of PPI Holdings, Inc. and its subsidiary. The consolidated financial statements of the predecessor include the accounts of Precision Pattern, Inc. for the year ended December 31, 1996 and for the period from January 1, 1997 to June 11, 1997. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORY PRICING Inventories are stated at lower of average cost or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. The assets are depreciated over their estimated useful lives using straight-line and accelerated methods. INTANGIBLE ASSETS The Company is amortizing deferred charges consisting of loan costs, lease costs and a noncompete agreement utilizing the straight-line method over five to ten years. Goodwill is being amortized over twenty years also using the straight-line method. WARRANTY OBLIGATIONS The Company generally provides its customers with a one to two year warranty from the date of purchase. Estimated warranty costs are accrued at the time of sale. INCOME TAXES The Company elected to have its income taxed as an S corporation under provisions of the Internal Revenue Code; therefore, taxable income or loss is reported to the individual stockholders for inclusion in their tax returns, and no provision for Federal and state income tax is included in these statements. F-85 PPI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BUY/SELL AGREEMENT On April 21, 1997, the Company and its shareholders entered into a buy/sell agreement which restricts any sale or other transfer of shares of the Company. The purpose of the agreement is to insure that all the shares of stock shall be offered for sale to the Company and the other shareholders before disposition of such shares to any other person or entity. NOTE 2 -- BUSINESS COMBINATION On June 11, 1997, PPI Holdings, Inc. acquired 100% of the outstanding stock of Precision Pattern, Inc. which consisted of 4,000 shares for $13,172,706 in cash. This transaction was accounted for using the purchase method by recording the assets and liabilities of the acquiree at their estimated market values at the acquisition date. PPI Holdings, Inc. is owned by several members of the Company's management. As part of the purchase transaction, Precision Pattern, Inc. borrowed funds from a bank to fund the acquisition. NOTE 3 -- INVENTORIES Inventories were as follows (amounts in thousands):
DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ----------- Raw material................................................ $2,268 $3,205 $3,086 Work in process............................................. 1,535 2,114 2,366 ------ ------ ------ 3,803 5,319 5,452 Less reserve for obsolesce.................................. 600 600 600 ------ ------ ------ $3,203 $4,719 $4,852 ====== ====== ======
NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment was as follows (amounts in thousands):
DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ----------- Leasehold improvements...................................... $ 1,065 $ 563 $ 563 Machinery and equipment..................................... 1,535 612 618 Furniture and fixtures...................................... 827 343 390 Vehicles.................................................... 138 16 59 ------- ------ ------- 3,565 1,534 1,630 Accumulated depreciation.................................... (2,500) (350) (452) ------- ------ ------- $ 1,065 $1,184 $ 1,178 ======= ====== =======
NOTE 5 -- PROFIT SHARING PLAN The Company has a profit sharing plan covering substantially all employees. The Company's contribution to the Plan is 6% of the compensation of all participants under the Plan determined for the Company's taxable year for which it makes the contribution. The Company must have current or accumulated net profits exceeding 5% of the net sales in order to make the contributions. Participant's interest is vested over a period of three to seven years of service. The Company expensed contributions for the year ended December 31, 1996, the periods from January 1, 1997 to June 11, 1997, June 12, 1997 to December 31, 1997 and the year ended December 31, 1998, in the amount of $283,500, $141,352, $347,620 and $587,036 , respectively. Employees also have the option to make elective deferrals to the Plan up to the limits set by the Internal Revenue Service. F-86 PPI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- REVOLVING CREDIT AGREEMENT At December 31, 1997 and 1998, the Company had $0 and $625,821 outstanding borrowings under a $5,000,000 revolving credit agreement. The agreement is secured by goods, equipment, accounts, inventory, instruments, documents, chattel paper, general intangibles and other personal property of the Company. Interest is calculated at prime rate plus various amounts up to 3/4% and is payable monthly. Payments on principal are made daily, as cash is available, from a lock box maintained by the lender. Final maturity is June 12, 2002. NOTE 7 -- LONG-TERM DEBT Long-term debt was as follows (amounts in thousands):
DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ----------- Note payable, bank; due June 12, 2002, payable in increasing quarterly installments including interest at prime rate plus various amounts up to 1% secured by goods, equipment, accounts, inventory, instruments, documents, chattel paper, general intangibles and other personal property of the Company and its subsidiary............................ $6,900 $4,550 $4,275 Note payable, bank; payable in quarterly installments of $100,000 with the balance due June 12, 2002. The note bears interest at prime plus 1% and is secured by goods, equipment, accounts, inventory, instruments, documents, chattel paper, general intangibles and other personal property of the Company and its subsidiary................ -- 3,000 2,900 Note payable, other; due September 12, 2010, payable in quarterly installments of $150,000 beginning on September 12, 2005. Interest is accrued on the unpaid portion of the note at 15% and is payable in bi-annual installments. None of the Company's assets are pledged as collateral on this note and it is subordinate to the bank note. As part of the purchase and note agreement, dividends are restricted to amounts necessary to cover income taxes of the shareholders on income from the Company. This restriction ended when the note was retired in 1998................... 3,000 -- -- ------ ------ ------ 9,900 7,550 7,175 Less current maturities..................................... 1,050 1,500 1,500 ------ ------ ------ $8,850 $6,050 $5,675 ====== ====== ======
