-----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, TimyDToaqEJHoqtfZQqTaZ1zHepZTK88OfOboFfeqzLO/1yzGWGMPwV360bWQJfN 6smpLyi4sKya3dBgxsmNcw== 0001047469-98-008893.txt : 19980309 0001047469-98-008893.hdr.sgml : 19980309 ACCESSION NUMBER: 0001047469-98-008893 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980306 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECRANE AIRCRAFT HOLDINGS INC CENTRAL INDEX KEY: 0000880765 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 341645569 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-47457 FILM NUMBER: 98559189 BUSINESS ADDRESS: STREET 1: 155 MONTROSE WEST AVE. SUITE 210 CITY: COPLEY STATE: OH BUSINESS PHONE: 3306683061 MAIL ADDRESS: STREET 1: 155 MONTROSE WEST AVENUE STREET 2: SUITE 210 CITY: COPLEY STATE: OH ZIP: 44321 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1997 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- DECRANE AIRCRAFT HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 3728 34-1645569 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) Identification Incorporation or Organization) No.)
2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CALIFORNIA 90245 (310) 725-9123 (Address, including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) R. JACK DECRANE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER DECRANE AIRCRAFT HOLDINGS, INC. 2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CALIFORNIA 90245 (310) 725-9123 (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service -------------------------- COPIES TO: STEPHEN A. SILVERMAN, ESQ. PETER P. WALLACE, ESQ. SPOLIN & SILVERMAN MORGAN, LEWIS & BOCKIUS LLP 100 Wilshire Boulevard, Suite 940 300 South Grand Avenue, 22nd Floor Santa Monica, California 90401 Los Angeles, California 90071 (310) 576-1221 (213) 612-2500 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2) Common Stock, Par Value, $0.01....... 2,500,000 Shares $18.25 $52,468,750.00 $15,478.36
(1) Includes 375,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MARCH 6, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [LOGO] 2,500,000 SHARES DECRANE AIRCRAFT HOLDINGS, INC. COMMON STOCK --------- Of the 2,500,000 shares of Common Stock of DeCrane Aircraft Holdings, Inc. ("Common Stock") offered hereby, 1,918,000 shares are being sold by the Company and 582,000 shares are being sold by Selling Stockholders. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. The proceeds of this offering received by the Company will be used to repay indebtedness. Following this offering, affiliates and certain principal stockholders of the Company will beneficially own approximately 24.6% of the Common Stock. The Common Stock is quoted on the Nasdaq National Market under the symbol "DAHX." On March 4, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $18.25 per share. -------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO THE SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS Per Share........................... $ $ $ $ Total(3)............................ $ $ $ $
(1) See "Underwriting" for indemnification arrangements. (2) Before deducting estimated expenses of $750,000 payable by the Company. (3) The Company and certain Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and the aggregate Proceeds to Company and Proceeds to the Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." -------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as, and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about 1998. BT ALEX. BROWN FURMAN SELZ SBC WARBURG DILLON READ INC. THE DATE OF THIS PROSPECTUS IS MARCH ,1998 [PHOTOGRAPH OF SILHOUETTE OF AN AIRPLANE FLYING] [PHOTOGRAPH OF AN AIRPLANE FLIGHT DECK] [COMPANY LOGO] The Company manufactures avionics interconnect components and sub-systems, as well as a full systems integrator and the leading provider of cabin management systems for the corporate jet market. Many of its products and services interface between the aircraft and its flight deck avionics systems, such as those pictured here. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE COMMON STOCK OFFERING AND PURCHASE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M OF THE SECURITIES AND EXCHANGE COMMISSION. SEE "UNDERWRITING." [PHOTOGRAPH OF CONTACTS] [PHOTOGRAPH OF BINS OF CONTACTS] The variety of contacts manufactured by the Company conduct electronic signals or electricity within an aircraft and must be precision machined to conform to strict design tolerances. The Company believes that it holds more qualified parts list positions for its contact product line than any other manufacturer. [PHOTOGRAPH OF HARNESS ASSEMBLIES] The Company's multi-product presence in the in-flight entertainment market is depicted above in a purser's station. This station utilizes the Company's harnesses, contacts and connectors. [PHOTOGRAPH OF CONNECTORS] The Company's line of specialty connectors are targeted for select niche markets, particularly in-flight entertainment and connectors used to interface avionics control units to aircraft. Many of these connectors utilize the Company's contacts. [PHOTOGRAPH OF INSTALLATION KITS] The Company manufactures avionics support structures which are used to connect the avionics control units to the aircraft. These structures, as shown above when combined with the Company's harness, contact and connector products, are the foundation of the installation kits assembled by the Company. [PHOTOGRAPH OF MAN AT A CAD STATION] The Company's engineering capability is a vital component of the Company's systems integration services. Depicted above is an engineer designing the interface on the new smoke detection and fire suppression system for Northwest Airlines on a state-of-the-art Pro E CAD station. [PHOTOGRAPH OF MEN INSTALLING A SYSTEM ONTO AN AIRCRAFT] Pictured above is the installation of a video on demand system in a SwissAir MD-11 widebody aircraft. As a full systems integrator and a certified FAA repair station, the Company performs complex installations on air transport aircraft. [PHOTOGRAPH OF AUDIO INTERNATIONAL PRODUCTS] The Company provides total cabin management products and services to the corporate jet market, including integrated switch panels, audio systems and video systems, as depicted above. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" MEAN DECRANE AIRCRAFT HOLDINGS, INC., A DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES, AND WITH RESPECT TO AVIATION REGULATORY ISSUES, ONE OR MORE, BUT NOT NECESSARILY ALL, OF THESE ENTITIES. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION. THE COMPANY The Company manufactures avionics components and provides avionics systems integration services in certain niche markets of the commercial and high-end corporate jet aircraft industries. The Company believes it is the largest and leading provider of components within the niche markets it serves. The Company utilizes its strong market positions to compete more effectively, as well as to capitalize on the expected growth and consolidating trends in the aerospace industry. Since its formation in 1989, the Company has completed nine acquisitions of businesses or assets, the most recent of which, Audio International Inc. ("Audio"), was completed in November 1997. The Company targets for acquisition those aircraft component manufacturers and system integration providers that are complementary to its existing businesses and have a leading market share in their respective niche markets. The Company believes that the fragmented nature of the market for aircraft components and systems integration services will provide it with additional opportunities to exploit industry consolidation trends. The Company's revenues have grown at a 47.4% compounded annual rate from 1995, the year of the most recent low in commercial aircraft production, through 1997, pro forma for the acquisition of Audio. The Company seeks to maximize its sales by emphasizing the complementary nature of its products and services. Components manufactured by the Company include: (i) contacts (the Company believes it is the largest supplier of bulk contacts to the commercial aircraft original equipment manufacturers ("OEMs")); (ii) connectors (which often utilize the contacts manufactured by the Company); (iii) harness assemblies (which often utilize the connectors manufactured by the Company); and (iv) avionics support structures (which often are packaged with the Company's connectors and harness assemblies in installation kits). The Company also manufactures dichroic liquid crystal display ("LCD") devices, which are used with flight deck avionics, and believes it is the largest supplier of such devices to the commercial aircraft OEMs. In addition, the Company provides stereo systems, video monitors and passenger switch and cabin lighting and climate controls for the high-end corporate jet market. The systems integration services provided by the Company include design and engineering, supplemental type certifications on behalf of the Federal Aviation Administration ("FAA"), manufacture of installation kits and systems installation. The Company manufactures many of the components required to complete a systems integration project, which it believes provides it a critical competitive advantage. The Company's principal strategy is to establish and expand leading positions in high-margin, niche markets within the commercial aircraft and high-end corporate jet industry, with a focus on the manufacture of avionics components and the integration of avionics systems. The Company seeks to achieve these leading positions while maintaining a balance of revenues among the OEM market, the retrofit market and the aftermarket. The Company believes that such a strategy will position it for growth over an entire aircraft industry economic cycle. Additionally, the Company believes that its position as a primary supplier of products and services to manufacturers of cabin avionics systems and flight deck avionics systems provides the Company with opportunities for growth independent of the aircraft OEM market, because such systems typically are installed on a retrofit basis by purchasers and operators of aircraft and not by aircraft OEMs. The Company also believes that demand for cabin avionics systems and flight deck avionics systems is increasing, primarily as a result of: (i) a desire by airlines for additional revenue- 3 producing services; (ii) longer flights combined with a demand by airline passengers for more sophisticated forms of in-flight services; and (iii) the advent of new technologies and FAA mandates related to aircraft safety and navigation. According to Boeing's 1997 CURRENT MARKET OUTLOOK (the "Boeing Report") published by the Boeing Commercial Airplane Group, expenditures for new commercial jet aircraft production are expected to total approximately $490 billion for the period from 1996 through 2006. Due to the high level of fragmentation within certain segments of the aircraft industry and efforts by OEMs to minimize purchasing costs, manufacturers of components and providers of aircraft retrofit, overhaul and repair services have been undergoing consolidation. The Company believes that there are a number of significant trends affecting the demand for its products and services. These trends include the continuing increase in new aircraft production, the increase in demand for cabin and flight deck avionics systems and the increase in airlines' purchase of products and services provided by third parties. According to OEM aircraft delivery schedules revised in January 1998, combined annual deliveries from Boeing (including the former McDonnell Douglas) and Airbus Industries are projected to increase from 397 aircraft in 1996 and 557 in 1997 to an estimated 785 in 1998. Airlines have increased purchases of certain components from third parties and have outsourced certain repair, overhaul and retrofit functions, creating increased demand for low cost high-quality component manufacturers and systems integrators. In November 1997, the Company began serving the high-end corporate jet market with its acquisition of Audio, which the Company believes is the nation's largest and leading independent provider of premium, customized aircraft entertainment and cabin management products and systems for corporate jets. According to the ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new corporate jet aircraft are expected to be delivered from 1997 through 2001, a 61% increase over the previous five year period. The Company believes that the increase in new corporate jet production is being driven by numerous factors, including: (i) the introduction of new, larger and more efficient aircraft; (ii) the growing popularity of fractional aircraft ownership; (iii) the minimal availability of used aircraft; (iv) the need for long range flights to expanding international markets; (v) the increased demand for more expedient travel. The Company believes that it is well-positioned to take advantage of the current trends and expected growth in the commercial and high-end corporate jet aircraft industry as the result of the following strengths: (i) leading positions in niche markets; (ii) a record of successful acquisitions; (iii) alignment with leading avionics and aircraft OEMs and suppliers; (iv) low-cost, high quality operations; (v) engineering and related technical capacity including industry and regulatory certifications; and (vi) management depth and experience. GROWTH STRATEGY The Company intends to grow its aerospace businesses through the following initiatives: COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage its core competencies in existing and additional markets, and add new expertise in the avionics and systems integration fields, by identifying and pursuing complementary acquisitions that offer strategic value, such as economies of scale, product line extensions, new customer relationships or increased manufacturing capacity. While there can be no assurance that the Company will complete additional acquisitions, the Company believes that the fragmented nature of the market for aircraft components and systems integration services will provide the Company with additional opportunities to exploit industry consolidation trends. See "Risk Factors--Risks Associated with Acquisitions." CAPITALIZE ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN AVIONICS. The Company believes its strong market positions and alignment with many of the leading commercial 4 aircraft industry participants will enable it to capitalize on the projected increases in the production of commercial and high-end corporate aircraft. For example, the Company believes that every aircraft currently produced by Boeing (including McDonnell Douglas) and Airbus includes components manufactured by the Company. The Company also believes that its products are on each model of high-end corporate jet aircraft sold today. The Company works closely with OEMs and modification centers to meet their delivery and scheduling requirements, and in some cases, to provide total, turnkey solutions to new aircraft. EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the Company's systems integration services have been concentrated in the in-flight passenger telecommunications market. In 1995, the Company commenced an effort to diversify the types of systems which it retrofits onto aircraft by expanding its expertise and sales efforts to include navigation and satellite communication, safety, and in-flight entertainment systems. As of December 31, 1997, the Company had contracted to provide systems integration services for global positioning systems ("GPS"), smoke detection/fire suppression safety systems, and in-flight entertainment systems. In the Company's area of systems integration, it believes that it is the only company which has in-house capabilities in each of the four elements of systems integration (design and engineering, certification, installation kit manufacturing and system installation). CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the Company's products and services are utilized to provide an interface between an aircraft and its avionics systems. Over the past several years, the Company increasingly has combined certain of the components which it manufactures in order to create higher value-added products, and develop further market opportunities through cross-selling and vertical integration of its products. By emphasizing the complementary nature of its products and services, the Company seeks to maximize penetration with existing customers and compete more effectively for new customers. * * * * The Company's corporate office is located at 2361 Rosecrans Avenue, Suite 180, El Segundo, California 90245. The Company's telephone number is (310) 725-9123. THE OFFERING Common Stock Offered by the Company....................... 1,918,000 shares(1) Common Stock Offered by the Selling Stockholders.......... 582,000 shares(1) Total Common Stock Offered............................ 2,500,000 shares(1) Common Stock to be Outstanding after the Offering......... 7,236,563 shares(1),(2) Use of Proceeds........................................... To repay certain indebtedness. See "Use of Proceeds." Nasdaq National Market Symbol............................. DAHX
- ------------------------ (1) Does not include up to 375,000 shares which may be sold by the Company and certain Selling Stockholders pursuant to the Underwriters' over-allotment option. See "Principal and Selling Stockholders" and "Underwriting." (2) Does not include: 527,156 shares of Common Stock reserved for issuance pursuant to the Company's Amended and Restated 1993 Share Incentive Plan (the "Share Incentive Plan") (see "Management--Executive Compensation--Share Incentive Plan"). 5 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996(1) 1997(2) --------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues........................................................................... $ 55,839 $ 65,099 $ 108,903 Gross Profit....................................................................... 12,376 15,707 28,656 Operating income................................................................... 1,835 4,251 11,995 Income (loss) before extraordinary item............................................ (3,446) (817) 5,254 Net income (loss).................................................................. (3,446) (817) 3,176 Net income (loss) applicable to common stockholders................................ (3,307) (6,357) 531 Income (loss) per common share Basic Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .69 --------- ----------- --------- Extraordinary loss(3).......................................................... -- -- (.55) --------- ----------- --------- Net income (loss).............................................................. $ (38.45) $ (73.92) $ .14 --------- ----------- --------- --------- ----------- --------- Diluted Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .62 Extraordinary loss(3).......................................................... -- -- (.42) --------- ----------- --------- Net income (loss).............................................................. $ (38.45) $ (73.92) $ .20 --------- ----------- --------- --------- ----------- --------- Pro forma income, before extraordinary item(4) Basic.................................................................................................. $ 1.16 Diluted................................................................................................ $ 1.10 OTHER FINANCIAL DATA: Depreciation and amortization...................................................... $ 4,542 $ 4,343 $ 5,372 Bookings (5)....................................................................... 50,785 81,914 112,082 Backlog at end of period (6)....................................................... 19,761 44,433 48,179
DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(7) --------- --------------- BALANCE SHEET DATA: Working capital........................................................................ $ 24,772 $ 24,772 Total assets........................................................................... 99,137 99,137 Total debt............................................................................. 38,838 6,422 Stockholders' equity................................................................... 39,527 71,943