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-87 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
DECEMBER 31, --------------------- 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 April 1999, all of the Company's shares outstanding were acquired by DeCrane Aircraft Holdings, Inc. F-88 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Custom Woodwork & Plastics, Inc. In our opinion, the accompanying balance sheets and the related statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Custom Woodwork & Plastics, Inc. at December 31, 1997 and 1998 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California October 1, 1999 F-89 CUSTOM WOODWORK & PLASTICS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30, ------------------- ----------- 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents................................. $ 452 $ 776 $ 873 Trade accounts receivable................................. 209 269 642 Inventories............................................... 197 434 400 Note receivable........................................... 50 -- -- ------ ------ ------ Total current assets.................................... 908 1,479 1,915 Property, plant and equipment, net.......................... 737 793 731 ------ ------ ------ Total assets.......................................... $1,645 $2,272 $2,646 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Trade accounts payable.................................... $ 15 $ 95 $ 100 Accrued expenses and other liabilities.................... 10 17 39 ------ ------ ------ Total current liabilities............................... 25 112 139 ------ ------ ------ Commitments and contingencies (Note 8)...................... -- -- -- ------ ------ ------ Stockholders' equity Common stock, $1 par value, 50,000 shares authorized; 500 shares issued and outstanding at December 31, 1997 and 1998 and June 30, 1999.................................... 1 1 1 Retained earnings........................................... 1,619 2,159 2,506 ------ ------ ------ Total stockholders' equity.............................. 1,620 2,160 2,507 ------ ------ ------ Total liabilities and stockholders' equity............ $1,645 $2,272 $2,646 ====== ====== ======
The accompanying notes are an integral part of the financial statements. F-90 CUSTOM WOODWORK & PLASTICS, INC. STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------- ------------------- 1997 1998 1998 1999 -------- -------- -------- -------- (UNAUDITED) Sales....................................................... $3,235 $4,480 $2,034 $4,002 Cost of sales............................................... 1,877 2,358 1,104 1,843 ------ ------ ------ ------ Gross profit................................................ 1,358 2,122 930 2,159 Operating expenses Selling, general and administrative....................... 365 397 169 198 ------ ------ ------ ------ Income from operations...................................... 993 1,725 761 1,961 Other income Interest income, net...................................... 27 35 18 9 Other (expense) income, net............................... (5) 2 -- -- ------ ------ ------ ------ Net income.................................................. $1,015 $1,762 $ 779 $1,970 ====== ====== ====== ======
The accompanying notes are an integral part of the financial statements. F-91 CUSTOM WOODWORK & PLASTICS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK -------------------- NUMBER OF RETAINED SHARES AMOUNT EARNINGS TOTAL --------- -------- -------- -------- Balance, December 31, 1996.................................. 500 $ 1 $ 1,268 $ 1,269 Net income................................................ -- -- 1,015 1,015 Distributions to stockholders............................. -- -- (664) (664) ---- ----- ------- ------- Balance, December 31, 1997.................................. 500 1 1,619 1,620 Net income................................................ -- -- 1,762 1,762 Distributions to stockholders............................. -- -- (1,222) (1,222) ---- ----- ------- ------- Balance, December 31, 1998.................................. 500 1 2,159 2,160 Net income (Unaudited).................................... -- -- 1,970 1,970 Distributions to stockholders (Unaudited)................. -- -- (1,623) (1,623) ---- ----- ------- ------- Balance, June 30, 1999 (Unaudited).......................... 500 $ 1 $ 2,506 $ 2,507 ==== ===== ======= =======
The accompanying notes are an integral part of the financial statements. F-92 CUSTOM WOODWORK & PLASTICS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------- ------------------- 1997 1998 1998 1999 -------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities Net income................................................ $1,015 $ 1,762 $ 779 $ 1,970 Adjustments to reconcile net income to net cash provided by operating activities Depreciation.......................................... 35 40 22 17 Changes in operating assets and liabilities Trade accounts receivable............................... (209) (60) 158 (373) Inventories............................................. 2 (237) 14 34 Trade accounts payable.................................. -- 80 33 5 Accrued expenses and other liabilities.................. -- 7 15 22 ------ ------- ------ ------- Net cash provided by operating activities............. 843 1,592 1,021 1,675 ------ ------- ------ ------- Cash flows from investing activities Purchases of property, plant and equipment................ (38) (96) (64) -- (Issuance) payment of note receivable..................... (50) 50 -- -- ------ ------- ------ ------- Net cash used for investing activities................ (88) (46) (64) -- ------ ------- ------ ------- Cash flows from financing activities Distributions paid to stockholders........................ (664) (1,222) (322) (1,578) ------ ------- ------ ------- Net cash used for financing activities................ (664) (1,222) (322) (1,578) ------ ------- ------ ------- Net increase in cash and cash equivalents................... 91 324 635 97 Cash and cash equivalents at beginning of period............ 361 452 452 776 ------ ------- ------ ------- Cash and cash equivalents at end of period.................. $ 452 $ 776 $1,087 $ 873 ====== ======= ====== =======