- ------------------------------ (1) Includes the effect of the acquisition of the remaining 25% minority interest in Cory Components, Inc. beginning February 20, 1996, the date on which the transaction occurred, and the results of ADS and Elsinore beginning September 18, 1996 and December 5, 1996, respectively, the dates on which they were acquired. (2) Includes the effect of the results of the Audio acquisition beginning November 14, 1997, the date on which it was acquired. (3) Represents the write off of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by the Company with the net proceeds from its IPO. (4) Pro forma for the Recapitalization, IPO and the application of the net proceeds therefrom. (5) Bookings represent the total invoice value of purchase orders received during the period. See "Business--Backlog." (6) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. See "Business--Backlog." (7) Reflects the sale by the Company of 1,918,000 shares of Common Stock in the Offering and the application of the net proceeds therefrom as set forth under "Use of Proceeds." 6 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS. COMMERCIAL AIRCRAFT INDUSTRY RISKS Among the Company's principal customers are the world's commercial aircraft and avionics OEMs. The principal market for such OEMs is the commercial airline industry, which is cyclical and has been adversely affected by a number of factors, including, but not limited to, increased fuel and labor costs and intense price competition. The commercial airline industry may be adversely affected by increased regulatory scrutiny in the wake of several major airline disasters and threats of terrorism. Several domestic and foreign commercial airlines have encountered significant financial difficulties, resulting in certain of such airlines ceasing to conduct business or seeking protection from creditors. These financial difficulties, as well as certain other factors, caused new commercial aircraft deliveries to decline from a peak of approximately 767 aircraft in 1991 to approximately 380 aircraft in 1995 according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by Standard and Poor's Industry Surveys (the "S&P Report"). Another industry downturn could adversely affect the Company's business. See "Business-- Industry Overview and Trends." HIGH-END CORPORATE JET AIRCRAFT INDUSTRY RISKS Among the Company's customers are the world's high-end corporate jet aircraft OEMs. The principal markets for such OEMs are large corporations and wealthy individuals. The corporate jet market is cyclical and has been adversely affected by a number of factors, including, but not limited to, general state of the U.S. economy, corporate profits, interest rates and commercial airline fares. An industry downturn could adversely affect the Company's business. SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS In 1997, the Company reported its first net profit since its inception. Contributing to the profit was the repayment of a significant portion of its outstanding indebtedness with the net proceeds of the initial public offering ("IPO") of common stock completed on April 16, 1997. Prior to the IPO, the Company operated with substantial leverage and debt service requirements since its inception. As a result, the Company experienced net losses in each year from 1990 through 1996, despite positive operating income. In addition, until 1996 the Company at times was not in compliance with certain financial covenants contained in its debt agreements. In each case such non-compliance was waived by the lenders. Since March 1996, the Company has been in compliance with all financial covenants contained in its debt agreements. There can be no assurance as to the future profitability of the Company nor can there be assurance that the Company will remain in compliance with the covenants contained in its debt agreements. The Company's senior revolving line of credit (the "Credit Facility") is guaranteed by each of the Company's subsidiaries and is secured by substantially all the assets of the Company and its subsidiaries. In the event that the Company is unable to remain in compliance with the covenants contained in its debt agreements, the lenders could declare all amounts owed under such debt agreements to be immediately due and payable, which could have a material adverse effect on the Company. See "Use of Proceeds," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements." FLUCTUATIONS IN QUARTERLY AND YEARLY RESULTS The Company's business is subject to quarterly and yearly fluctuations. Specifically, the magnitude of certain systems integration programs relative to the Company's overall business has the potential to expose the Company's results of operations to fluctuations in quarterly and yearly results. In addition, 7 irregular timing of awards or cancellations of systems integration contracts, as well as development and technology delays by OEMs or their suppliers, could further exacerbate such fluctuations in quarterly and yearly operations. If such events occur, the results of operations of the Company may be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY CUSTOMERS The Company's two largest customers for the fiscal year ended December 31, 1997, were Boeing and Matsushita Avionics Systems ("Matsushita"), which accounted for approximately 19.0% and 11.2%, respectively, of the Company's consolidated revenues. For the year ended December 31, 1997, revenues from Boeing would have been 20.9% had its acquisition of McDonnell Douglas been consummated on January 1, 1997. In addition, a significant portion of the Company's sales of components are sold to Boeing indirectly through sales to suppliers of Boeing. Most of the Company's sales to Boeing are pursuant to contracts which may be terminated by Boeing at any time. In addition, under certain circumstances, Boeing may enforce alternative economic terms pursuant to such contracts in which case the contracts could become less commercially favorable to the Company or the Company may elect to terminate the applicable portion of such contracts. There can be no assurance that Boeing will not terminate any of its contracts with the Company. The five year contract under which the Company supplies a substantial majority of the bulk contact requirements for Boeing ends in September 1998. There can be no assurances that the Company will be awarded the subsequent contract by Boeing for its bulk contact requirements. During October 1997, Boeing announced that parts shortages caused by its supplier network and production chain disrupted its production schedules and adversely affected its production and delivery rates. Boeing shut down its 737 and 747 production lines for approximately a month and did not resume normal production rates until late November 1997. There can be no assurances that Boeing will not suffer further production schedule disruptions. The Company generally sells components and services to Matsushita pursuant to purchase orders, but does not have any supply contracts with Matsushita. The loss of any one or more of the Company's key customers could have a material adverse effect on the Company. See "Business--Customers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." REGULATION The FAA prescribes standards and licensing requirements for aircraft components, licenses private repair stations and issues Designated Alteration Station ("DAS") approvals, which give the holder the right to certify certain aircraft design modifications on behalf of the FAA. The ability of the Company to arrange for rapid government certification of its systems integration services is important to the Company's business and depends on its continuing access to or use of private repair stations, DASs, and FAA-designated and FAA-certified engineering professionals. There can be no assurance that: (i) the Company will continue to have adequate access to such stations and professionals; or (ii) the current public and congressional scrutiny of the FAA's inspection philosophy and mechanisms will not result in the changes to the standards for the use of such private repair stations or DASs, or their elimination, either of which could have a material adverse effect on the Company. The FAA curtailed the Company's use of a DAS for several months during 1997 until certain of its facilities were brought into compliance with the FAA's regulations governing DAS status. See "Business Industry Regulation and Approvals." In addition, although the Company believes that it possesses all required domestic and foreign governmental licenses and certificates, including without limitation Parts Manufacturer Approvals ("PMAs") and Supplemental Type Certificates ("STCs"), any delay in obtaining or failure to obtain a required license or certificate, or the revocation or limitation of such licenses or certificates, could have a material adverse effect on the Company's operations. See "Business--Industry Regulation and Approvals." 8 RISKS ASSOCIATED WITH ACQUISITIONS The Company's ability to grow by acquisition is dependent upon, and may be limited by, the availability of suitable acquisition candidates and capital, and by restrictions contained in the Company's debt agreements. In addition, growth by acquisition involves risks that could adversely affect the Company's results of operations, including difficulties in integrating the operations and personnel of acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of acquired companies. In the past, acquisitions by the Company have resulted in increased indebtedness and interest expense which caused the Company to incur net losses in each year since its inception, until 1997, despite positive operating income. There can be no assurance that the Company will be able to identify suitable acquisition candidates, obtain the capital necessary to pursue its acquisition strategy, consummate acquisitions on satisfactory terms or, if any acquisitions are consummated, satisfactorily integrate such acquired businesses into the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--General" and "Business--Growth Strategy." COMPETITION The Company operates in a highly competitive industry and competes against a number of companies, some of which have significantly greater financial, technological and marketing resources than the Company. The Company believes that its ability to compete depends on high product performance, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. There can be no assurance that the Company will be able to compete successfully with respect to these or other factors. See "Business--Competition." ASIAN FINANCIAL MARKETS The Asian markets are important markets for commercial aircraft and avionics OEMs. There can be no assurance that the current crisis in the Asian financial markets will not result in cancellation of orders for new aircraft or deferral of deliveries, and negatively impact the OEMs, which could have a material adverse effect on the Company. GOLD AND COPPER A significant portion of the cost of the materials used in the contacts manufactured by the Company is comprised of the cost of gold, and to a lesser extent, the cost of copper. Accordingly, a significant increase in the price of gold or copper could have a material adverse effect on the Company's results of operations. The Company has not purchased commodities contracts for gold or copper and does not anticipate doing so in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FOREIGN CURRENCY The Company has a manufacturing facility in Switzerland and incurs in Swiss Francs a significant percentage of the cost of the contacts it manufactures in Switzerland. Therefore the Company's financial results are subject to fluctuations of the Swiss Franc in relation to the U.S. Dollar. From 1996 through 1998, solely in an effort to mitigate the effects of currency fluctuations, the Company has entered into forward exchange contracts to purchase Swiss Francs and it expects to engage in such hedging transactions in the future. However, there can be no assurance that such transactions will prevent currency fluctuations from adversely affecting the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements." 9 SUPPLY OF QUALIFIED ENGINEERING PERSONNEL The Company's ability to attract and retain a high-quality engineering staff is important to its business. Competition for qualified avionics engineers is intense. There can be no assurance that the Company will be able to retain its existing engineering staff or fill new positions or vacancies created by expansion or turnover. See "Business--Products and Services" and "Business--Employees." CONTROL OF COMPANY BY PRINCIPAL STOCKHOLDERS Following the completion of the Offering, Nassau Capital Partners, L.P. and NAS Partners I L.L.C. (collectively, "Nassau") and Brantley Venture Partners II, L.P. ("Brantley") will beneficially own 10.7% and 6.8%, respectively, of the issued and outstanding Common Stock. See "Principal and Selling Stockholders." Nassau, Brantley, DSV, among others, are parties to a shareholders agreement with the Company which requires the Company to include on the Company's slate of nominees for director a person designated by each of Nassau, Brantley and DSV, for so long as each such stockholder owns at least 5% of the Common Stock. See "Certain Transactions--Shareholders Agreement." The terms of the present Board members nominated by Nassau, Brantley and DSV do not expire until 2000, 1999 and 1999, respectively, notwithstanding any decreases to such beneficial owners' ownership of Common Stock. See "Management--Executive Officers and Directors." EXCESS LOSS RISKS The Company currently has in force aviation products insurance. However, there can be no assurance that the Company's existing insurance coverage will be adequate to cover future claims that may arise or that such coverage can be renewed at commercially reasonable rates. ENVIRONMENTAL RISKS; ENVIRONMENTAL REGULATION The Company's business operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations. In addition, certain environmental laws such as the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), and similar state laws impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances. The Company has 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. The Company has received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency ("EPA") as to the Company's use of certain such sites. It is possible, given the retroactive nature of CERCLA liability, that the Company will, from time to time, receive additional notices of potential liability relating to current or former activities. There can be no assurance that the Company will not incur significant costs for prior waste disposal by the Company or its predecessors. In addition, some of the Company's operations are located on properties which are contaminated to varying degrees. There can be no assurance that the Company will not incur significant costs in the future to address contamination. There can be no assurance that the Company will not incur significant costs in the future due to current or former operations and waste disposal practices or changing environmental compliance requirements. See "Business--Environmental Matters" and "Business--Legal Proceedings." DISRUPTIONS AT THE COMPANY'S FACILITIES A significant portion of the Company's manufacturing and administrative operations are currently located in the greater Los Angeles, California area, an area that may be subject to earthquakes or other natural disasters. An earthquake or other natural disaster could have a material adverse effect on the Company's business and operating results. See "Business--Facilities." 10 YEAR 2000 COMPLIANT Due to numerous acquisitions made over the past several years, the Company operates several stand-alone systems using different, and in some cases internally customized, software purchased prior to the Company's acquisition of the relevant operating units. The Company concluded that essentially all existing software should be upgraded to newer, off-the-shelf, integrated manufacturing and business application software. In 1997, the Company commenced the implementation of this strategy. One of the criteria to be used in selecting the software is that it be Year 2000 compliant. Failure to complete the migration to such software by the Year 2000 could have a material adverse effect on the Company. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of a substantial number of shares of Common Stock in the public market after the Offering, or the expectation that such sales could occur, could adversely affect the market price of the Common Stock and the Company's ability to raise capital through a subsequent offering of securities. Of the 7,236,563 shares of Common Stock to be outstanding after the Offering, 5,297,423 shares will be available for resale in the public market without restriction immediately following the Offering if held by holders who are not "affiliates" of the Company (as defined in the Securities Act of 1933, as amended (the "Securities Act")). All of the remaining shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act. These restricted securities were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act. After expiration of the 90-day lock-up period following the Offering, pursuant to agreements with the Underwriters: (i) all restricted securities will be available for resale pursuant to the limitations of Rule 144; and (ii) the Company, pursuant to its certificate of incorporation (the "Certificate"), may authorize the issuance of additional shares of Common Stock and shares of one or more series of voting preferred stock. The issuance of additional shares of capital stock could result in the dilution of the voting power of the shares of Common Stock purchased in the Offering. In addition, following the expiration of the 90-day lock-up period, certain stockholders have the right, pursuant to the terms and conditions of a registration rights agreement (the "Registration Rights Agreement"), to require the Company to: (i) effect (in the aggregate) up to four registrations under the Securities Act covering all or any portion of the unregistered shares of Common Stock held by such stockholders, provided that if the Company effects a registration at the request of a stockholder, no further demand may be made for a period of at least nine months; and (ii) include all or any portion of such stockholders' shares of Common Stock in any proposed registration by the Company of shares of Common Stock (subject to reduction to the extent that the managing underwriter, if any, is of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein). See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." ANTI-TAKEOVER PROVISIONS The Board of Directors has the authority to issue up to 10,000,000 additional shares of Preferred Stock (the "Undesignated Preferred Stock") and to determine the terms and number of shares constituting any wholly unissued series of Undesignated Preferred Stock. The Board, without further approval of the holders of Common Stock, may issue shares of Undesignated Preferred Stock with rights that could adversely affect the rights of the holders of Common Stock. The issuance of shares of Undesignated Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of the Company or other corporate actions. In addition, certain provisions of the Certificate and the Company's bylaws (the "Bylaws") and of Delaware law could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. These provisions could limit the price that certain investors might be willing to pay in the 11 future for shares of the Common Stock. See "Description of Capital Stock Preferred Stock" and "Description of Capital Stock--Certain Certificate and Bylaw Provisions and Delaware General Corporation Law Section 203." USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 1,918,000 shares of Common Stock being offered hereby by the Company are estimated to be $32.4 million after deducting underwriting discounts and commissions and estimated expenses of the Offering. The Company plans to use such net proceeds to repay amounts due under the Company's Credit Facility. The Company will not receive any of the proceeds from shares sold by the Selling Stockholders. Pending the use of the net proceeds for the purposes described above, the Company will invest such net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has never paid cash dividends on the Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to finance operations and the expansion of its business. Any future determination to pay cash dividends will be made at the discretion of the Company's board of directors (the "Board") and will be dependent upon the Company's financial condition, operating results, capital requirements and such other factors as the Board deems relevant. Further, the Company's Credit Facility prohibits payment of dividends, and the Company expects that any future debt arrangements may also include such a prohibition. PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the symbol "DAHX." As of March 4, 1998, the last reported sales price of the Common Stock on Nasdaq was $18.25 per share. The following table shows, for the periods indicated, the range of high and low sale prices per share for the Common Stock as reported on Nasdaq:
HIGH LOW ----- --------- FISCAL 1997 Second Quarter (from 4/16/97).................................................................. $ 147/8 $ 93/4 Third Quarter.................................................................................. 191/4 145/8 Fourth Quarter................................................................................. 21 151/4 FISCAL 1998 First Quarter (through 3/4/98)................................................................. $ 19 $ 163/4
As of December 31, 1997, there were 5,318,563 shares of Common Stock outstanding, which were held by 31 shareholders of record. 12 CAPITALIZATION The following table sets forth as of December 31, 1997: (i) the consolidated capitalization of the Company; and (ii) the consolidated capitalization of the Company as adjusted for the sale by the Company of 1,918,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom as described in "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock--The Recapitalization" and the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus.
ACTUAL AS ADJUSTED ---------- ------------ Long-term debt (including current portion)............................................. $ 38,270 $ 5,854 ---------- ------------ ---------- ------------ Stockholders' equity: Common Stock, $.01 par value, 5,318,563 shares issued and outstanding, 7,236,563 shares as Adjusted................................................................. $ 53 $ 72 Additional paid-in capital........................................................... 51,057 83,454 Accumulated deficit.................................................................. (11,444) (11,444) Foreign currency translation adjustment.............................................. (139) (139) ---------- ------------ Total stockholders' equity......................................................... 39,527 71,943 ---------- ------------ Total capitalization(1)................................................................ $ 77,797 $ 77,797 ---------- ------------ ---------- ------------
- ------------------------ (1) Total capitalization consists of long-term debt and stockholders' equity. 13 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations and balance sheet data for the Company as of and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the Company's audited consolidated financial statements. All of the information should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1993 1994 1995 1996(1) 1997(2) --------- --------- --------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues....................................................... $ 48,197 $ 47,092 $ 55,839 $ 65,099 $ 108,903 Cost of sales.................................................. 36,258 36,407 43,463 49,392 80,247 --------- --------- --------- ----------- --------- Gross profit................................................... 11,939 10,685 12,376 15,707 28,656 Selling, general and administrative expenses................... 7,953 7,716 9,426 10,747 15,756 Amortization of intangible assets.............................. 1,210 1,209 1,115 709 905 --------- --------- --------- ----------- --------- Operating income............................................... 2,776 1,760 1,835 4,251 11,995 Interest expense............................................... 2,940 3,244 3,821 4,248 3,154 Other (income) expense, net.................................... (148) 332 382 108 243 --------- --------- --------- ----------- --------- Income (loss) before provision for income taxes, cumulative effect of accounting change and extraordinary item........... (16) (1,816) (2,368) (105) 8,598 Provision for income taxes (3)................................. (620) (613) (1,078) (712) (3,344) --------- --------- --------- ----------- --------- Income (loss) before cumulative effect of accounting change and extraordinary item........................................... (636) (2,429) (3,446) (817) 5,254 Cumulative effect of accounting change (4)..................... (121) -- -- -- -- Extraordinary loss from debt refinancing (5)................... -- (264) -- -- (2,078) --------- --------- --------- ----------- --------- Net income (loss).............................................. $ (757) $ (2,693) $ (3,446) $ (817) $ 3,176 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Net income (loss) applicable to common stockholders............ $ (972) $ (2,891) $ (3,307) $ (6,357) $ 531 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Income (loss) per common share Basic Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .69 Cumulative effect of accounting change..................... (1.46) -- -- -- -- Extraordinary loss......................................... -- (3.15) -- -- (.55) --------- --------- --------- ----------- --------- Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .14 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Diluted Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .62 Cumulative effect of accounting change..................... (1.46) -- -- -- -- Extraordinary loss......................................... -- (3.15) -- -- (.42) --------- --------- --------- ----------- --------- Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .20 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Pro forma before extraordinary item (6) Basic.................................................................................................... $ 1.16 Diluted.................................................................................................. $ 1.10 OTHER FINANCIAL DATA: Depreciation and amortization.................................. $ 3,553 $ 3,868 $ 4,542 $ 4,343 $ 5,372 Bookings (7)................................................... 46,830 47,896 50,785 81,914 112,082 Backlog at end of period (8)................................... 23,933 24,493 19,761 44,433 48,179 DECEMBER 31, ------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- ----------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital................................................ $ (637) $ 11,459 $ 12,583 $ 10,486 $ 24,772 Total assets................................................... 34,653 37,685 36,329 69,266 99,137 Total debt..................................................... 19,653 23,874 24,672 42,250 38,838 Mandatorily redeemable preferred stock and common stock warrants..................................................... 5,818 2,329 1,633 6,879 -- Stockholders' equity (deficit)................................. (2,618) 766 (1,697) 1,236 39,527
See accompanying notes to the Selected Consolidated Financial Data. 14 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Includes the effect of the acquisition of the remaining 25% minority interest in Cory Components, Inc. beginning February 20, 1996, the date on which the transaction occurred, and the results of ADS and Elsinore beginning September 18, 1996 and December 5, 1996, respectively, the dates on which they were acquired. (2) Includes the effect of the acquisition of Audio beginning November 14, 1997, the date on which it was acquired. (3) Prior to the acquisition of the remaining 25% minority interest in Cory Components, Inc. in 1996, the Company did not consolidate the earnings of its Cory Components subsidiary for tax purposes. As such, despite a consolidated pre-tax loss in each of the years, the Company recorded a provision for income taxes from 1993 up to the date of the Minority Interest Acquisition in 1996 which primarily relates to Cory Components. (4) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting for Income Taxes." (5) Represents the write-off of unamortized deferred financing costs, unamortized original issue discounts and a prepayment penalty incurred as result of the refinancing by the Company of a substantial portion of its debt in November 1994 and the write off of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by the Company concurrent with its IPO in 1997. These charges are net of an income tax benefit. (6) Pro forma for the Recapitalization, IPO and the application of the net proceeds therefrom. (7) Bookings represent the total invoice value of purchase orders received during the period. See "Business--Backlog." (8) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. See "Business--Backlog." 15 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following Unaudited Pro Forma Consolidated Financial Data presents the results of operations of the Company as if the following transactions had occurred on January 1, 1997: (i) the Recapitalization (see "Description of Capital Stock--the Recapitalization"), the IPO, and the application of the net proceeds therefrom; (ii) the acquisition of Audio; and (iii) the sale by the Company of 1,918,000 shares of Common Stock in the Offering and the application of the net proceeds therefrom as set forth under "Use of Proceeds." The Unaudited Pro Forma Consolidated Financial Data for the year ended December 31, 1997 reflects the unaudited financial statements of Audio for the period from January 1 through November 14, 1997, the date on which it was acquired. The Unaudited Pro Forma Consolidated Financial Data is not necessarily indicative of the results of operations that actually would have occurred had the transactions referenced above been consummated on the dates indicated, or that may be obtained in the future. The Unaudited Pro Forma Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. 16 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
DECRANE RECAPITALIZATION PRO FORMA FOR AUDIO AIRCRAFT AND IPO RECAPITALIZATION INTERNATIONAL, ACQUISITION HOLDINGS, INC. ADJUSTMENTS AND IPO INC. ADJUSTMENTS -------------- ----------------- ---------------- -------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................. $ 108,903 $ -- $ 108,903 $ 12,431 $ -- Cost of sales............................. 80,247 -- 80,247 7,345 63(6) -------------- ------- ---------------- -------------- ------------- Gross profit (loss)....................... 28,656 -- 28,656 5,086 (63) Selling, general and administrative expenses................................ 15,756 100(2) 15,856 3,983 (89)(7) Amortization of intangible assets......... 905 -- 905 -- 587(8) -------------- ------- ---------------- -------------- ------------- Operating income (loss)................... 11,995 (100) 11,895 1,103 (561) Interest expense.......................... 3,154 (1,528)(3) 1,626 8 1,583(9) Other expenses............................ 243 -- 243 5 -- -------------- ------- ---------------- -------------- ------------- Income (loss) before provision (benefit) for income taxes(1)..................... 8,598 1,428 10,026 1,090 (2,144) Provision (benefit) for income taxes...... 3,344 528(4) 3,872 365 (517)(10) -------------- ------- ---------------- -------------- ------------- Income (loss)(1).......................... $ 5,254 $ 900 $ 6,154 $ 725 $ (1,627) -------------- ------- ---------------- -------------- ------------- -------------- ------- ---------------- -------------- ------------- Income (loss) applicable to common stockholders(1)......................... $ 2,609 $ 3,545(5) $ 6,154 $ 725 $ (1,627) -------------- ------- ---------------- -------------- ------------- -------------- ------- ---------------- -------------- ------------- Income (loss) per common share(1) As reported Basic................................. $ 0.69 Diluted............................... 0.62 Pro forma Basic................................. $ 1.16 Diluted............................... 1.10 Weighted average number of common shares outstanding As reported Basic................................. 3,803 Diluted............................... 4,892 Pro forma Basic................................. 5,304 Diluted............................... 5,606 PRO FORMA FOR OFFERING PRO FORMA ACQUISITION ADJUSTMENTS AS ADJUSTED -------------- ------------- ----------- Revenues.................................. $ 121,334 $ -- $ 121,334 Cost of sales............................. 87,655 -- 87,655 -------------- ------------- ----------- Gross profit (loss)....................... 33,679 -- 33,679 Selling, general and administrative expenses................................ 19,750 -- 19,750 Amortization of intangible assets......... 1,492 -- 1,492 -------------- ------------- ----------- Operating income (loss)................... 12,437 -- 12,437 Interest expense.......................... 3,217 (2,192)( 1) 1,025 Other expenses............................ 248 -- 248 -------------- ------------- ----------- Income (loss) before provision (benefit) for income taxes(1)..................... 8,972 2,192 11,164 Provision (benefit) for income taxes...... 3,720 880 (12 4,600 -------------- ------------- ----------- Income (loss)(1).......................... $ 5,252 $ 1,312 $ 6,564 -------------- ------------- ----------- -------------- ------------- ----------- Income (loss) applicable to common stockholders(1)......................... $ 5,252 $ 1,312 $ 6,564 -------------- ------------- ----------- -------------- ------------- ----------- Income (loss) per common share(1) As reported Basic................................. Diluted............................... Pro forma Basic................................. $ .99 $ .91 Diluted............................... .94 .87 Weighted average number of common shares outstanding As reported Basic................................. Diluted............................... Pro forma Basic................................. 5,304 7,222 Diluted............................... 5,606 7,524
The accompanying notes are an integral part of the Unaudited Pro Forma Consolidated Financial Data. 17 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (1) Reflects income (loss) before the effect of a $2,078,000 extraordinary loss incurred as a result of the Company's debt refinancing. See the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. (2) Represents incremental selling, general and administrative expenses associated with regulatory compliance requirements including listing, registrar and transfer agent fees, quarterly and annual report and proxy statement preparation and distribution expenses, legal and accounting fees and director and officers' liability insurance premiums. (3) Represents a reduction in interest expense to reflect the IPO and application of the net proceeds therefrom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) Represents an increase in the provision for income taxes resulting from an increase in pro forma taxable income. (5) Reflects the elimination of preferred stock dividends and adjustment to the redemption value of mandatorily redeemable common stock warrants as a result of the Recapitalization and IPO. (6) Represents an increase in depreciation expense to reflect a $486,000 increase in the fair value of assets acquired. (7) Represents: (i) a $21,000 increase in depreciation expense to reflect a $486,000 increase in the fair value of assets acquired; and (ii) a $110,000 net decrease in compensation expense attributable to the resignation of one former stockholder of Audio as of the acquisition date, offset by an increase in compensation for the two remaining former stockholders of Audio pursuant to employment agreements entered into with the Company. (8) Represents an increase in amortization expense resulting from the amortization of $20,110,000 of goodwill related to the acquisition on a straight-line basis over 30 years. (9) Represents an increase in interest expense resulting from Credit Facility borrowings to finance the acquisition. (10) Represents a decrease in the provision for income taxes as a result of a decrease in pro forma taxable income. (11) Reflects a decrease in interest expense to reflect the sale by the Company of 1,918,000 shares of Common Stock in the offering and the application of the net proceeds therefrom as set forth under "Use of Proceeds." (12) Represents an increase in the provision for income taxes resulting from an increase in pro forma taxable income. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's results of operations have been affected by its history of acquisitions. Since its formation in 1989, the Company has completed nine acquisitions of businesses or assets, the most recent of which, Audio, was closed in November 1997. The Company's revenues have grown at a 47.3% compounded annual rate from 1995, the year of the most recent low in commercial aircraft production, through 1997, pro forma for the acquisition of Audio. During this same period, operating income as a percentage of revenues increased to 11.0% from 3.3%, primarily as a result of increased sales volume without a corresponding increase in fixed costs, a shift in the sales mix toward more profitable products, variable cost reductions and price increases. The Company's principal strategy is to establish and expand leading market positions in high-margin, niche markets within the commercial aircraft and high-end corporate jet industries, with a focus on the manufacturing of avionics components and the integration of avionics systems. The Company seeks to achieve these leading market positions while maintaining a balance of revenues among the OEM market, the retrofit market and the aftermarket. The Company believes that such a strategy will position it for growth over an entire aircraft industry economic cycle. For example, the Company's revenues grew 31% without acquisitions from 1992 through 1995, a period in which new aircraft deliveries by Boeing and Airbus declined from 603 to 330. All of the Company's acquisitions have been accounted for under the purchase method of accounting which resulted in approximately $40.3 million of goodwill reflected on the balance sheet as of December 31, 1997. The annual amortization of goodwill will result in non-cash charges to future operations of approximately $1.6 million per year (of which approximately 40% of such amortization is deductible for tax purposes). Historically, the Company's systems integration operations have been affected by the timing and magnitude of program awards, at times resulting in quarterly and yearly fluctuations in revenue and earnings, such as the one-time growth created by the 1996 contract to provide systems integration services for in-flight entertainment system developed by Interactive Flight Technologies Inc. ("IFT") on 19 wide-body aircraft for Swiss Air Transport Co. Ltd. ("Swissair"). That program has been substantially completed (in 16 of the 19 aircraft) as of December 31, 1997, and no follow-on contracts have been booked with IFT. However, the Company believes that it has lessened its exposure to such fluctuations by developing capabilities in multiple major systems integration areas: in-flight entertainment systems, safety systems, and GPS and other navigation systems. In April 1997, the Company used the net proceeds from the IPO, together with borrowings under the Credit Facility, to repay outstanding (i) senior revolving line of credit borrowings; (ii) senior term notes; (iii) senior subordinated notes; and (iv) convertible subordinated notes payable. In conjunction with the debt repayment, the Company incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, which is comprised of: (i) a $1.9 million write-off of deferred financing costs; (ii) a $1.2 million write-off of unamortized original issued discounts; (iii) a $0.3 million charge for a prepayment penalty and expenses; and (iv) a $0.1 million write-off of the unamortized portion of an interest rate cap agreement. Certain of the contact blanks used by the Company in the production of its contacts are manufactured at the Company's Swiss facility and shipped to its 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, the Company entered into forward exchange contracts at fixed rates and plans to continue this forward exchange program in the future. The Company does not engage in any currency exchange transactions for trading or speculative purposes. Gains and losses on 19 foreign exchange contracts are recognized currently in the consolidated statements of operations. In the fourth quarter of 1997, the Company recorded a $0.5 million unrealized market value loss on the open 1998 contracts. In 1996, the Company did not experience any material changes in the cost of contact blanks resulting from currency fluctuations. RESULTS OF OPERATIONS The following table sets forth the items in the Company's consolidated statements of operations as percentages of its revenues for the periods indicated:
YEAR ENDED DECEMBER 31, 1995 1996 1997 ---------- ---------- ---------- Revenues.................................................................. 100.0% 100.0% 100.0% Cost of sales............................................................. 77.8 75.9 73.7 ---------- ---------- ---------- Gross profit.............................................................. 22.2 24.1 26.3 Selling, general and administrative expenses.............................. 16.9 16.5 14.5 Amortization of intangible assets......................................... 2.0 1.1 0.8 ---------- ---------- ---------- Operating income.......................................................... 3.3 6.5 11.0 Interest expense.......................................................... 6.8 6.5 2.9 Other expense, net........................................................ 0.7 0.2 0.2 ---------- ---------- ---------- Income (loss) before provision for income taxes, and extraordinary item... (4.2) (0.2) 7.9 Provision for income taxes................................................ (2.0) (1.1) (3.1) ---------- ---------- ---------- Income (loss) before extraordinary item................................... (6.2) (1.3) 4.8 Extraordinary loss from debt refinancing.................................. -- -- (1.9) ---------- ---------- ---------- Net income (loss)......................................................... (6.2)% (1.3)% 2.9% ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders....................... (5.9)% (9.8)% 0.5% ---------- ---------- ---------- ---------- ---------- ----------