The accompanying notes are an integral part of the financial statements. F-93 CUSTOM WOODWORK & PLASTICS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY Custom Woodwork & Plastics, Inc. (the "Company") designs and manufactures interior furniture components for middle- and high-end corporate aircraft. The Company operates in the U.S. market and 100% and 74% of the Company's sales for fiscal 1998 and 1997 were to Gulfstream Aerospace Corporation, respectively. The Company's customers are principally concentrated in the corporate aircraft industry. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. It is the policy of the Company to deposit its cash and cash equivalents in federally insured financial institutions. From time to time deposits may exceed Federal Deposit Insurance Corporation ("FDIC") limits. At December 31, 1998, the Company had $476,000 on deposit in excess of the FDIC limits. INVENTORIES Inventories are valued at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are capitalized and ordinary repairs and maintenance are charged against operations in the year incurred. Depreciation is computed using the straight-line method for buildings and building improvements and the double-declining balance method for machinery and equipment, vehicles and furniture and fixtures. Estimated useful lives are 40 years for buildings and building improvements and 5 to 7 years for machinery and equipment, vehicles and furniture and fixtures. REVENUE RECOGNITION Revenue is recognized when products are shipped. INCOME TAXES The Company elected to have its income taxed as an S corporation under provisions of the Internal Revenue Code; therefore, taxable income or loss is reported to the individual stockholders for inclusion in their tax returns, and no provision for Federal and state income tax is included in these statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash, receivables, accounts payable and accrued expenses and other liabilities do not significantly differ from fair values as of December 31, 1997 and 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-94 CUSTOM WOODWORK & PLASTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNAUDITED INTERIM RESULTS The financial information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. NOTE 3 -- INVENTORIES Inventories consist of the following (amounts in thousands):
DECEMBER 31, JUNE 30, ------------------- ----------- 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Raw material................................................ $ 14 $ 24 $ 47 Work-in-process............................................. 183 410 353 ---- ---- ---- Total inventories......................................... $197 $434 $400 ==== ==== ====
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (amounts in thousands):
DECEMBER 31, ------------------- 1997 1998 -------- -------- Land........................................................ $ 75 $ 75 Buildings and building improvements......................... 644 644 Machinery and equipment..................................... 113 113 Vehicles.................................................... 90 163 Furniture and fixtures...................................... 16 16 ----- ------ Total cost................................................ 938 1,011 Accumulated depreciation and amortization................. (201) (218) ----- ------ Net property and equipment................................ $ 737 $ 793 ===== ======
Depreciation expense for the years ended December 31, 1997 and 1998 was $35,000 and $40,000, respectively. NOTE 5 -- LINE OF CREDIT The Company had a $200,000 revolving line of credit with a bank, collaterialized by all of the assets of the Company. Loans under the line of credit bear interest at the rate of 8.75% per annum. All borrowings under the line of credit were used for working capital purposes. The line of credit matured in February 1999 and was not renewed. As of December 31, 1997 and 1998, the Company had no borrowings outstanding under the line of credit. NOTE 6 -- RELATED PARTY TRANSACTIONS At December 31, 1997, the Company had a $50,000 note receivable from a related party. The note was repaid in full in 1998. F-95 CUSTOM WOODWORK & PLASTICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- EMPLOYEE BENEFIT PLANS The Company has a savings and retirement plan which qualifies under Section 401(k) of the Internal Revenue Code in which all full-time employees are eligible to participate. In accordance with the terms of the plan, employees may elect to contribute up to 15% of their annual compensation to the plan, subject to certain limitations. The Board of Directors may elect to declare a discretionary matching contribution to the Plan of 50% of all contributions made up to 6% of each employee's salary. The Company did not make any matching contributions for 1997 or 1998. NOTE 8 -- COMMITMENT AND CONTINGENCIES The Company is involved in routine legal and administrative proceedings incidental to the normal conduct of business. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 9 -- SUBSEQUENT EVENT In August 1999, substantially all of the Company's net assets were acquired by DeCrane Aircraft Holdings, Inc. F-96 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors PCI NewCo, Inc. We have audited the accompanying balance sheets of PCI NewCo, Inc. as of December 31, 1997 and 1998, and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of PCI NewCo, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BAIRD, KURTZ & DOBSON November 1, 1999 Wichita, Kansas F-97 PCI NEWCO, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) ASSETS Current assets Cash...................................................... $ 188 $ 350 $ 410 Accounts receivable....................................... 763 751 1,116 Inventories............................................... 563 885 764 Prepaid expenses and other................................ 