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL 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 following: (i) the inclusion of $10.7 million of revenues from ADS which was acquired on September 18, 1996; (ii) growth in the Company's private labeling programs of $6.4 million; (iii) growth in contact sales of $6.3 million driven by new aircraft production rate increases; (iv) an increase in sales of harness assemblies for in-flight entertainment systems of $5.1 million; (v) 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; (vi) an increase of sales to IFT of $3.3 million relating to a major systems integration program for Swissair; (vii) the inclusion of $3.0 million of revenue from Elsinore which was acquired on December 5, 1996; (viii) new systems integration programs for navigational systems of $1.5 million; (ix) the inclusion of $1.3 million of revenue from Audio which was acquired on November 14, 1997; (x) a new systems integration program for United Parcel Service of $0.9 million; and (xi) the overall growth in the commercial aircraft market. Partially offsetting this increase was a decline in sales to AT&T Wireless Services, Inc. ("AT&T Wireless") 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 profit margin was attributable to an increased sales volume, favorable mix, 20 savings from the rationalization of the newly purchased AMP Facility with the Company's existing facilities in El Segundo, California and Lugano, Switzerland, sustained price increases and lower material costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("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 the following: (i) the Company added staff to pursue higher sales to OEMs and to develop capabilities for in-flight entertainment, navigation and satellite communication and safety systems integration services; (ii) the inclusion of SG&A expenses from (a) Aerospace Display Systems ("ADS"), a manufacturer of dichroic LCD devices acquired from Allard Industries, Inc., (b) certain manufacturing assets (collectively, the "AMP Facility") from AMP, Inc. ("AMP") and (c) Elsinore Aerospace Services, Inc. and the Elsinore Engineering Services division (collectively, "Elsinore") of Elsinore. L.P. which were acquired in late 1996; and (iii) the inclusion of SG&A expenses from Audio which was acquired 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 IPO on April 16, 1997 and the repayment of a substantial portion of the Company's debt with the proceeds. PROVISION FOR INCOME TAXES. During 1997, the Company reduced its 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. The Company has 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, the Company incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, as a result of refinancing the Company's debt with the proceeds from the IPO. 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. NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable to common stockholders increased $6.9 million to a net income of $0.5 million for 1997 from a net loss applicable to common stockholders of $6.4 million for 1996. The increase resulted from the factors described above, plus a $2.1 million decrease in the redemption value adjustment of mandatorily redeemable common stock warrants between the two periods. Current warrants were subsequently redeemed. In addition, the increase was also influenced by a $0.8 million decrease in cumulative preferred stock dividends attributable to the preferred stock that was converted into common stock as part of the Recapitalization. See "Description of Capital Stock-the Recapitalization". FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for 1996 from $55.8 million for 1995. Revenues increased primarily due to the following: (i) growth in contact sales driven by new aircraft production rate increases and growth in the Company's private labeling programs of $6.4 million; (ii) an increase of sales to IFT of $3.0 million in 1996 relating to a major systems integration program for Swissair; (iii) the inclusion of $2.8 million of revenues from ADS which was acquired on September 18, 1996; (iv) an increase in sales of specialty connectors for cabin management and in-flight 21 entertainment systems on Boeing's 777 aircraft of $2.4 million; and (v) an increase in sales of harness assemblies for in-flight entertainment systems of $2.4 million. Partially offsetting this increase was a decline in sales to AT&T of $9.2 million, reflecting the completion in 1995 of a major systems integration program primarily for American Airlines. GROSS PROFIT. Gross profit increased $3.3 million, or 26.9%, to $15.7 million for 1996 from $12.4 million for 1995. Gross profit as a percentage of revenues increased to 24.1% for 1996 from 22.2% for 1995. This increase was attributable to an improvement in gross profit as a percentage of revenues from the sale of contacts for 1996, partially offset by a decline in higher margin sales to AT&T. This improvement resulted from sustained price increases, increased sales volume, lower wage-related expenses and lower material costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.5 million, or 15.7%, to $10.9 million for 1996 from $9.4 million for 1995. SG&A expenses as a percentage of revenues decreased to 16.7% for 1996 from 16.9% for 1995. SG&A expenses increased primarily due to the following: (i) the Company added staff to pursue higher sales to OEMs and to develop capabilities for in- flight entertainment, navigation and satellite communication and safety systems integration services; and (ii) the inclusion of SG&A expenses from ADS and Elsinore, which were acquired in 1996. This increase in SG&A expenses was offset partially by the elimination of $0.7 million of expenses of the Minority Interest Acquisition. OPERATING INCOME. Operating income increased $2.4 million, or 131.7%, to $4.3 million for 1996 from $1.8 million for 1995. The increase in operating income resulted from the factors described above and a decline of $0.4 million in amortization of intangible assets as a result of the termination of certain non-compete agreements. INTEREST EXPENSE. Interest expense increased $0.4 million, or 11.2%, to $4.2 million for 1996 from $3.8 million for 1995. This increase resulted from higher outstanding indebtedness attributed to the funding of the acquisitions of ADS and Elsinore and the purchase of the AMP Facility. NET LOSS. Net loss decreased $2.6 million, or 76.3%, to $0.8 million for 1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted from the factors described above and a lower tax provision resulting from the Minority Interest Acquisition in February 1996. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased $3.1 million, or 92.2%, to $6.4 million for 1996 from a net loss applicable to common stockholders of $3.3 million for 1995. The increase resulted from the change in redemption value of mandatorily redeemable common stock warrants of $5.0 million (resulting from an increase in the value of the warrants due to the Company's improved results from operations and the anticipated price of the Common Stock as a result of the Offering) and the increase in cumulative convertible preferred stock dividends of $0.7 million (resulting from new issuances of preferred stock), which were offset in part by the decrease in net loss of $2.6 million. As a result of the Recapitalization, substantially all warrants were exchanged for Common Stock and all preferred stock was converted into Common Stock. See "Description of Common Stock--The Recapitalization." LIQUIDITY AND CAPITAL RESOURCES The Company has required cash primarily to fund acquisitions and, to a lesser extent, to fund capital expenditures and for working capital. In 1997 and 1996, the Company generated cash from operating activities of $4.6 million and $3.0 million, respectively. Cash from operating activities is net of interest payments of $2.8 million and $3.0 million for 1997 and 1996, respectively. With the net proceeds of the Offering to be received by the 22 Company, the Company estimates that it will repay a significant portion of its debt. As a result, the related interest payments will decrease substantially. See "Use of Proceeds." In 1997 and 1996, the Company used $5.2 million and $0.9 million, respectively, in cash for working capital. The Company's accounts receivable consist of trade receivables and unbilled receivables which are recognized pursuant to the percentage of completion method of accounting. Trade receivables increased $3.0 million and $2.7 million in 1997 and 1996, respectively, due to higher sales. Unbilled receivables increased $0.2 million in 1997 as a result of the systems integration program for Swissair (through IFT) that began in mid-1996. Inventories increased by $5.0 million and $2.7 million in 1997 and 1996, respectively, in support of sales growth. Accounts payable decreased by $0.4 million in 1997 and increased by $1.9 million in 1996. The foregoing amounts for accounts receivable, inventories and accounts payable are consistent with the amounts set forth in the Consolidated Statements of Cash Flow contained herein. Net cash used in investing activities was $27.8 million for 1997 and $24.0 million for 1996. Of the $27.8 million used in 1997, $23.6 million related to the acquisition of Audio in November 1997. (The total purchase price for the Audio acquisition also included contingent consideration with a maximum of $6.0 million payable in 1999 and 2000.) Of the $24.0 million used in 1996, $22.6 million related to the Minority Interest Acquisition in February 1996, the acquisition of ADS in September 1996 and the acquisition of Elsinore and the purchase of the AMP Facility in December 1996. Capital expenditures of $3.8 million and $1.5 million were made in 1997 and 1996, respectively. Capital expenditures were incurred in 1997 to: (i) increase manufacturing capacity in support of revenue growth; (ii) improve plating controls and capacity; and (iii) construct three additional selective plating machines. The Company anticipates capital expenditures of approximately $4.5 million in 1998. Net cash provided by financing activities in 1997 was $23.0 million. The Company raised $28.9 million in net proceeds from the sale of approximately 2.7 million shares of Common Stock in the IPO in April, 1997. The net proceeds from the Offering were applied to repay amounts due under the Company's prior senior revolving line of credit (the "Prior Credit Facility"). Subsequently, in April 1997, concurrent with the IPO, the Company replaced the Prior Credit Facility with the present Credit Facility, and in November 1997 financed the Audio Acquisition (including the related fees and expenses) through a drawdown under the Credit Facility. Net cash provided by financing activities in 1996, was $21.1 million. Specifically, the Company financed the Minority Interest Acquisition (including the related fees and expenses) in February 1996 for $6.5 million, the acquisition of ADS (including the related fees and expenses) in September 1996 for $11.4 million, and the acquisition of Elsinore and the initial cash portion of the AMP Facility acquisition in December 1996 for an aggregate of $8.0 million. The foregoing acquisitions were financed by various combinations of convertible preferred stock (all of which was subsequently converted to Common Stock during the Recapitalization), warrants for Common Stock, convertible notes, debt notes, and a total of $2.1 million in drawdowns under the Prior Credit Facility. Cash decreased $0.1 million in 1997 and remained unchanged in 1996 due to the factors described above. The Company entered into the Credit Facility in April, 1997 which initially provided for a $40.0 million senior revolving credit facility which expires in 2002. The Credit Facility was amended to increase the permitted maximum borrowings by $20.0 million to $60.0 million in November 1997, concurrent with the closing of the acquisition of Audio. Availability under the Credit Facility was $24.0 million and working capital aggregated $24.8 million as of December 31, 1997. The interest rate under the Credit Facility was initially, at the option of the Company, either the prime rate or 1% above a certain floating interbank offered rate ("IBOR"). The interest rate is to be reset quarterly based upon a ratio of debt to the Company's earnings before interest, taxes, depreciation and amortization, pro forma (for acquisitions) for the 12 month period ending on such date; the maximum rate is either 0.75% above the prime rate or 2.0% above IBOR. The Credit Facility contains restrictive and financial covenants, 23 including a restriction on acquisitions having a purchase price in excess of $10 million. The Credit Facility was amended to increase the permitted maximum borrowings by $15 million to $75.0 million in February 1998 and is subject to an automatic reduction by $0.5 million on the last day of each month commencing January 31, 1999. The Company believes that the current levels of working capital and amounts available under the Credit Facility will enable it to meet its liquidity requirements through the end of 1999. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise classify items of other comprehensive income, as defined therein, by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company intends to fully comply with the provisions of this statement upon its required adoption in the first quarter of 1998, and does not anticipate a significant impact on the financial statements. Also in June 1997, the Financial Accounting Standards Board 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 the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required beginning with the statement made as of December 31, 1998. FORWARD-LOOKING STATEMENTS This Prospectus, particularly the sections entitled "Prospectus Summary," "Use of Proceeds," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains certain forward-looking statements and other statements that are not historical facts concerning, among other things, market conditions of the aircraft industry, the demand for avionics components and systems and future strategic acquisitions. There can be no assurance that the Company has accurately identified and properly weighed all of the factors which affect market conditions and demand for the Company's products and services, that the public information upon which the Company has relied is accurate or complete or that the Company's analysis of the market and demand for its products and services is correct and, as a result, the strategy based on such analysis will be successful. See "Risk Factors" for a more detailed summary of factors which could affect future results. 24 BUSINESS GENERAL The Company manufactures avionics components and provides avionics systems integration services in certain niche markets of the commercial and high-end corporate jet aircraft industries. The products and services offered by the Company are utilized primarily in commercial and corporate aircraft to connect, support and/or integrate various avionics systems, including cabin avionics systems and flight deck avionics systems. The Company's targeted markets consist of commercial aircraft and avionics OEMs, the commercial aircraft retrofit market, the commercial aircraft aftermarket and high-end corporate jet market. The Company also sells products and services to the military aircraft market. The Company seeks to maximize its sales by emphasizing the complementary nature of its products and services. Components manufactured by the Company include: (i) contacts (of which the Company believes it is the largest supplier of bulk contacts to the commercial aircraft OEMs); (ii) connectors (which often utilize the contacts manufactured by the Company); (iii) harness assemblies (which often utilize the connectors manufactured by the Company); and (iv) avionics support structures (which often are packaged with the Company's connectors and harness assemblies in installation kits). The Company also manufactures dichroic LCD devices, which are used with flight deck avionics, and believes it is the largest supplier of such devices to the commercial aircraft OEMs. In addition, the Company provides stereo systems, video monitors, amplifiers, chimes and paging devices, headphone systems and passenger switch and cabin lighting and climate controls for the high-end corporate jet market. The systems integration services provided by the Company include design and engineering, FAA certification, manufacture of installation kits and systems installation. The Company manufactures many of the components required to complete a systems integration project, which it believes provides it a critical competitive advantage. The Company was formed in 1989 to capitalize on emerging trends in the aircraft market through acquisitions. Since its formation, the Company has completed nine acquisitions of businesses or assets. A summary of these transactions follows:
YEAR OF TRANSACTION TARGET PRINCIPAL PRODUCTS AND SERVICES(1) - ------------ ------------------------------- ---------------------------------- APPROXIMATE PURCHASE PRICE(2) ----------------- (IN MILLIONS) 1990 Hollingsead International, Inc. Avionics support structures $ 9.1 1991 Tri-Star Electronics International, Inc. Contacts and connectors *(3) 1991 Tri-Star Europe, S.A. Contact blanks *(3) 1991 Tri-Star Technologies, Inc. Wire marking equipment *(3) 1991 Cory Components Connectors & harness assemblies 7.7(4) 1996 ADS Dichroic LCD devices 13.4 1996 Elsinore Engineering services 2.6 1996 AMP Facility Contact blanks 6.8 1997 Audio Cabin management & entertainment products 24.7(5)
- -------------------------- (1) At the time of the transaction. (2) Includes, where applicable, related fees and expenses and post closing adjustments. (3) Although each of Tri-Star Electronics International, Inc., ("Tri-Star"), Tri-Star Europe S.A. ("Tri-Star Europe") and Tri-Star Technologies, Inc. ("TST") was acquired pursuant to a separate agreement, the purchase price, which was $10.4 million for all three entities, was determined in the aggregate. (4) The Company acquired 75% of Cory Components in 1991 for approximately $2.0 million. In February 1996, the Company acquired the 25% which it did not already own for approximately $5.7 million. (5) Subject to contingent consideration of up to $6,000,000 depending on certain performance criteria for Audio. 25 The Company commenced its operations in October 1990 with the acquisition of Hollingsead, which, at the time of the acquisition, was solely a manufacturer of avionics support structures. The Company expanded its manufacturing operations with the 1991 acquisition of Tri-Star, Tri-Star Europe and TST and Cory Components, Inc. (the "Tri-Star Companies"). The Company's management has refocused and expanded the businesses which were acquired in the Hollingsead and Tri-Star transactions. By capitalizing on Hollingsead's manufacturing strength in avionics support structures, which are used extensively in the systems integration process, the Company has expanded Hollingsead into a full-service systems integrator concentrated in the retrofit market. Concurrently, the Company has enhanced the market positions of the Tri-Star Companies as a leading supplier of certain low-cost, high-quality avionics components. Management has focused on reducing costs, improving quality and increasing the market penetration of the components manufactured by these companies. During the last two years, the Company completed: (i) the acquisitions of ADS and Elsinore; (ii) the purchase of the AMP Facility; (iii) the acquisition of the remaining 25% interest in Cory Components which it did not already own; and (iv) the acquisition of Audio. The acquisition of ADS, a manufacturer of dichroic LCD devices, which the Company believes is the largest supplier of such products to commercial aircraft OEMs, expanded the Company's offering of components used in flight deck avionics systems. The acquisition of ADS has allowed the Company to capitalize on the upturn in aircraft OEM production by increasing its revenue content per aircraft. The acquisition of Elsinore, with its DAS approval, permits the Company to issue, through Elsinore, on behalf of the FAA, certification that the designs of aircraft modifications performed in connection with systems integration services conform to all pertinent FAA requirements. Such certifications are issued as FAA-approved STCs, which constitute, in effect, specific FAA design approval for each modification. In addition, the acquisition of Elsinore enhanced the Company's systems integration capabilities and increased the number of engineering professionals dedicated to the Company's systems integration effort by approximately 50%. The acquisition of Elsinore also provided the Company with an important new customer in the aircraft industry, Daimler-Benz Aerospace Airbus GmbH, and the opportunity to obtain additional customers. The Company's purchase of the AMP Facility added contact capability and capacity which enables the Company to optimize and expand its contact manufacturing operations. The AMP Facility enables the Company to produce contact blanks using a cold-heading manufacturing process which, when used for high volume production, is more cost effective than screw machine operations. As a result of the purchase of the AMP Facility, the Company has significantly increased its sales of contacts and the number of distributors to which it sells. The Company believes Audio, which it acquired in November 1997, is the nation's largest and leading independent provider of premium, customized aircraft entertainment and cabin management products and systems for the high-end corporate jet market. The acquisition of Audio expanded the Company's offering of products and systems for the corporate jet market. INDUSTRY OVERVIEW AND TRENDS The Company participates in the commercial, high-end corporate jet and military segments of the aircraft industry. Within those segments, the Company sells to commercial and high-end corporate jet OEMs, major avionics equipment OEMs and military aircraft OEMs as well as to the aircraft retrofit market, aircraft component aftermarket and corporate jet modification centers. According to the Boeing Report, expenditures for new commercial jet aircraft production are expected to total approximately $490 billion for the period from 1996 through 2006; and worldwide air travel will average 4.9% annual growth over the next two decades. The aircraft component retrofit market (the integration of new systems into existing aircraft) and the aircraft component aftermarket (the manufacture and sale of replacement products for existing aircraft) are served by a highly fragmented group of companies, including many of the OEMs. The aviation industry has been consolidating at an increasing pace in recent years, and it is expected that such consolidation will continue for the foreseeable future. 26 The market for commercial aircraft designed to carry 100 or more passengers is served principally by Boeing and Airbus. The market for commercial aircraft designed to carry fewer than 100 passengers is served by more than a half dozen other manufacturers. The major systems installed on new commercial and military aircraft, such as flight deck avionics systems, are produced by a limited number of OEMs, including Allied Signal, Rockwell Collins, General Electric, Honeywell, Raytheon and Sextant Avionique. Components and sub-systems for new aircraft are provided by a much more fragmented group of smaller, specialized companies such as the Company. The Company markets its commercial aircraft products directly to the aircraft OEMs as well as to the major systems OEMs. In some cases, the Company sells its products under private label agreements with certain component manufacturers. The Company believes that there are numerous barriers to entry which limit access to the aircraft industry. These barriers include: (i) general FAA certification requirements, including those necessary to perform aircraft modifications or maintenance; (ii) required compliance with military specifications for certain products sold to commercial and military markets; (iii) required compliance with qualification and approval standards imposed by aircraft and avionics systems OEMs in addition to FAA aircraft manufacturing and aircraft modification design and installation standards; (iv) reluctance of OEMs to list new companies as approved vendors on the engineering drawings of the OEMs (referred to as "print position"); and (v) significant initial capital investment and tooling requirements necessary for the manufacture of certain aircraft components and systems. The Company believes the following trends are affecting the commercial and corporate aircraft industry: INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The Boeing Report cites that over the next decade, the world jetliner fleet is projected to grow from 11,500 aircraft at the end of 1996 to nearly 17,000 aircraft in 2006 and to 23,600 by 2016; and the report estimates that, over the next 20 years, the industry will require 16,160 new aircraft both to support the projected world fleet expansion and to replace capacity lost as aircraft are removed from commercial airline service. According to aircraft delivery schedules revised in January 1998, combined annual deliveries from Boeing (including the former McDonnell Douglas) and Airbus Industries are projected to increase from 397 aircraft in 1996 and 557 in 1997 to an estimated 785 in 1998. The Company believes that every commercial aircraft currently produced by Boeing and Airbus contains components manufactured by it. The Boeing report notes that the pent-up demand for replacement aircraft, and upcoming deadlines for noise abatement, which may take some older aircraft out of service, will require carriers to add capacity in order to keep pace with traffic growth. INCREASED DEMAND FOR NEW CORPORATE JET AIRCRAFT. According to the ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new corporate jet aircraft are expected to be delivered from 1997 through 2001, a 61% increase over the previous five year period. The Company believes that the increase in new corporate jet aircraft production is being driven by a number of factors, including: (i) the introduction of new, larger and more efficient aircraft; (ii) the growing popularity of fractional aircraft ownership; (iii) the minimal availability of used aircraft; (iv) the need for long range flights to expanding international markets; and (v) the increased demand for more expedient travel. INDUSTRY CONSOLIDATION - REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. In order to reduce purchasing costs and have greater control over quality, OEMs and aircraft operators have been reducing the number of vendors and suppliers from whom they purchase. Suppliers and vendors must now possess the critical mass and production and distribution capabilities required to provide a broader range of products and services to airlines and OEMs on a just-in-time basis. These requirements, coupled with the high level of fragmentation within the aerospace industry, have led many companies to realize significant internal synergies and external marketing benefits from merging. 