34 39 56 ------ ------ ------ Total current assets.................................... 1,548 2,025 2,346 Property and equipment, net................................. 208 328 304 ------ ------ ------ Total assets.......................................... $1,756 $2,353 $2,650 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Revolving credit agreement................................ $ 200 $ 200 $ -- Note payable to stockholder............................... 290 115 Accounts payable.......................................... 217 243 94 Accrued expenses.......................................... 108 97 224 ------ ------ ------ Total current liabilities............................... 815 655 318 ------ ------ ------ Commitments and contingencies (Note 10) Stockholders' equity Common stock--Class A, no par value, 100,000 shares authorized; 10,000 shares issued and outstanding as of December 31, 1997 and 1998 and 10,526 shares issued and outstanding as of September 30, 1999.................... 1 1 1 Common stock--Class B, no par value, 100,000 shares authorized; none issued and outstanding................. -- -- -- Additional paid-in capital................................ 224 224 247 Retained earnings......................................... 716 1,473 2,084 ------ ------ ------ Total stockholders' equity.............................. 941 1,698 2,332 ------ ------ ------ Total liabilities and stockholders' equity............ $1,756 $2,353 $2,650 ====== ====== ======
The accompanying notes are an integral part of the financial statements. F-98 PCI NEWCO, INC. STATEMENTS OF INCOME (IN THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------- ------------------- 1997 1998 1998 1999 -------- -------- -------- -------- (UNAUDITED) Net sales................................................... $4,899 $7,933 $5,756 $6,692 Cost of goods sold.......................................... 3,821 5,807 4,272 4,747 ------ ------ ------ ------ Gross profit................................................ 1,078 2,126 1,484 1,945 Operating expenses Selling, general and administrative....................... 362 536 389 520 ------ ------ ------ ------ Income from operations...................................... 716 1,590 1,095 1,425 Other expense (income) Interest expense (income), net............................ 39 35 25 (2) Miscellaneous income...................................... (1) (7) (4) (3) ------ ------ ------ ------ Net income.................................................. $ 678 $1,562 $1,074 $1,430 ====== ====== ====== ======
The accompanying notes are an integral part of the financial statements. F-99 PCI NEWCO, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK-- CLASS A --------------------- NUMBER ADDITIONAL OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL -------- ---------- ---------- -------- -------- Balance, December 31, 1996............................ 10,000 $ 1 $224 $ 118 $ 343 Net income.......................................... -- -- -- 678 678 Common stock dividends.............................. -- -- -- (80) (80) ------ ---------- ---- ------ ------ Balance, December 31, 1997............................ 10,000 1 224 716 941 Net income.......................................... -- -- -- 1,562 1,562 Common stock dividends.............................. -- -- -- (805) (805) ------ ---------- ---- ------ ------ Balance, December 31, 1998............................ 10,000 1 224 1,473 1,698 Net income (Unaudited).............................. -- -- -- 1,430 1,430 Sale of common stock (Unaudited).................... 526 -- 23 -- 23 Common stock dividends (Unaudited).................. -- -- -- (819) (819) ------ ---------- ---- ------ ------ Balance, September 30, 1999 (Unaudited)............... 10,526 $ 1 $247 $2,084 $2,332 ====== ========== ==== ====== ======
The accompanying notes are an integral part of the financial statements. F-100 PCI NEWCO, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------- ------------------- 1997 1998 1998 1999 -------- -------- -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 678 $1,562 $1,074 $ 1,430 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization........................... 65 92 42 53 Loss on sale of property and equipment.................. 3 -- -- -- Changes in operating assets and liabilities Accounts receivable....................................... (484) 12 (77) (365) Inventories............................................... (83) (322) (336) 121 Prepaid expenses and other................................ (26) (5) 22 (17) Accounts payable and accrued expenses..................... 170 15 88 (22) ----- ------ ------ ------- Net cash provided by operating activities............... 323 1,354 813 1,200 ----- ------ ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment....................... (166) (212) (192) (29) ----- ------ ------ ------- Net cash used for investing activities.................. (166) (212) (192) (29) ----- ------ ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of note payable.................... 20 -- -- -- Proceeds from sale of common stock........................ -- -- -- 23 Common stock dividends.................................... (80) (805) (475) (819) Revolving line of credit repayments....................... -- -- -- (200) Principal payments on note payable........................ -- (175) (36) (115) ----- ------ ------ ------- Net cash used for financing activities................ (60) (980) (511) (1,111) ----- ------ ------ ------- NET INCREASE IN CASH........................................ 97 162 110 60 CASH AT BEGINNING OF PERIOD................................. 91 188 188 350 ----- ------ ------ ------- CASH AT END OF PERIOD....................................... $ 188 $ 350 $ 298 $ 410 ===== ====== ====== =======