27 INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has been an increase in demand for cabin avionics systems, including in-flight passenger telecommunications systems and in-flight entertainment systems, such as video, video-on-demand and other interactive systems. The Company believes that the increase in new corporate jet production is being driven by numerous factors, including: (i) the introduction of new, larger and more efficient aircraft; (ii) the growing popularity of fractional aircraft ownership; (iii) the minimal availability of used aircraft; (iv) the need for long range flights to expanding international markets; (v) the increased demand for more expedient travel. PROLIFERATION OF NEW SAFETY REQUIREMENTS. The advent of new technologies and FAA mandates are driving a proliferation of new safety systems for airplanes. The world's airlines, aircraft and avionics OEMs and regulatory agencies have coordinated to develop industry standards, regulations and system requirements for future air navigation systems ("FANS"). Through the implementation of FANS, a complete modernization of both airborne and ground-based air traffic management systems is expected to be introduced. As overall navigation system accuracy is improved, new navigation systems, such as GPS, will be required. Other new technologies which have already been mandated include the traffic collision avoidance system ("TCAS"), 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, a predictive windshear detection system and enhanced digital flight data recorders. Each of these systems presents aircraft avionics retrofit opportunities to the Company. DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to reduce operating and capital costs associated with providing services. In response, airlines have increased purchases of certain components from third parties and have outsourced certain repair, overhaul and retrofit functions. Similarly, aircraft and avionics OEMs increasingly are reducing their level of vertical integration by outsourcing more manufacturing, repair and retrofit functions to third parties. The Company believes that these trends are creating increased demand for low-cost, high-quality component manufacturers and systems integrators, such as the Company. COMPETITIVE STRENGTHS The Company believes that it is well-positioned to take advantage of the current trends and expected growth in the commercial and high-end corporate jet aircraft industry as a result of the following competitive strengths: LEADING POSITIONS IN NICHE MARKETS. The Company successfully has established strong positions in several specialized niches within the commercial aircraft industry. The Company believes that it is the largest supplier of bulk contacts to the commercial aircraft OEMs. The Company also believes it is the largest supplier of dichroic LCD devices for use by commercial aircraft OEMs and a major supplier of harness assemblies for use in in-flight entertainment systems. The Company believes it is the largest provider of premium, customized aircraft entertainment and cabin management products and systems for the high-end corporate jet market. The Company seeks to utilize its strong market positions to compete more effectively as well as to capitalize on industry consolidation trends. RECORD OF SUCCESSFUL ACQUISITIONS. Since its formation in 1989, the Company has completed nine acquisitions of businesses or assets, including, in 1997, the acquisition of Audio and, in 1996, the acquisitions of ADS and Elsinore and the purchase of the AMP Facility. The Company has demonstrated its ability to: (i) identify strategic acquisition targets; (ii) complete the acquisitions of identified targets; (iii) retain key management; and (iv) increase revenues of an acquired company, often while refocusing that company's business strategy. The Company believes that its acquisition success has resulted from its ability to identify and screen acquisition candidates, implement an effective cost reduction program and expand and diversify the products and services provided by an acquired company. In the past, acquisitions by the Company have resulted in increased indebtedness and interest expense which has caused 28 the Company to incur net losses in each year since its inception despite positive operating income. See "Risk Factors--Risks Associated with Acquisitions." ALIGNMENT WITH LEADING AVIONICS AND AIRCRAFT OEMS AND SUPPLIERS. The Company seeks to maximize its growth by establishing long-term relationships with leaders in the Company's primary markets. For example, the Company has entered into supply agreements with Boeing. The Company believes that through these agreements it is the supplier of a substantial majority of the bulk contacts for all aircraft currently manufactured by Boeing and the sole source supplier of certain connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft. The Company is also: (i) a preferred supplier of harness assemblies to Matsushita for its in-flight entertainment systems; (ii) a preferred systems integrator for the fire suppression and smoke detection systems of Securaplane and Kidde Safety; (iii) a preferred systems integrator for Canadian Marconi Co. and Smiths Industries plc in navigation systems; and (iv) a preferred systems integrator for Honeywell's GPS systems. LOW-COST, HIGH-QUALITY OPERATIONS. The Company believes that it has established low-cost operations through well-defined cost reduction programs, technological development and the use of vertical integration, where appropriate. The Company's low-cost operations are demonstrated, for example, by the growth of the Company's contact private labeling programs under which the Company supplies contacts to many of its competitors. The Company uses sophisticated procedures and processes to ensure its products meet or exceed industry and customer quality requirements. Many customers formally have recognized the effectiveness of the Company's quality programs by issuing quality approval letters, awarding quality compliance certificates and authorizing the Company's inspection personnel to act as the authorized quality representative of the customer. For example, in February 1996, the Company became the 13th Boeing supplier to receive its D1-9000 Advanced Quality System award, and two of the Company's facilities are currently ISO-9001 or ISO-9002 certified. ENGINEERING AND RELATED TECHNICAL CAPACITY INCLUDING INDUSTRY AND REGULATORY CERTIFICATIONS. The Company believes that it is one of a few companies with the capability to perform full-service systems integration functions (design and engineering, FAA certification, installation kit manufacturing and installation of cabin avionics and flight deck avionics systems on aircraft). The Company employs FAA-certified airframe and power-plant mechanics who are authorized to perform certain aircraft modification functions, and approximately 12% of the Company's employees are engineering professionals. This level of expertise enables the Company to respond rapidly and effectively to the technical requirements of its customers as well as to capitalize on the outsourcing trends in its industry. The Company's subsidiaries hold numerous PMA authorizations from the FAA, permitting them to manufacture and sell various parts in many different aircraft; three FAA domestic repair station certificates, authorizing them to perform certain aircraft modifications; and one of only 26 DASs worldwide which are authorized by the FAA to provide approval of certain aircraft modifications as the FAA's designee certificates (all as of December 31, 1997). The FAA approvals obtained by the Company's subsidiaries are owned, and may only be used by, the subsidiary obtaining such approval. MANAGEMENT DEPTH AND EXPERIENCE. The Company has assembled a team of executives, program managers and engineers from many of the major manufacturers and suppliers to the aircraft industry. Key management and professional employees of the Company bring experience with them from such companies as The B.F. Goodrich Co. ("B.F. Goodrich"), BE Aerospace, Inc., COMSAT Corp., Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc., Matsushita and McDonnell Douglas, providing the Company with broad commercial aircraft industry expertise. On average, the Company's executive management has approximately 18 years of related industry experience. 29 GROWTH STRATEGY The Company's principal strategy is to establish and expand leading positions in high-margin, niche markets within the commercial aircraft and high-end corporate jet industry, with a focus on the manufacture of avionics components and the integration of avionics systems. The Company seeks to achieve these leading positions while maintaining a balance of revenues among the OEM market, the retrofit market and the aftermarket. The Company believes that such a strategy will position it for growth over an entire aircraft industry economic cycle. Specifically, the Company seeks to: COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage its core competencies in existing and additional markets, and add new expertise in the avionics and systems integration fields, by identifying and pursuing complementary acquisitions that offer strategic value, such as economies of scale, product line extensions, new customer relationships or increased manufacturing capacity. While there can be no assurance that the Company will complete additional acquisitions, the Company believes that the fragmented nature of the market for aircraft components and systems integration services will provide the Company with additional opportunities to exploit industry consolidation trends. See "Risk Factors--Risks Associated with Acquisitions." CAPITALIZE ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN AVIONICS. The Company believes its strong market positions and alignment with many of the leading commercial aircraft industry participants will enable it to capitalize on the projected increases in the production of commercial and high-end corporate aircraft. For example, the Company believes that every aircraft currently produced by Boeing (including McDonnell Douglas) and Airbus includes components manufactured by the Company. The Company also believes that its products are on each model of high-end corporate jet aircraft sold today. The Company works closely with OEMs and modification centers to meet their delivery and scheduling requirements, and, in some cases, to provide total, turnkey solutions to new aircraft. Additionally, the Company believes that the demand for cabin avionics systems is increasing, primarily as a result of: (i) a desire by airlines for additional revenue-producing services; (ii) longer flights; and (iii) increased passenger demand for more sophisticated forms of in-flight services. The Company believes that this increased demand represents a significant retrofit and aftermarket opportunity for cabin avionics systems, as well as the components (such as contacts, connectors and harness assemblies) and systems integration and installation services necessary to such systems. EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the Company's systems integration services have been concentrated in the in-flight passenger telecommunications market. In 1995, the Company commenced an effort to diversify the types of systems which it retrofits onto aircraft by expanding its expertise and sales efforts to include navigation and satellite communication, safety, and in-flight entertainment systems. As of December 31, 1997, the Company had contracted to provide systems integration services for GPS (Continental Airlines through Honeywell and KLM Royal Dutch Airlines through Canadian Marconi and Smiths Industries plc), smoke detection/fire suppression safety systems (Southwest Airlines through Securaplane and Northwest Airlines through Kidde Safety) and in-flight entertainment systems (Swissair through IFT). In the Company's area of systems integration, it believes that it is the only company which has in-house capabilities in each of the four elements of systems integration (design and engineering, certification, installation kit manufacturing and system installation). CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the Company's products and services are utilized to provide an interface between an aircraft and its avionics systems. Over the past several years, the Company increasingly has combined certain of the components which it manufactures in order to create higher value-added products, and develop further market opportunities through cross-selling and vertical integration of its products. For example, the contacts manufactured by the Company often are utilized as an integral component of the Company's connectors. In turn, the connectors manufactured by the Company often are utilized as primary components of the Company's harness assemblies. Additionally, in support of the systems integration services provided by the Company, the 30 Company's harness assemblies often are packaged with its avionics support structures to form the foundation for the installation kits which are then sold to the Company's systems integration customers. By emphasizing the complementary nature of its products and services, the Company seeks to maximize penetration with existing customers and compete more effectively for new customers. PRODUCTS AND SERVICES The Company's principal products and services are: contacts; connectors; harness assemblies; avionics support structures; dichroic LCD devices; entertainment and cabin management products; and the integration of certain cabin and flight deck avionics systems into different aircraft models. The Company believes that its products are used in each of the commercial aircraft models currently produced by Boeing (including McDonnell Douglas models) and Airbus, the two largest commercial aircraft OEMs. In 1997, sales of five classes of product or service accounted for the bulk of the Company's revenues (pro forma for the acquisition of Audio): contacts (approximately 30%), connectors (approximately 22%), systems integration (approximately 15%), dichroic LCD devices (approximately 11%), and entertainment and cabin management products (approximately 11%). No other product or service accounted for more than 10% of the Company's pro forma revenues in 1997. CONTACTS. The Company produces precision-machined contacts for use in commercial aircraft. Contacts conduct electronic signals or electricity and are installed at the terminus of a wire or an electronic or electrical device. The Company supplies contacts for use in connectors found in virtually every electronic and electrical system on the aircraft. Over the last three years the Company has successfully initiated private labeling programs whereby the Company manufactures contacts for several of the major connector manufacturers. The Company sells contacts directly to aircraft and avionics OEMs and, through its private labeling programs, to connector manufacturers who sell connectors to the aircraft and avionics OEMs under their brand name. The Company believes that it is able to sell contacts on a private label basis because of its reputation for high quality, its levels of service and its low-cost manufacturing operations. The Company believes that it is the supplier of a substantial majority of the bulk contact requirements for all aircraft currently manufactured by Boeing. CONNECTORS. The Company manufactures and sells to the commercial aircraft industry electronic and electrical connectors, which provide the electronic or electrical link between discrete wires and devices. Connectors also serve as a separable interface that facilitates assembly, installation, repair and removal of wires or equipment. The Company manufactures a narrow range of electrical and electronic connectors that are designed and manufactured specifically to operate in the harsh airborne environment of an aircraft and to meet the critical performance requirements demanded by the commercial aircraft market. The Company produces connectors that are used in aircraft galleys, flight decks and control panels in the passenger cabin. The Company is the sole-source supplier of certain connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft. The Company characterizes its connectors as follows: (i) application specific-- designed and developed by the Company for a specific application, usually for a single customer; (ii) proprietary-- Company-designed connectors which are sold to the broad market for a variety of applications, often evolving over time from an application specific product; and (iii) industry standard--produced in accordance with an industry or military controlled design or specification and sold to the broad market to which the design or specification relates. Examples of the Company's application specific, proprietary and industry standard connectors are as follows: 31 APPLICATION SPECIFIC. The Company manufactures a connector used as an electrical distribution block for Boeing's 777 aircraft. Currently, this product is used solely for this application; however, in the future, it could be used in similar applications on other aircraft. PROPRIETARY. The CQ connector family is an application specific product designed by the Company for use with in-flight entertainment and cabin management systems on Boeing's 777 aircraft. INDUSTRY STANDARD. The Company sells standard connectors, built to U. S. military specification ("mil-spec") standards, which can be used in many applications without further testing or certification. HARNESS ASSEMBLIES. The Company produces harness assemblies for use in cabin avionics systems, primarily in-flight entertainment systems. A harness assembly is made from wire, which the Company buys from its vendors, and connectors, contacts and hardware, which the Company manufactures. The Company sells its harness assemblies to avionics OEMs. In addition, the Company uses harness assemblies in its systems integration activities. The Company is currently a primary supplier of harness assemblies to Matsushita, one of the largest manufacturers of in-flight entertainment systems. AVIONICS SUPPORT STRUCTURES. The Company has designed, patented and produced a wide range of avionics support structures for use on commercial aircraft. Avionics support structures are typically comprised of trays, shelving, racks, mounts, and insertion and extraction devices which are combined with other components to form the installation kit that securely holds and connects avionics equipment to the aircraft and other systems or devices such as antennae, flight instruments and power supplies. Avionics support structures are used to support and environmentally cool (using fans and air chambers) the avionics equipment, including navigation, communication and flight control equipment. Avionics support structures are generally located in the avionics bay of an aircraft and are secured to the frame of the aircraft. The Company's avionics support structures are recognized by its customers under the Box-Mount-TM- name which the Company believes is highly respected in the marketplace. The Company sells its avionics support structures to aircraft and avionics OEMs, airlines and major modification centers. In addition, these products are essential components included in the installation kits which are used in the Company's systems integration operations. DICHROIC LCD DEVICES. Through the acquisition of ADS, the Company became a leading manufacturer of dichroic LCDs and modules (which are LCDs packaged with a backlight source and direct drive electronics) used in commercial and military aircraft. The Company believes it is the primary supplier of dichroic LCD devices to aircraft and avionics OEMs and the U.S. military. The Company's dichroic LCD products, which provide output information to the flight crew, are used in a variety of flight deck applications, including flight control systems, fuel quantity indicators, airborne communications and safety systems. Dichroic LCD products are widely used in the aerospace industry because of their high performance characteristics and custom design. Key performance characteristics of dichroic LCD devices include high readability in sunlight and darkness, ability to withstand wide temperature fluctuations and readability from extreme viewing angles. During the development phase of flight deck avionics, the Company works closely with its customers to develop products that meet the customers' requirements which are subsequently incorporated into new or modified flight decks. 