The accompanying notes are an integral part of the financial statements. F-101 PCI NEWCO, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS PCI NewCo, Inc (the "Company") manufacturers aircraft components for several aircraft manufacturers located in the United States. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORY PRICING Inventories are stated at lower of weighted-average cost or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line and accelerated methods. INCOME TAXES The Company elected to have its income taxed as an "S" corporation under provisions of the Internal Revenue Code; taxable income or loss is reported to the individual stockholders for inclusion in their tax returns. Therefore, no provision for Federal and state income tax is included in these statements. UNAUDITED INTERIM RESULTS The financial information as of September 30, 1999 and for the nine months ended September 30, 1998 and 1999 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. NOTE 2 -- ACCOUNTS RECEIVABLE AND MAJOR CUSTOMERS The Company sells most of its primary product to two customers. There are a limited number of buyers of the Company's products. The Company extends unsecured credit to its customers, with credit extended to two customers exceeding 88% and 67% of accounts receivable at December 31, 1997 and 1998, respectively. NOTE 3 -- INVENTORIES Inventories consist of the following (amounts in thousands):
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) Raw materials............................................... $350 $396 $494 Work-in-process............................................. 213 489 270 ---- ---- ---- Total inventories......................................... $563 $885 $764 ==== ==== ====
F-102 PCI NEWCO, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment consists of the following (amounts in thousands):
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) Leasehold improvements...................................... $ 15 $ 76 $ 76 Machinery and equipment..................................... 226 343 361 Furniture and fixtures...................................... 7 11 13 Computer equipment.......................................... 28 38 47 Vehicles.................................................... 28 46 46 ---- ----- ----- Total cost................................................ 304 514 543 Accumulated depreciation and amortization................. (96) (186) (239) ---- ----- ----- Net property and equipment................................ $208 $ 328 $ 304 ==== ===== =====
NOTE 5 -- REVOLVING CREDIT AGREEMENT At December 31, 1997 and 1998, the Company had outstanding borrowings in the amount of $200,000 under a bank revolving credit agreement. The agreement is unsecured and is personally guaranteed by the principal stockholder. Interest is at 1/2% under the prime rate (7.25% at December 31, 1998) and is payable monthly. The agreement provides for maximum borrowings of $500,000 and matures on November 27, 1999. NOTE 6 -- NOTE PAYABLE TO PRINCIPAL STOCKHOLDER The Company has an unsecured note payable to the principal stockholder in the amount of $290,000 and $115,000 at December 31, 1997 and 1998, respectively. Interest is paid annually at a rate of 7%. Subsequent to December 31, 1998, the balance was paid in full. NOTE 7 -- ACCRUED EXPENSES Accrued expenses consists of the following (amounts in thousands):
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) Payroll..................................................... $ 67 $ 36 $ 161 Profit sharing.............................................. 33 57 61 Other....................................................... 8 4 2 ---- ----- ----- Total accrued expenses.................................... $108 $ 97 $ 224 ==== ===== =====
F-103 PCI NEWCO, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- PROFIT SHARING PLAN The Company has a 401(k) profit sharing plan covering substantially all employees. The Company's contribution to the plan is 6% of the compensation of all participants under the plan determined for the Company's taxable year for which it makes the contribution. The Company expensed contributions for the years ended December 31, 1997 and 1998 in the amounts of $33,000 and $57,000, respectively. NOTE 9 -- STOCK OPTIONS During 1998, the Company granted options to one of its employees for up to 526 shares of Class A common stock. The options immediately vested and all were exercised in 1999. A summary of the status of the options outstanding at December 31, 1998, and changes during the year then ended is presented below:
WEIGHTED- NUMBER AVERAGE OF EXERCISE SHARES PRICE -------- --------- Options outstanding at December 31, 1997.................... -- -- Options granted during the year............................. 526 $ 118.82 --- Options outstanding at December 31, 1998.................... 526 $ 118.82 === Options exercisable at December 31, 1998.................... 526 $ 118.82 ===
The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for stock options issued to employees, and no compensation cost has been recognized. No fair value disclosures with respect to stock options are presented because in the opinion of management, such disclosures would not materially effect the financial statements. NOTE 10 -- COMMITMENTS AND CONTINGENCIES The Company rents its business facility from a property rental company, which is partially owned by the Company's principal stockholder. The lease was month-to-month through September 1999 when a 10-year lease was entered into. Annual lease payments were $88,000 and $96,000 for 1997 and 1998, respectively. NOTE 11 -- ADDITIONAL CASH FLOW INFORMATION Interest paid in cash during the twelve months ended December 31, 1997 and 1998 was $39,000 and $35,000, respectively. NOTE 12 -- YEAR 2000 ISSUE Like all entities, the Company is exposed to risks associated with the Year 2000 Issue, which affects computer software and hardware; transactions with customers, vendors and other entities; and equipment dependent on microchips. The Company has begun but not yet completed the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with which the Company does business. If remediation efforts of the Company or third parties with which it does business are not successful, the Year 2000 problem could have negative effects on the Company's financial condition and results of operations in the near term. NOTE 13 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Company's financial instruments. For the revolving credit agreement and note payable to the principal stockholder, the fair value is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. F-104 PCI NEWCO, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments, and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