32 The Company also manufactures electronic clocks which utilize its dichroic LCD devices. The Company's clocks utilize its dichroic LCD technology and are suitable for use in general aviation, business, commercial and military aircraft. The Company believes that it is the only clock manufacturer which has designed a line of clocks capable of serving all types of aircraft. ENTERTAINMENT AND CABIN MANAGEMENT. Through its recent acquisition of Audio, the Company became a leading supplier of aircraft entertainment and cabin management product and systems to the high-end corporate jet market. Audio brings to the Company additional expertise in: (i) cabin management systems including switching and control modules; (ii) audio and video components; and (iii) systems engineering and the integration of cabin management electronics. The Company provides stereo systems, video monitors, amplifiers chimes and paging devices, headphone systems and passenger switch and cabin lighting and climate controls. The Company sells its entertainment and cabin management products and systems to corporate jet OEMs and major modification centers. SYSTEMS INTEGRATION. The Company performs all of the functions necessary to retrofit an existing aircraft with an avionics system that previously did not exist on the aircraft, or replace an existing system with an updated one. As a full-service systems integrator, the Company provides design and engineering, FAA certification, installation kit manufacturing and systems installation services required to retrofit an aircraft with a new system. A summary of these functions follows: DESIGN AND ENGINEERING. The Company provides a full range of systems, electrical and mechanical engineering services to its customers through its staff of qualified and experienced engineers and program management personnel. The Company's engineers work proactively with its customers in all phases of the systems integration effort to achieve an engineering design data package. This engineering design data package provides information to: (i) certify product compliance with applicable industry and FAA standards and regulations; (ii) define the manufacturing requirements for kit implementation; and (iii) provide installation definition for actual installation of the system onto aircraft. FAA CERTIFICATION. The Company employs on a full-time basis or contracts for FAA-certified Designated Engineering Representatives ("DERs") to evaluate the engineering design data package, coordinate compliance testing to applicable FAA regulations and obtain formal FAA approval of the engineering design data package. These DERs facilitate FAA approval of the Company's products and services. In general, DERs evaluate the design of an aircraft modification, part or system, ensure compliance with the applicable Federal Aviation Regulations and oversee product testing to ensure the airworthiness of the aircraft as modified. DERs also either issue, on behalf of the FAA, certain approvals, or work with the FAA to obtain certain approvals directly from the FAA. Significant aircraft modifications by anyone other than the aircraft manufacturer require the issuance of an STC, which constitutes an FAA determination that the design of the modification meets all pertinent FAA requirements. STCs may be issued directly by the FAA or on behalf of the FAA by an approved DAS. The acquisition of Elsinore and its DAS approval enables the Company to issue STCs for certain modifications without applying directly to the FAA for such certifications. INSTALLATION KIT MANUFACTURING. The Company ordinarily applies for and receives multi-aircraft STCs which constitute design approval for a modification which may be applied to any aircraft of a particular type. The approved modifications commonly are referred to as "installation kits." Such installation kits generally include: (i) parts, components, and sub-assemblies; and (ii) detailed instructions on approved installation. The installation kit and all of its elements are defined in the STC in a Master Data List. Once the Company has an STC, issued directly by the FAA or by the 33 Company's DAS through Elsinore, the Company applies to the FAA for a PMA or a supplement to an existing PMA, which allows the Company to manufacture the installation kit in accordance with the approved design and data package. SYSTEMS INSTALLATION. The Company employs a dedicated team of FAA-certified mechanics and repairmen to ensure proper installation of the installation kits and associated avionics systems. These mechanics and repairmen, who have extensive installation experience over a broad range of commercial aircraft models, operate within the provisions and limitations of the FAA repair station certificates which cover the Company's three repair stations. The Company believes that its staff of kit installation personnel is sufficiently large and diverse in talent to complete multiple installation projects simultaneously at different locations. During 1997 and currently, the Company has focused its systems integration efforts on the following three general categories of systems: (i) in-flight entertainment systems; (ii) safety systems; and (iii) GPS and navigation systems. The Company has targeted these three areas because it believes significant retrofit opportunities exist due to the advent of new technologies and the need for the airlines to: (i) capture incremental revenues without increased capital investment (in-flight entertainment); (ii) satisfy increased safety and regulatory requirements; and (iii) reduce operating expenses (navigation). A summary of recent Company activity in each of these categories follows: IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is a preferred components supplier to Cathay Pacific Airlines (through Matsushita), as well as a supplier of kits to United Airlines (through BE Aerospace, Inc.). Each of these companies have designed digital interactive passenger entertainment systems which provide video-on-demand, video games and other electronic gaming. SAFETY SYSTEMS. The Company is an integrator of safety systems which are required by the FAA, or voluntarily adopted by airlines. The Company was recently selected to integrate smoke detection and suppression systems for Kidde Safety and Securaplane on aircraft for Northwest Airlines and Southwest Airlines, respectively. The Company believes significant opportunity exists for the integration of these types of safety systems onto aircraft worldwide, and will continue to grow as additional safety requirements and industry practices are mandated, such as enhanced digital flight data recorders and ground proximity warning systems. GPS AND NAVIGATION SYSTEMS. The Company has entered into agreements to provide systems integration services for GPS on thirteen 747-200/300 aircraft and one MD-82 aircraft. The Company believes that GPS and similar systems (consistent with the FANS initiative) will be retrofitted into numerous aircraft over the next few years. In many cases, the airlines are electing to replace older navigation systems with newer GPS technology due to avionics obsolescence and significantly increased maintenance costs. In December 1997, the Company signed a memorandum of understanding with Honeywell whereby it will become Honeywell's preferred systems integrator for GPS. INDUSTRY REGULATION AND APPROVALS The aviation industry is highly regulated in the U.S. by the FAA and is regulated in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. The Company and its customers are subject to these regulations. In addition, many of these customers impose their own compliance and quality requirements on the Company. The FAA prescribes standards and licensing requirements for aircraft components, licenses private repair stations and issues DAS approval, which gives the holder the right to certify the design of aircraft modifications on behalf of the FAA. As a result of the FAA's oversight of the Company, the FAA can authorize or deny authorization of many of the services and products provided by the Company. Any FAA denial of such required authorizations would preclude the ability of the Company to provide the pertinent service or product. Should the Company fail to comply with the applicable FAA standards or 34 regulations, the FAA would have available to it a wide-range of enforcement options. Such enforcement options include: (i) issuance of a warning letter or a letter of correction to the Company; (ii) initiation of a civil penalty action against the Company; (iii) suspension or emergency suspension of a Company certificate or approval; or (iv) the revocation or emergency revocation of a Company certificate or approval. In July of 1997, the FAA notified the Company that its facilities did not fully comply with certain regulations governing its DAS status, granted the Company until September 10, 1997 to bring the facilities into full compliance, and curtailed the operations of the relevant facilities as a DAS until they achieved full compliance. On August 28, 1997 the FAA inspected the Company's facilities and determined they were in full compliance. The Company's DAS approval status was fully restored on 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 in support of its enforcement powers. In the event the FAA were to suspend or revoke a Company certificate or approval on an emergency basis, the Company would be obliged to cease immediately the manufacture of products and the delivery of services which require such certificate or approval. In the event the FAA were to suspend or revoke a Company certificate or approval on other than an emergency basis, the Company would be permitted to continue the manufacture of products and the delivery of services which require such certificate or approval pending any available appeals. However, if the FAA were to prevail in any such appeal, upon the completion of the appeal process the Company would be obliged to cease the manufacture of such products and the delivery of such services. In addition, in the event the FAA were to determine that the Company's noncompliance with the applicable FAA standards or regulations created a safety hazard, the FAA could order that the pertinent component or aircraft immediately cease to be operated until appropriate corrective action is taken. This could require the grounding of aircraft and/or the removal of affected components from aircraft already returned to service. The Company's FAA approvals are owned, and may only be used by, the subsidiary obtaining such approval. All aircraft operated by airlines in the United States must be of a type which has received an FAA type certificate ("TC"). A TC is issued by the FAA after the FAA determines that the aircraft type design meets the applicable FAA airworthiness standards. After a type design has been approved through the issuance of a TC by the FAA, a manufacturer with rights to the TC can apply for FAA approval to produce the aircraft. This approval is a "production certificate." Any major change in design of a type certificated aircraft which is not significant enough to require a new application for a TC under the FAA's rules must still be approved by the FAA. FAA approval of such a design change developed by an entity other than the TC holder is issued under an STC. There are two types of STCs: a "single-aircraft" STC, which may be applied to a single aircraft, and a "multi-aircraft" STC, which may be applied to all aircraft of a particular type design, for example, all Boeing 747-400s. As of December 31, 1997, the Company had obtained 94 STCs, most of which were obtained on behalf of its customers in connection with the Company's systems integration services, and substantially all of which are multi-aircraft STCs. The Company foresees the need to obtain additional STCs so that it can expand the services it provides and the customers it serves. Proposed aircraft modifications can be tested and approved and STCs issued directly by the FAA or on behalf of the FAA by holders of DAS approvals. DAS approvals are granted to domestic repair stations, air carriers, commercial operators of large aircraft, and manufacturers which demonstrate their ability to provide the personnel and follow specific procedures to ensure the issuance of STCs only for appropriate design modifications. Each DAS approval holder is specifically limited by the FAA as to the type of STCs which it can issue. The Company, which holds a DAS approval through Elsinore, can now issue many of the STCs (both single and multi-aircraft) it requires in connection with its systems integration operations. 35 This has eliminated the need for the Company, in most instances, to apply to the FAA for STC approvals, enabling the Company to obtain STCs more quickly than in the past. After obtaining an STC, the Company must apply for a PMA or a PMA supplement to produce the modification installation kit covered by the STC. The Company has four PMAs and 69 supplements to its PMAs (as of December 31, 1997). Each initial PMA is, in general, an approval of the manufacturing or modification facility's production quality control system. Each supplement authorizes the manufacture of a particular part in accordance with the requirements of the corresponding STC. The Company routinely applies for and receives PMA supplements. The Company also is required to have FAA authority to perform the installation of a modification kit. This authority is provided either by the Company's PMAs and supplements or its repair station certificates. In order for a company to perform certain repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. The Company has three such repair stations. In addition to FAA approval of the design, production, and installation of modifications, the FAA certifies personnel. Selected Company personnel have been certified by the FAA to perform certain tasks related to the design, production, and performance of aircraft modifications. Such certified personnel include mechanics and repairmen. In addition, the FAA delegates some of its oversight responsibilities, such as testing and inspection responsibilities, to FAA-certified designees. The Company employs FAA designees on a full-time basis to facilitate FAA approval and oversight of the Company's activities. In addition, the Company contracts with additional FAA designees as they are needed. Mil-specs are frequently used by both military and commercial customers in the aerospace industry to define and control characteristics of a product. Through the use of a government Qualified Parts List ("QPL") and Qualified Vendor's List ("QVL"), the customer is assured that a product or service has met all of the requirements set forth in the mil-specs. Parts listed with a QPL allow others to reliably design parts to interface with such parts as a result of the mil-spec standards used. The Company believes that it holds more QPLs for its contact product line than any other manufacturer. SALES AND MARKETING The Company's commercial aircraft products are sold through a group of geographically assigned direct sales personnel and agents. Technical product sales support for these sales personnel is provided through product line managers and the Company's product engineering personnel. Customer service communication is provided by geographically assigned sales correspondents located in the Company's manufacturing facilities. The Company may also assign responsibility for marketing, sales and/or services for certain key customers to one of the Company's executives. The Company has four authorized distributors who purchase, stock and resell certain of the Company's product lines. The Company's systems integration services are sold by sales managers employed by the Company who are assigned to geographic territories. Because of the significant amount of technical engineering work required in the sales process, these sales managers are generally assisted by a support team which includes program management, installation and engineering personnel. The support team specializes in one of: (i) in-flight entertainment; (ii) safety systems; and (iii) GPS and navigation. At such time as the Company obtains a contract for the system proposed by the sales manager, the support teams continue to manage the project throughout the entire integration process. CUSTOMERS In 1997, the Company sold its products and services to approximately 1,300 customers. The Company's primary customers include aircraft and avionics OEMs, airlines, aircraft component manufacturers and distributors, and aircraft repair and modification companies. The Company's two largest customers for the fiscal year ended December 31, 1997 were Boeing and Matsushita, which accounted for approximately 19.0% and 11.1%, respectively, of the Company's consolidated revenues. In addition, a 36 significant portion of the Company's sales of components are sold to Boeing indirectly through sales to suppliers of Boeing. Historically, the Company's systems integration operations have been affected by the timing and magnitude of program awards, at times resulting in quarterly and yearly fluctuations in revenue and earnings, such as the one-time growth created by the 1997 contract to provide systems integration services for IFT's in-flight entertainment system on 19 wide-body aircraft for Swissair. That program has been substantially completed (in 16 of the 19 aircraft) as of December 31, 1997, and no follow-on contracts have been booked with IFT. However, the Company believes that it has lessened its exposure to such fluctuations by developing capabilities in multiple major systems integration areas: in-flight entertainment systems, safety systems, and GPS and other navigation systems. The Company has secured orders for integration services in each of these targeted areas. The Company believes that in 1998 it will more than significantly offset the reduction in revenues related to the IFT business with system integration services for in-flight entertainment systems for United Airlines (through BE Aerospace, Inc.) and fire suppression and detection services for Southwest Airlines (through Securaplane), Northwest Airlines (through Kidde Safety) and American Airlines (through B.F. Goodrich/Whitaker), as well as a cabin pressurization system for Northwest Airlines and Air Canada (through the Hamilton Standard division of United Technologies, Inc. ("Hamilton Standard")). The Company believes that potential retrofit opportunities exist for the cabin pressurization system with other operators of DC9-30 and DC9-50 series aircraft. The timing and magnitude of program awards for systems integration services may make other customers significant sources of nonrecurring income in a single year. However, the Company believes that it will continue to be able to significantly offset such year-to-year fluctuations with new contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--General." Most of the Company's sales to Boeing are pursuant to contracts which may be terminated by Boeing at any time. One contract provides that: (i) if the Company reduces its prices or lead times of like quantity of comparable items to customers other than Boeing, then the Company must sell on the same terms to Boeing; and (ii) if other Boeing suppliers offer to sell to Boeing products comparable to those of the Company at prices more than 5% lower than the prices specified in such contract, the Company must either similarly reduce its prices or permit Boeing to delete the affected products from the contract. Another contract provides that Boeing is not obligated to order any products covered by the agreement if: (i) Boeing's customers specify an alternate product; (ii) the product in Boeing's judgement is not technologically competitive at the time; (iii) Boeing changes the design of an aircraft such that the Company's products are no longer required for such aircraft; or (iv) Boeing reasonably determines that the Company cannot support Boeing's requirements for products in the amounts and within the delivery schedules Boeing requires. The Company's contracts with Boeing grant Boeing an irrevocable non-exclusive worldwide license to use the Company's patents, designs, trade secrets, semiconductor mask works and tooling related to the development, production and maintenance or repair of products sold to Boeing upon the occurrence of certain events, including: (i) the acquisition by or transfer to a third party of any of the Company's rights to manufacture products for Boeing; (ii) upon various defaults by the Company; and (iii) the bankruptcy of the Company. The Company generally sells components and services to Matsushita pursuant to purchase orders, but does not have any supply contracts with either company. MANUFACTURING AND QUALITY CONTROL The Company manufactures contacts, connectors, harness assemblies, dichroic LCD devices and avionics support structures. Many of these products involve similar manufacturing processes which have become core competencies of the Company. The Company manufactures these products using process-specific equipment and procedures that have been custom-designed or fabricated to provide high-quality products at the lowest possible cost to the Company. The Company is vertically integrated from concept 37 and design through final assembly, testing and certification for these production processes. The Company believes this vertical integration is critical to assuring product performance, customer service and competitive pricing. The Company has implemented programs to reduce costs, including overhead expenses, and maximize return on capital. In some cases these programs have involved the use of proprietary equipment or processes which have enabled the Company to reduce costs while maintaining high quality levels. For example, the Company uses a proprietary selective plating process which allows the Company to minimize the usage of gold when plating contacts. The Company has enhanced and expanded the use of this process, as well as other plating processes. Certain of the Company's customers have developed their own design, product performance, manufacturing process and quality system standards and require their suppliers, including the Company, to comply with such standards. As a result, the Company has developed and implemented comprehensive quality system policies and procedures which meet or exceed the requirements of its customers. Many of the Company's customers have recognized formally the effectiveness of the Company's quality programs by issuing quality approval letters and awarding quality compliance certificates. In addition, certain customers have authorized the Company's inspection personnel to act as the authorized quality representative of the customer. This authorization enables the Company to ship directly into the inventory stockrooms of these customers, eliminating the need for receiving inspection activities by these customers. The Company uses sophisticated equipment and procedures to ensure the quality of its products and to comply with mil-specs and FAA certification requirements. The Company performs 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 the Company's manufacturing facilities. RAW MATERIALS AND COMPONENT PARTS The components which the Company manufactures require the use of various raw materials including gold, aluminum, copper, rhodium, plating chemicals and plastics, the availability and prices of which may fluctuate. The price of raw materials represents a significant portion of the sales price of many of the Company's products. Although some of the Company's contracts have prices tied to the price of raw materials, increases in raw materials prices cannot always be recovered in product sale prices. The Company also purchases 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 the Company's ability to obtain necessary raw materials and component parts may affect its ability to meet customer production needs. PATENTS AND PROPRIETARY INFORMATION The Company has various trade secrets, proprietary information, trademarks, trade names, patents, copyrights and other intellectual property rights which the Company believes, in the aggregate (but not individually), are important to its business. COMPETITION The Company competes with a number of established companies that have significantly greater financial, technological and marketing resources than the Company. The Company believes that its ability to compete depends on high product performance, short lead-time and timely delivery, competitive price, and superior customer service and support. 38 The niche markets within the aircraft industry served by the Company are relatively fragmented with several competitors for each of the products and services provided by the Company. Due to the global nature of the commercial airline industry, competition in these categories comes from both U.S. and foreign companies. However, the Company knows of no single competitor that provides the same range of products and services as those provided by the Company. The Company's principal competitors in contacts and connectors are large and diversified corporations which produce a broad range of products. The Company's principal competitor in the contact market is Deutch Engineered Connecting Devices, a division of the Deutch Co. In the connector market, the Company's principal competitors include ITT Canon (a division of ITT Corporation), AMP and Radiall S.A. Several of these companies are also customers of the Company. The Company's principal competitors for avionics support structures include smaller companies such as Barry Controls, Inc., Electronic Cable Specialists ("ECS") and Vibrachoc, a subsidiary of Compagnie Generale d'Electricite. The main competitor for dichroic LCD devices is Cristalloid, Inc. The main competitors for entertainment and cabin management products and systems for corporate jet aircraft are Pacific Systems Corporation, Baker Electronics and DPI Labs. Competitors which provide portions of systems integration services include ECS, the engineering departments of certain airlines and numerous independent airframe maintenance and modification companies. BACKLOG Bookings increased $30.1 million, or 36.7%, to $112.1 million for 1997 compared to $81.9 for 1996. The increase in bookings for 1997 includes a net $12.3 million attributable to ADS, which was acquired in September 1996. As of December 31, 1997, the Company had a sales order backlog of $48.2 million, including $2.4 million for Audio, which was acquired on November 14, 1997 compared to $44.4 million as of December 31, 1996. Approximately 7.0% of the purchase orders outstanding as of December 31, 1997 are scheduled for delivery for 1999 and beyond. Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. Accordingly, the Company's backlog at December 31, 1997 is not necessarily indicative of actual shipments or sales for any future period, and period-to-period comparisons may not be meaningful. EMPLOYEES As of December 31, 1997, the Company had 1,243 employees (including 144 temporary employees), of whom 146 were in engineering (including 17 temporary employees), 39 were in sales, 933 were in manufacturing operations (including 118 temporary employees) and 125 were in finance and administration (including 9 temporary employees). None of the Company's employees are subject to a collective bargaining agreement, and the Company has not experienced any material business interruption as a result of labor disputes since it was formed. The Company believes that it has a good relationship with its employees. 39 FACILITIES The Company leases most of its facilities, with lease terms ranging from one to nine years, as reflected in the following table.