DECEMBER 31, DECEMBER 31, 1997 1998 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial assets Cash...................................................... $188 $188 $350 $350 Financial liabilities Revolving credit agreement................................ $200 $200 $200 $200 Note payable to principal stockholder..................... $290 $290 $115 $115
NOTE 14 -- SUBSEQUENT EVENTS DIVIDENDS PAID Dividends of $624,000 were declared on January 1, 1999, and were paid on April 15, 1999. SALE OF COMPANY On October 6, 1999, substantially all of the Company's assets were sold to an unrelated entity. F-105 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of DeCrane Aircraft Holdings, Inc. In our opinion, the accompanying balance sheets and the related statements of income, of partners' equity and of cash flows present fairly, in all material respects, the financial position of The Infinity Partners, Ltd. as of December 31, 1998 and September 30, 1999 and the results of its operations and its cash flows for the year ended December 31, 1998 and the nine months ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California January 18, 2000 F-106 THE INFINITY PARTNERS, LTD. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- ASSETS Current assets Cash and cash equivalents................................. $ 150 $ 604 Trade accounts receivable................................. 874 2,024 Inventories............................................... 507 1,092 Prepaid expenses.......................................... 24 40 Note receivable from related party........................ -- 716 ------ ------ Total current assets.................................... 1,555 4,476 Plant and equipment, net.................................... 375 1,047 ------ ------ Total assets.......................................... $1,930 $5,523 ====== ====== LIABILITIES AND PARTNERS' EQUITY Current liabilities Current portion of long-term debt......................... $ 54 $ 432 Trade accounts payable.................................... 392 606 Customer advances......................................... 374 581 Accrued expenses.......................................... 265 559 ------ ------ Total current liabilities............................... 1,085 2,178 Long-term debt, less current maturities..................... 216 772 Commitments and contingencies (Note 9) Partners' equity............................................ 629 2,573 ------ ------ Total liabilities and partners' equity................ $1,930 $5,523 ====== ======
The accompanying notes are an integral part of the financial statements. F-107 THE INFINITY PARTNERS, LTD. STATEMENTS OF INCOME (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------- 1998 1998 1999 ------------ -------- -------- (UNAUDITED) Sales............................................... $10,136 $6,261 $16,166 Cost of sales....................................... 7,998 5,144 12,050 ------- ------ ------- Gross profit........................................ 2,138 1,117 4,116 Operating expenses Selling, general and administrative............... 716 396 1,252 ------- ------ ------- Income from operations.............................. 1,422 721 2,864 Other expenses (income) Interest expense.................................. 19 14 44 Interest income................................... (8) (5) (8) ------- ------ ------- Net income.......................................... $ 1,411 $ 712 $ 2,828 ======= ====== =======
The accompanying notes are an integral part of the financial statements. F-108 THE INFINITY PARTNERS, LTD. STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
PARTNERS' EQUITY --------- Balance, December 31, 1997.................................. $ 211 Net income................................................ 1,411 Distributions to partners................................. (993) ------ Balance, December 31, 1998.................................. 629 Net income................................................ 2,828 Distributions to partners................................. (884) ------ Balance, September 30, 1999................................. $2,573 ======
The accompanying notes are an integral part of the financial statements. F-109 THE INFINITY PARTNERS, LTD. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------- 1998 1998 1999 ------------ -------- -------- (UNAUDITED) Cash flows from operating activities Net income................................................ $ 1,411 $ 712 $ 2,828 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization......................... 46 31 82 Changes in operating assets and liabilities Trade accounts receivable............................... (643) (460) (1,150) Inventories............................................. (219) 49 (585) Prepaid expenses........................................ 5 21 (32) Trade accounts payable.................................. 174 (149) 214 Customer advances....................................... 1 (372) 207 Accrued expenses........................................ 258 635 294 ------- ------ ------- Net cash provided by operating activities............. 1,033 467 1,858 ------- ------ ------- Cash flows from investing activities Purchases of plant and equipment.......................... (187) (76) (599) Loan to related party..................................... -- -- (700) ------- ------ ------- Net cash used for investing activities................ (187) (76) (1,299) ------- ------ ------- Cash flows from financing activities Term debt borrowings...................................... 240 240 822 Release of restricted cash securing bank term loan........ 50 50 -- Distributions to partners................................. (993) (204) (884) Debt principal payments................................... (76) (67) (43) ------- ------ ------- Net cash provided by (used for) financing activities.......................................... (779) 19 (105) ------- ------ ------- Net increase in cash and cash equivalents................... 67 410 454 Cash and cash equivalents at beginning of period............ 83 83 150 ------- ------ ------- Cash and cash equivalents at end of period.................. $ 150 $ 493 $ 604 ======= ====== ======= Supplemental disclosures Cash paid for interest.................................... $ 19 $ 14 $ 28 Equipment acquired with capital lease and term debt obligations............................................. 60 60 154