APPROXIMATE SQUARE LEASE LOCATION DESCRIPTION FOOTAGE EXPIRATION - ---------------------------------------- -------------------------------------------- ------------- ----------- El Segundo, CA Manufacturing and engineering facility 81,300 2005 Garden Grove, CA Manufacturing and engineering facility 58,300 2004 Hatfield, PA Manufacturing and engineering facility 27,500 1999 Lugano, Switzerland Manufacturing facility 21,000 2001 Irvine, CA Manufacturing facility 16,400 1999 Wiltshire, United Kingdom Manufacturing facility 5,700 1998 El Segundo, CA Executive offices 5,000 2007 Santa Barbara, CA Engineering facility 3,500 2000 Seattle, WA Engineering facility 3,200 1999 Santa Ana, CA Engineering facility 1,300 1999
Additionally, the Company owns an 18,000 square foot manufacturing and engineering facility in North Little Rock, Arkansas. The Company believes its properties are in good condition and are adequate to support its operations for the foreseeable future. ENVIRONMENTAL MATTERS The Company is subject to various federal, state, local, and foreign environmental requirements, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, certain environmental laws, such as CERCLA and similar state laws, impose strict, retroactive, and joint and several liability upon persons responsible for releases or potential releases of hazardous substances. The Company has 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. The Company has received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency as to the Company's use of certain such sites. In addition, some of the Company's operations are located on properties which are contaminated to varying degrees. However, the Company has not incurred, nor does it expect to incur, significant costs to address such contamination because entities other than the Company have been held primarily responsible for such contamination, the levels of contamination are sufficiently low so as not to require remediation or the Company is indemnified against such costs. In most cases the Company does not believe that its liability for past waste disposal is material. However, in a limited number of cases the Company does not have sufficient information to assess its potential liability, if any. It is possible, given the retroactive nature of CERCLA liability, that the Company will from time to time receive additional notices of potential liability, relating to current or former activities. The Company has been and is in substantial compliance with environmental requirements and believes it has no liabilities under environmental requirements, except those which would not be expected to have a material adverse effect on the Company's business, results of operations, or financial condition. However, some risk of environmental liability is inherent in the nature of the Company's business and the Company might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental requirements. See "Risk Factors-- Environmental Regulation" and "Business--Legal Proceedings." 40 LEGAL PROCEEDINGS The Company's manufacturing facility in El Segundo, California, has received several notices of violation related to its wastewater discharge permit. The Company has taken various corrective measures. However, the Company continues to experience difficulty in meeting the wastewater flow limitations contained in its discharge permit and is evaluating additional measures, including seeking modification to its permit. If the Company is not able to resolve these issues, it may be required to install new treatment equipment. However, the cost for such installation is not expected to be material, and the Company does not believe that the notices will result in any material sanctions. See "Risk Factors-- Environmental Regulation" and "Business--Environmental Matters." The Company is a party to a license agreement with McDonnell Douglas (now a part of Boeing) pursuant to which the Company may request certain data in order to design and market modifications to aircraft manufactured by McDonnell Douglas. The agreement provides that the Company will pay McDonnell Douglas a royalty of five percent of the net sales price of all modifications sold by the Company for which the Company has requested data from McDonnell Douglas. The Company has requested data for a single modification, which modification the Company believes is exempt from the obligation to pay royalties under the agreement. In 1996, McDonnell Douglas made a demand for $650,000 for royalties. The Company does not believe that it is obligated to McDonnell Douglas in any amount. However, there can be no assurance that the Company will not be required to pay royalties to McDonnell Douglas. Certain subsidiaries of the Company have recently been served in an action filed in federal court by American International Airways, Inc., relating to the conversion and modification of two Boeing 747 aircraft from passenger to freighter configuration. No specific amount of damages is sought. The events in question occurred prior to the Company's purchase of the relevant businesses from its prior owner; the Company intends to deny any liability, and further believes that it is indemnified with respect to any such liabilities. 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information regarding the directors and executive officers of the Company as of December 31, 1997:
NAME AGE POSITION - ------------------------------------------------ ----------- ---------------------------------------------------------- R. Jack DeCrane 51 Chairman of the Board and Chief Executive Officer R. G. MacDonald 67 Vice Chairman of the Board Robert A. Rankin 45 Chief Financial Officer, Secretary and Treasurer Roger L. Keller 53 Group Vice President of Systems Charles H. Becker 51 Group Vice President of Components James R. Bergman (a) 55 Director Paul H. Cascio (b) 36 Director Jonathan A. Sweemer (a)(b) 42 Director Mitchell I. Quain 46 Director
- ------------------------ (a) Member of the Compensation Committee. (b) Member of the Audit Committee. The Company is currently evaluating other independent non-management director candidates and anticipates that the Company's independent, non-management directors will continue to represent a majority on each of the Company's Audit Committee and Compensation Committee. The Company's Board is divided into three classes. Directors of each class will be elected at the annual meeting of stockholders of the Company (the "Annual Meeting") held in the year in which the term of such class expires and will serve thereafter for three years. Mr. MacDonald and Mr. Quain serve as class I directors for a term expiring as of the Annual Meeting in 1998. Messrs. Cascio and Bergman serve as class II directors for a term expiring as of the Annual Meeting in 1999. Messrs. DeCrane and Sweemer serve as class III directors for a term expiring as of the Annual Meeting in 2000. R. Jack DeCrane is the founder of the Company and has been Chairman of the Board of Directors of the Company since it was founded in December 1989. Mr. DeCrane served as President of the Company, which office then included the duties of chief executive officer, until April 1993 when he was elected to the newly-created office of Chief Executive Officer. Prior to founding the 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. Mr. DeCrane is his own appointee to the Board under the terms of an agreement between the Company and certain of its shareholders and lenders. See "Certain Transactions Shareholders Agreement." R. G. MacDonald has been Vice Chairman of the Company since December 1996. Mr. MacDonald has been a member of the Board since December 1994, and was President of the Company from April 1993 until December 1996. The office of President of the Company included the duties of chief operating officer. Mr. MacDonald was a consultant to the Company from February 1993 to April 1993. Prior to joining the Company, he served as President and Chief Executive Officer of MDB Systems, Inc., a manufacturer of ruggedized computer disk systems, from 1990 to 1993. Robert A. Rankin has been Chief Financial Officer, Secretary and Treasurer of the Company since November 1993. Mr. Rankin joined the Company in 1992 as Senior Vice President of Tri-Star, which office then included the duties of chief financial officer of the Company. Prior to joining the Company, he was Vice President of Finance for the Chandler Evans Control Systems subsidiary of Coltec Industries, Inc., an 42 aerospace company, from 1990 to 1992. He was employed by the aerospace division of B.F. Goodrich from 1977 to 1989 in various capacities, the most recent of which was as Controller of the aircraft wheel and brake business unit of B.F. Goodrich. Roger L. Keller has been Group Vice President of Systems of the Company since December 1996. Mr. Keller has also served as President of Hollingsead since December 1995, and was employed by the Company as Vice President of Engineering, Sales and Program Management from May 1994 through November 1995. Prior to joining the Company, he was Vice President of Engineering for Active Noise and Vibration Technologies, Inc. from 1992 to 1994, and Vice President of Sales, Marketing and Program Management for the Airtransport Services division of Honeywell from 1986 to 1992. Charles H. Becker has been Group Vice President of Components of the Company since December 1996, and President of Tri-Star since December 1994. Prior to joining the Company, Mr. Becker was President of the Interconnect Systems Division of Microdot, Inc. from 1984 to 1994. James R. Bergman has been a member of the Board since October 1991. He is a founder and, since 1974, has been a general partner of DSV Associates, DSV Partners III and DSV. Mr. Bergman is DSV's appointee to the Board under the terms of an agreement between the Company and certain of its shareholders and lenders. See "Certain Transactions--Shareholders Agreement." In August 1996, Mr. Bergman became a general partner of Brantley Venture Partners III, L.P. (an affiliate of Brantley). He is also a director of Maxim Integrated Products, Inc. and Quad Systems Corporation. Paul H. Cascio has been a member of the Board since September 1996. He is a general partner of Brantley. Mr. Cascio also serves as Vice President and Secretary of Brantley Capital Corporation. Mr. Cascio is Brantley's appointee to the Board under the terms of an agreement between the Company and certain of its shareholders and lenders. See "Certain Transactions--Shareholders Agreement." From December 1987 through May 1996, when he became a general partner of Brantley Venture Partners, Mr. Cascio was a Managing Director and head of the Industrial Manufacturing and Services Group in the corporate finance department at Dean Witter Reynolds Inc. Jonathan A. Sweemer has been a member of the Board since February 1996. He has been a member of Nassau Capital Partners, L.P. (which is, collectively with NAS Partners I, L.L.C., referred to in this document as "Nassau") since January 1995. From May 1992 to December 1994, Mr. Sweemer was a Vice President for Princeton University Investment Co. Mr. Sweemer is Nassau's appointee to the Board under the terms of an agreement between the Company and certain of its shareholders and lenders. See "Certain Transactions--Shareholders Agreement." Mitchell I. Quain has been a member of the Board since May 1997. He is an Executive Vice President of and has been a member of the board of Furman Selz LLC since May 1997. From June 1975 to May 1997, he was a Managing Director of and held other positions with Schroder & Co. Inc. Mr. Quain has more than 20 years of financial and operating experience. Certain stock options have been granted to Mr. Quain, pursuant to a Board resolution providing for such options for non-management directors who do not serve pursuant to the terms of the Shareholder Agreement. See "Certain Transactions-- Independent Director." EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table describes all annual compensation awarded to, earned by or paid to the Company's Chief Executive Officer and the four-most highly compensated executive officers other than the Chief Executive Officer (collectively the "Named Executive Officers") for the fiscal year ended December 31, 1997. 43 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table describes all annual compensation awarded to, earned by or paid to the Company's Chief Executive Officer and the four-most highly compensated executive officers other than the Chief Executive Officer (collectively the "Named Executive Officers") for the fiscal year ended December 31, 1997, 1996 and 1995.
ANNUAL COMPENSATION ---------------------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS/SAR(2) PAYOUTS --------- --------- --------- ------------------- ----------- ----------------- ----------- R. Jack DeCrane 1997 $ 244,744 $ 220,000 $ -- 50,000 Chief Executive 1996 206,600 146,000 7,813 34,028 Officer and 1995 180,000 55,000 -- -- Chairman of the Board R.G. MacDonald 1997 184,859 102,000 10,536 4,000 Vice Chairman of 1996 177,437 82,000 13,200 -- the Board(4) 1995 173,607 35,000 8,292 -- Robert A. Rankin 1997 149,309 103,000 7,158 15,000 Chief Financial 1996 139,375 65,000 12,838 19,850 Officer and 1995 135,000 20,000 6,628 -- Secretary Roger L. Keller 1997 163,866 -- 1,682 10,000 President of 1996 150,000 -- 2,083 19,850 Hollingsead and 1995 121,250 7,500 -- 14,179 Group Vice President of Systems(5) Charles H. Becker 1997 174,492 102,000 6,168 15,000 President of 1996 148,750 65,000 9,103 19,850 Tri-Star and Group 1995 137,515 16,000 1,610 14,179 Vice President of Components(6) ALL OTHER COMPENSATION(3) ----------------- R. Jack DeCrane $ 29,411 Chief Executive -- Officer and -- Chairman of the Board R.G. MacDonald -- Vice Chairman of -- the Board(4) -- Robert A. Rankin -- Chief Financial 80,357 Officer and Secretary Roger L. Keller -- President of -- Hollingsead and 17,405 Group Vice President of Systems(5) Charles H. Becker 18,000 President of 30,586 Tri-Star and Group -- Vice President of Components(6)
- -------------------------- (1) Amounts paid by the Company for premiums on health, life and long-term disability insurance and automobile leases provided by the Company for the benefit of the Named Executive Officer. (2) Number of shares of Common Stock issuable upon exercise of options granted during the last fiscal year. (3) Relocation costs. (4) Mr. MacDonald served as President of the Company through December 1996. Mr. MacDonald became Vice Chairman of the Board in December 1996. (5) Mr. Keller served as President of Hollignsead through December 1996. Mr. Keller became Group Vice President of Systems in December 1996. (6) Mr. Becker served as President of Tri-Star through December 1996. Mr. Becker became Group Vice President of Components in December 1996. STOCK OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth individual grants of stock options granted to the Named Executive Officers during the fiscal year ended December 31, 1997. 44 OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES OF SECURITIES STOCK PRICE UNDERLYING % OF EXERCISE OR APPRECIATION(1) OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION -------------------------- NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10% - ------------------------------- ----------- --------------- ----------- ------------- ----------- ------------- R. Jack DeCrane................ 50,000 30.6% $ 16.75 2007 $ 526,699 $ 1,334,759 Robert A. Rankin............... 15,000 9.2% 16.75 2007 158,010 400,428 Roger L. Keller................ 10,000 6.1% 16.75 2007 105,340 266,952 Charles H. Becker.............. 15,000 9.2% 16.75 2007 158,010 400,428 Richard G. MacDonald........... 4,000 2.4% 16.75 2007 42,136 106,781
- ------------------------ (1) The potential realizable value assumes a rate of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. These assumed annual compound rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future prices of the Common Stock STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF UNEXERCISED OPTIONS The following table sets forth information about the stock options exercised by the Named Executive Officers of the Company during the fiscal year ended December 31, 1997. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN- UNDERLYING UNEXERCISED THE-MONEY OPTIONS/ SAR AT OPTIONS/SAR FY-END(1) SHARES ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------------------ --------------- ------------- ------------------------- ------------------------- R. Jack DeCrane..................... -- -- 80,819/95,370 1,329,172/655,294 Robert A. Rankin.................... -- -- 16,448/32,581 269,315/247,930 Roger L. Keller..................... -- -- 13,047/30,982 210,897/305,098 Charles H. Becker -- -- 14,180/34,849 229,559/287,686 Richard G. MacDonald................ -- -- 45,372/15,342 747,324/187,814