The accompanying notes are an integral part of the financial statements. F-110 THE INFINITY PARTNERS, LTD. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY The Infinity Partners, Ltd. (the "Company") designs and manufactures interior components for middle-and high-end corporate aircraft. On November 19, 1999, the Company converted to a Texas limited partnership; prior to that date, the Company was organized as a limited liability company. The Company operates in the U.S. market and all of the Company's sales and resulting accounts receivable for the year ended December 31, 1998 and nine months ended September 30, 1999 were to one customer. The Company's customer is in the corporate aircraft industry. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. It is the policy of the Company to deposit its cash and cash equivalents in federally insured financial institutions. From time to time deposits may exceed Federal Deposit Insurance Corporation limits. At December 31, 1998 and September 30, 1999, the Company had $902,000 and $776,000 on deposit in excess of those limits. INVENTORIES Inventories are valued at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. PLANT AND EQUIPMENT Plant and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are capitalized and ordinary repairs and maintenance are charged against operations in the year incurred. Leasehold improvements are amortized over the shorter of the related asset's useful life or the lease term. Depreciation is computed using the straight-line method over the following estimated useful lives: leasehold improvements -- 5 to 10 years; machinery and equipment -- 7 years; vehicles -- 5 years; and furniture, fixtures and office equipment -- 3 to 7 years. REVENUE RECOGNITION Revenues on long-term contracts are recognized using the percentage of completion method based on costs incurred to date compared to the total estimated cost at completion. Amounts received from customers in excess of revenues recognized are classified in current liabilities as customer advances. The Company anticipates that substantially all incurred costs associated with contract work-in-process at September 30, 1999 will be billed and collected in 2000. Unbilled accounts receivable are $32,000 at September 30, 1999; there were none at December 31, 1998. Unbilled accounts receivable are expected to be billed and collected during the succeeding twelve-month period. INCOME TAXES The Company is organized as a partnership, therefore taxable income or loss is reported to the individual partners for inclusion in their tax returns. No provision for federal and state income tax is included in these statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash, receivables, accounts payable and accrued expenses and other liabilities do not significantly differ from fair values as of December 31, 1998 and September 30, 1999. F-111 THE INFINITY PARTNERS, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED INTERIM RESULTS The financial information for the nine months ended September 30, 1998 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. NOTE 3 -- INVENTORIES Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (IN THOUSANDS) Raw material............................................ $507 $ 871 Work-in-process......................................... -- 221 ---- ------ Total inventories..................................... $507 $1,092 ==== ======
Included in work-in-process are costs relating to long-term contracts recognized on the percentage of completion method of accounting. NOTE 4 -- PLANT AND EQUIPMENT Plant and equipment consists of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (IN THOUSANDS) Leasehold improvements.................................. $186 $ 532 Machinery and equipment................................. 95 307 Vehicles................................................ 35 55 Furniture, fixtures and office equipment................ 126 315 ---- ------ Total cost............................................ 442 1,209 Accumulated depreciation and amortization............. (67) (162) ---- ------ Net plant and equipment............................... $375 $1,047 ==== ======
F-112 THE INFINITY PARTNERS, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- PLANT AND EQUIPMENT (CONTINUED) Plant and equipment under capital leases included above consists of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (IN THOUSANDS) Machinery and equipment................................. $ 8 $ 80 Furniture, fixtures and office equipment................ -- 53 --- ---- Total cost............................................ 8 133 Accumulated depreciation and amortization............. (2) (16) --- ---- Net plant and equipment under capital leases.......... $ 6 $117 === ====
Depreciation of equipment under capital leases is included in cost of sales and selling, general and administrative expense. NOTE 5 -- ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (IN THOUSANDS) Salaries, wages, bonuses, compensated absences and related taxes......................................... $ 44 $493 Uninvoiced accounts payable............................. 220 44 Other................................................... 1 22 ---- ---- Total accrued expenses................................ $265 $559 ==== ====
F-113 THE INFINITY PARTNERS, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- DEBT Debt consists of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (IN THOUSANDS) Note payable, due in monthly principal and interest installments of $4,141, interest at prime plus 2.75%, collaterialized by substantially all of the Company's assets, repaid in July 1999............................... $224 $ -- Term loan, due in quarterly installments of $87,500 plus interest at 10%, personally guaranteed by one of the partners, repaid in December 1999 (Note 7)................ -- 700 Note payable, due in monthly installments of $3,535 plus interest at 10%, personally guaranteed by one of the partners, repaid in December 1999......................... -- 205 Note payable, due in monthly principal and interest installments of $2,573, interest at 9.5%, collaterialized by certain equipment, repaid in December 1999............. -- 114 Capital lease obligations, interest at 6.0% to 8.3%, collaterialized by leased equipment....................... 3 127 Note payable, due in monthly principal and interest installments of $419, interest at 8.99%, collaterialized by a vehicle, repaid in December 1999..................... -- 19 Note payable, due in monthly principal and interest installments of $581, interest at 10.02%, collaterialized by a vehicle, repaid in October 1999...................... 16 12 Non-interest bearing note payable, due in monthly installments of $487, collaterialized by leasehold improvements, repaid in December 1999..................... 27 27 ---- ------ Total debt.............................................. 270 1,204 Less current portion.................................... (54) (432) ---- ------ Long-term debt, less current portion.................... $216 $ 772 ==== ======
The aggregate maturities of long-term debt are as follows:
(IN THOUSANDS) Three months ending December 31, 1999....................... $ 114 Twelve months ending December 31, 2000...................................................... 457 2001...................................................... 368 2002...................................................... 105 2003...................................................... 105 2004...................................................... 55 ------ Total long-term debt.................................... $1,204 ======
NOTE 7 -- RELATED PARTY TRANSACTIONS In 1999, the Company obtained a $700,000 bank term loan (Note 6) and loaned the proceeds to one of its partners. In connection with the sale of the Company in December 1999 (Note 10), the partner repaid the note in full and the Company repaid the bank term loan. F-114 THE INFINITY PARTNERS, LTD. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- EMPLOYEE BENEFIT PLANS The Company has a savings and retirement plan which qualifies under Section 401(k) of the Internal Revenue Code in which all full-time employees who are over the age of twenty-one and have at least one year of service with the Company are eligible to participate. In accordance with the terms of the plan, employees may elect to contribute up to 15% of their annual compensation to the plan, subject to certain limitations. The Company may elect to declare a discretionary matching contribution to the Plan up to 6% of each employee's salary. Company contributions were $35,000 and $26,000 for the year ended December 31, 1998 and nine months ended September 30, 1999, respectively. NOTE 9 -- COMMITMENT AND CONTINGENCIES LEASE COMMITMENTS The Company leases office space, vehicles and certain machinery and equipment under various capital and operating leases. Future minimum capital and operating lease commitments under non-cancelable leases are as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- (IN THOUSANDS) Three months ending December 31, 1999....................... $ 7 $ 100 Year ending December 31,.................................... 2000...................................................... 29 400 2001...................................................... 29 396 2002...................................................... 29 382 2003...................................................... 28 379 2004...................................................... 21 87 2005 and thereafter....................................... -- 386 ---- ------ Total minimum payments required........................... 143 $2,130 ====== Less amount representing future interest cost............. (16) ---- Recorded obligation under capital leases................ $127 ====
Total rental expense charged to operations the year ended December 31, 1998 and nine months ended September 30, 1999 was $91,000 and $189,000, respectively. LITIGATION The Company is involved in routine legal and administrative proceedings incidental to the normal conduct of business. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 10 -- SUBSEQUENT EVENT In December 1999, substantially all of the Company's net assets were acquired by DeCrane Aircraft Holdings, Inc. F-115 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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................................................................... 1 Summary Unaudited Pro Forma Consolidated Financial Data................... 8 Summary Historical Consolidated Financial Data............................ 10 Risk Factors.............................................................. 12 Recent Developments....................................................... 20 Use of Proceeds........................................................... 21 Capitalization............................................................ 21 Selected Consolidated Financial Data...................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 24 Business.................................................................. 34 Management................................................................ 49 Security Ownership of Significant Beneficial Owners and Management........ 54 Related Party Transactions................................................ 56 Description of Bank Credit Facility....................................... 58 Description of Notes...................................................... 60 Plan of Distribution...................................................... 91 Legal Matters............................................................. 91 Experts................................................................... 92 Index to Unaudited Pro Forma Consolidated Financial Data.................. P-1 Index to Financial Statements............................................. F-1
DeCrane Aircraft Holdings, Inc. 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 --------------------- PROSPECTUS --------------------- FEBRUARY 10, 2000 - ------------------------------------------- - ------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----