- ------------------------ (1) Based on the common stock share price of $16.75 per share as of December 31, 1997, the measuring date. EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS R. Jack DeCrane and the Company have entered into an employment agreement pursuant to which Mr. DeCrane is to serve as Chief Executive Officer for a term of four years, effective September 1, 1994. The agreement requires Mr. DeCrane to devote his full business time to the Company and contains a covenant not to compete with the Company for a period of 12 months following termination of the agreement. The agreement provides for various benefits including: (i) an annual salary of $180,000, which is subject to annual review and increase, but not decrease; (ii) an annual bonus ranging from 30% to 70% of Mr. DeCrane's annual base salary depending on the level of the Company's achievement of certain performance goals; and (iii) vested stock options to purchase 77,982 shares of Common Stock at an exercise price of $0.53 per share. Additionally, Mr. DeCrane is also entitled to life insurance (in an amount at least equal to $1,000,000), and health care benefits generally provided by the Company to other senior executives. The agreement also provides for various payments to Mr. DeCrane or his 45 beneficiaries in the event of his death, disability, or termination without cause. In the event of his death, Mr. DeCrane's beneficiaries would be entitled to: (i) a payment equal to Mr. DeCrane's then current salary for one year plus his remaining bonus through year-end; and (ii) continuation of certain insurance benefits for one year. Upon termination due to disability, Mr. DeCrane would be entitled to: (i) receive the sum of his then current base salary for one year plus his bonus through year end; and (ii) continuation of certain health benefits for one year. In the event of a termination without cause by the Company or Mr. DeCrane's resignation due to a material breach of the agreement by the Company or the Company's request that he resign or retire, Mr. DeCrane would be entitled to: (i) his then current base salary for one year and his remaining bonus through the end of the year of termination plus an amount equal to the amount earned in the immediately preceding year; (ii) continuation of certain health benefits for a one year period; and (iii) reimbursement of certain relocation and outplacement expenses. R. G. MacDonald and the Company entered into a letter agreement, dated June 28, 1993, pursuant to which Mr. MacDonald is to receive for an unspecified term: (i) an annual base salary of $150,000; (ii) an annual bonus ranging from 20% to 50% of his annual base salary depending on the Company's level of achievement of certain performance goals; and (iii) the Company's standard benefit package with the addition of an executive term life insurance policy in the amount of $200,000. Under the agreement, Mr. MacDonald received options to purchase 56,714 shares of the Company's Common Stock at an exercise price of $0.53 per share. Charles H. Becker and Tri-Star entered into a letter agreement, dated November 28, 1994, pursuant to which Mr. Becker is to receive for an unspecified term: (i) an annual base salary of $140,000; (ii) an annual bonus ranging from 10% to 40% of his annual base salary depending on Tri-Star's level of achievement of certain performance goals; and (iii) other benefits available under the Company's executive benefits program. Under the agreement, Mr. Becker received options to purchase 14,179 shares of the Company's Common Stock at an exercise price of $0.53 per share. SHARE INCENTIVE PLAN Under the Share Incentive Plan adopted by the Company in 1993 (the "Share Incentive Plan"), the Company may grant to its eligible employees: (i) options ("Options") to purchase shares of Common Stock; (ii) shares of Common Stock that vest upon the achievement of specified service or performance conditions within a specified period of time (the "Restricted Shares"); and (iii) options to receive payments based on the appreciation of Common Stock ("SARs"). Options, Restricted Shares and SARs are collectively referred to as "Grants." Under the Share Incentive Plan, the Company may grant Options that qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Options that do not so qualify. The Share Incentive Plan is to be administered by a committee selected by the Company's Board and composed of at least two members of the Board (the "Administrator"). The current members of the Administrator are Messrs. Bergman and Sweemer. Restricted Shares may be granted to key employees of the Company at the sole discretion of the Administrator. SARs may be specifically granted upon the terms and conditions specified by the Administrator. Grants are to be made to key employees of the Company designated by the Administrator at its sole discretion. The Company has reserved 527,156 shares of Common Stock for issuance under the Share Incentive Plan. The Share Incentive Plan terminates on February 1, 2003, and thereafter no Grants may be made. In June 1997, with the approval of the Administrator, the Company extended the Share Incentive Plan to Mitchell I. Quain, an independent non-management director of the Company, and issued 6,000 Options to Mr. Quain under the terms of the Share Incentive Plan. See "Certain Transactions-Independent Director". The exercise price of any Option may not be less than 100% (or 110% in the case of an Option granted to a person owning (within the meaning of Section 424(d) of the Code) more than 10% of the 46 total combined voting power of all classes of stock of the Company) of the fair market value of the Common Stock at the time of the grant of the Option. No Option may be exercised after the expiration of ten years from the date of grant of such Option. No Option may be sold, pledged, assigned or transferred in any manner otherwise than by will or the laws of descent or distribution. The purchase price of any shares of Common Stock purchased under an Option must be paid in full at the time of the exercise of an Option in cash, by check or, if permitted by the Administrator, by shares of Common Stock having a fair market value on the date of the exercise equal to the purchase price or a combination thereof. In the event that a holder of a Grant (a "Grantee") ceases to be employed by the Company for any reason other than death, retirement or disability or such employee is terminated without cause, such Grants shall terminate upon the termination of his employment, unless extended by the Administrator. In the event of termination of employment due to death, retirement or disability of a Grantee or in the event such termination is without cause, the Administrator may allow the Grantee (or his estate) to exercise Options and SARs (to the extent exercisable on the date of termination of employment) at any time within one year after the date of such termination of employment. Restricted Shares held by a Grantee will vest upon the Grantee's death and all restrictions will thereupon lapse. 1996 INCENTIVE PLAN In 1996 the Company introduced an incentive plan (the "1996 Incentive Plan") for its management personnel tied to the Company's and each operating unit's annual budget as approved each year by the Compensation Committee of the Board. The 1996 Incentive Plan matrix provides for an annual bonus of up to 70% of the employee's base salary if the Company or its relevant operating unit achieves 110% of budget. Fifty percent of the bonus is payable solely based on performance of the Company or the relevant operating unit and the remainder is payable upon the achievement by the employee of his or her individual objectives in the discretion of the Chief Executive Officer of the Company or the President of the relevant operating unit. 401(K) RETIREMENT PLAN Effective April 1992, the Company adopted the Lincoln National Life Insurance Company Non-Standardized 401(k) Salary Reduction Plan and Trust Prototype Plan (the "401(k)"). The 401(k) allows employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, plus interest, as a retirement fund. The Company matched 25% of the employee contribution for the fourth quarter of 1997 for up to 6% of the employee's salary. In 1998, the Company intends 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. DIRECTORS' COMPENSATION In June 1997 the Board adopted a policy of compensating any non-management directors who do not serve pursuant to the terms of the Shareholder Agreement (see "Certain Transactions--Shareholders Agreement") in an amount equal to $6,000 per year plus $1,500 for each quarterly Board meeting attended. At present, Mitchell I. Quain is the only director who qualifies for such compensation. The other directors of the Company do not receive annual fees or fees for attending meetings of the Board of Directors or committees thereof. However, all directors are reimbursed for out-of-pocket expenses. In June 1997, the Board also extended the Share Incentive Plan to such independent non-management directors, and issued 6,000 Options to Mr. Quain under the terms of the Share Incentive Plan. See "Certain Transactions--Independent Director". 47 LIMITATION ON DIRECTOR LIABILITY AND INDEMNIFICATION Pursuant to the Certificate, and as permitted by Delaware law, directors of the Company are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. Such limitation of liability has no effect on the availability of equitable remedies, such as injunctive relief or rescission. 48 PRINCIPAL AND SELLING STOCKHOLDERS SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, MANAGEMENT AND SELLING STOCKHOLDERS The following chart provides information as to the beneficial ownership of Common Stock as of December 31, 1997, as adjusted to give effect to the application of the proceeds of the Offering, by: (i) each director and Named Executive Officer; (ii) directors and executive officers of the Company as a group; (iii) each person known to the Company to be the beneficial owner of 5% or more of Common Stock, and (iv) each stockholder selling shares of Common Stock as part of the Offering (the "Selling Stockholders").
OWNERSHIP OF COMMON STOCK PRIOR TO OWNERSHIP OF COMMON STOCK AFTER THE OFFERING NUMBER OF THE OFFERING ----------------------------------- SHARES ------------------------------- PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP - ------------------------------------------------ ---------------- ----------------- ------------ ------------ ----------------- Nassau Capital Partners L.P..................... 874,633(1) 16.5% 100,000 774,633 10.7% 22 Chambers Street Princeton, NJ 08542 Jonathan A. Sweemer............................. 874,633(2) 16.5% 100,000 774,633 10.7% 22 Chambers Street Princeton, NJ 08542 Brantley Venture Partners II, L.P............... 490,928 9.2% -- 490,928 6.8% 20600 Chagrin Blvd., Suite 1150 Cleveland, Ohio 44122 Paul H. Cascio.................................. 490,928(3) 9.2% -- 490,928 6.8% 20600 Chagrin Blvd., Suite 1150 Cleveland, OH 44122 Wellington Management Company, LLP.............. 485,000(4) 9.1% -- 485,000 6.7% 75 State Street Boston, Massachusetts 02109 Mellon Bank Corporation ........................ 436,600(5) 8.2% -- 436,600 6.0% One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Artisan Partners Limited Partnership 391,200 7.4% -- 391,200 5.4% 1000 North Water Street, #1770 Milwaukee, Wisconsin 53202 Artisan Investment Corporation.................. 391,200(6) 7.4% -- 391,200 5.4% 1000 North Water Street, #1770 Milwaukee, Wisconsin 53202 Andrew A. Ziegler............................... 391,200(6) 7.4% -- 391,200 5.4% 1000 North Water Street, #1770 Milwaukee, Wisconsin 53202 Carlene Murphy Ziegler.......................... 391,200(6) 7.4% -- 391,200 5.4% 1000 North Water Street, #1770 Milwaukee, Wisconsin 53202 The Dreyfus Corporation......................... 373,100(5) 7.0% -- 373,100 5.2% c/o Mellon Bank Corporation One Mellon Bank Center Pittsburgh, Pennsylvania 15258 The TCW Group, Inc. ............................ 304,100 5.7% -- 304,100 4.2% 865 South Figueroa Street Los Angeles, California 90017 Robert Day...................................... 304,100(8) 5.7% -- 304,100 4.2% 200 Park Avenue, Suite 200 New York, New York 10166 DSV Partners, IV................................ 493,440 9.3% 216,180 277,260 3.8% 1920 Main St., Suite 820 Irvine, CA 92614 James R. Bergman................................ 493,440(7) 9.3% 216,180 277,260 3.8% 1920 Main St., Suite 820 Irvine, CA 92614
49
OWNERSHIP OF COMMON STOCK PRIOR TO OWNERSHIP OF COMMON STOCK AFTER THE OFFERING NUMBER OF THE OFFERING ----------------------------------- SHARES ------------------------------- PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP - ------------------------------------------------ ---------------- ----------------- ------------ ------------ ----------------- Dreyfus Investment Advisors, Inc................ 273,100(9) 5.1% -- 273,100 3.8% c/o Mellon Bank Corporation One Mellon Bank Center Pittsburgh, Pennyslvania 15258 Mellon Bank N.A................................. 273,100(9) 5.1% -- 273,100 3.8% One Mellon Bank Center Pittsburgh, Pennsylvania 15258 Electra Investment Trust P.L.C.................. 471,639 8.9% 235,820 235,819 3.3% 65 Kings Way London, England WC2B6QT R. Jack DeCrane................................. 147,119(10) 2.8% 30,000 117,119 1.6% 2361 Rosecrans Avenue El Segundo, California 90245 R. G. MacDonald................................. 53,879(11) 1.0% -- 53,879 * 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 Robert A. Rankin................................ 20,702(12) * -- 20,702 * 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 Charles H. Becker............................... 19,851(13) * -- 19,851 * 2201 Rosecrans Avenue El Segundo, California 90245 Roger L. Keller................................. 13,047(14) * -- 13,047 * 12442 Knott Avenue Garden Grove, California 92841 Mitchell I. Quain............................... 12,000(15) * -- 12,000 * 230 Park Avenue New York, N.Y. 10169 All directors and executive officers as a group (eight persons)............................... 2,125,599(16) 40.0% 346,180 1,779,419 24.6%
- ------------------------ * Less than 1% (1) Includes 5,473 shares held by NAS Partners I L.L.C., an affiliate of Nassau Capital Partners, L.P. (2) Represents 869,160 shares held by Nassau Capital Partners, L.P. and 5,473 shares held by NAS Partners I L.L.C., affiliates of Mr. Sweemer. (3) Represents shares held by Brantley of which Mr. Cascio is a general partner of the general partner. (4) Represents shares held by clients of Wellington, which in its capacity as investment adviser may be deemed to control such shares. (5) Includes 273,000 shares beneficially owned jointly among Mellon Bank Corporation, Mellon Bank N.A., The Dreyfus Corporation and Dreyfus Investment Advisors, Inc. (6) Represents shares held by Artisan Partners Limited Partnership and beneficially owned jointly with Artisan Investment Corporation, A. A. Ziegler and C.M. Ziegler. (7) Represents shares held by DSV of which Mr. Bergman is a general partner. (8) Represents shares held by The TCW Group of which Mr. Day may be a controlling person. (9) Represents shares beneficially owned jointly among Mellon Bank Corporation, Mellon Bank, N.A., The Dreyfus Corporation and Dreyfus Investment Advisers, Inc. (10) Includes 80,819 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (11) Includes 45,372 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (12) Includes 16,448 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (13) Includes 14,180 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (14) Includes 13,047 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (15) Includes 2,000 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. (16) Includes 171,866 shares which may be acquired upon the exercise of stock options which are exercisable or will be exercisable prior to 60 days from December 31, 1997. 50 The Company and the Selling Shareholders have granted the underwriters a 30-day option to purchase up to 375,000 shares solely to cover over-allotments, which additional shares are not included in the above table. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE James R. Bergman, a director of the Company, filed a Form 5 under Section 16(a) of the Exchange Act (a "Form 5") dated March 5, 1998, indicating a failure to timely file a Form 3 under Section 16(a) of the Exchange Act (a "Form 3") when required under Section 16(a), disclosing his indirect beneficial ownership of a portion of the 493,439 shares of Common Stock directly owned by DSV (of which he is a general partner) at the time of the IPO. The foregoing Form 5 was required to have been filed by February 15, 1998. Jonathan Sweemer, a director of the Company, filed a Form 5 dated February 25, 1998, indicating a failure to timely file: (i) a Form 3 with respect to 869,160 shares of Common Stock beneficially owned by Nassau Capital Partners L.P., at the time of the IPO, and (ii) a Form 4 with respect to the acquisition of 33,526 additional shares of Common Stock issued by the Company to Nassau Capital Partners L.P. to correct a disputed calculation regarding the number of shares that should have been issued as part of the Recapitalization. Mr. Sweemer disclaims any beneficial interest in any of the foregoing shares. The foregoing Form 5 was required to have been filed by February 15, 1998. Nassau Capital Partners L.P., filed a Form 5 dated February 25, 1998, indicating a failure to timely file: (i) a Form 3 disclosing its beneficial ownership of 869,160 shares of Common Stock at the time of the IPO, and (ii) a Form 4 with respect to the acquisition of 33,526 additional shares of Common Stock issued by the Company to correct a disputed calculation regarding the number of shares that should have been issued as part of the Recapitalization. The foregoing Form 5 was required to have been filed by February 15, 1998. Paul H. Cascio, a director of the Company, failed to file a Form 5 by February 15, 1998, indicating a failure to timely file a Form 3, disclosing his indirect beneficial ownership of the 490,928 shares of Common Stock directly owned by Brantley Venture Partners, L.P. (of which he is a general partner of a general partner), at the time of the IPO. On March 6, 1998, such Form 5 was sent for filing. 51 CERTAIN TRANSACTIONS SHAREHOLDERS AGREEMENT Pursuant to the Fifth Amended and Restated Shareholders Agreement dated January 10, 1997 (as amended, the "Shareholders Agreement") among the Company, Nassau, Electra, Brantley, DSV and certain other parties, and subject to election by the Company's stockholders, Nassau, Brantley and DSV each have the right to nominate a representative to serve as a director so long as the relevant stockholder owns at least 5% of the Common Stock (including Common Stock which may be acquired upon exercise of warrants). See "Management--Executive Officers and Directors." Following completion of the Offering, Nassau, Brantley and DSV will beneficially own 10.7%, 6.8% and 3.8%, respectively, of the issued and outstanding Common Stock. The Shareholders Agreement also provides that Mr. DeCrane may nominate a director for election by the Company's stockholders for so long as he is the Chief Executive Officer of the Company. RECAPITALIZATION; WAIVERS AND EXCHANGES OF SECURITIES Effective immediately prior to the IPO, certain of the Company's then-existing shareholders, including Nassau, Brantley, DSV and Electra Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra"), as well as the holders of the Lender Warrants, agreed to waive a number of rights under the agreements by which such shareholders and warrant holders acquired such rights from the Company, releasing the Company from certain dividend payment requirements, voting requirements and certain other rights, as well as eliminating certain negative and affirmative covenants contained therein. Upon consummation of the IPO and as part of the Recapitalization: (i) all of the shares of preferred stock of the Company were exchanged for shares of Common Stock; (ii) certain warrants were exchanged by Nassau and Electra for shares of Common Stock; and (iii) certain convertible promissory notes and warrants to purchase Common Stock held by Nassau and Electra were terminated. See "Description of Common Stock--The Recapitalization". In December 1997, the Company issued an additional 16,918 shares of Common Stock to Electra and 33,825 shares to Nassau to correct a disputed calculation regarding the number of shares that should have been issued in the foregoing exchanges as part of the Recapitalization. Upon consummation of the IPO and as part of the Recapitalization, R.G. MacDonald, Charles H. Becker, Robert A. Rankin and John Hinson, an officer of the Company, exchanged an aggregate of 75,000 shares of preferred stock of the Company for 21,268 shares of Common Stock. See "Description of Common Stock-The Recapitalization". Upon consummation of the IPO and as part of the Recapitalization, Electra, DSV, Brantley and certain other parties exchanged all of the 6,847,705 outstanding shares of preferred stock of the Company for 1,941,804 shares of Common Stock. See "Description of Common Stock--The Recapitalization". INDEPENDENT DIRECTOR In June 1997, the Company extended its Share Incentive Plan for employees to independent non-management directors of the Company who are not appointed to the Board pursuant to the Shareholders Agreement, and issued 6,000 Options to Mitchell I. Quain, the only director presently qualifying for such plan. 52 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 35,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. COMMON STOCK As of December 31, 1997, there were 5,318,563 shares of Common Stock outstanding and held of record. An additional 527,156 shares were reserved for issuance upon exercise of all outstanding options under the Share Incentive Plan. Each holder of Common Stock is entitled to one vote for each share held and does not have cumulative voting rights. The holders of the Common Stock are entitled to elect all of the directors, subject to the rights of certain stockholders and lenders under the Shareholders Agreement to nominate candidates. The Common Stock is not convertible into any other security. See "Certain Transactions--Shareholders Agreement." Subject to the restrictions on payments of dividends imposed by the Company's debt agreements, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted the holders of any then outstanding shares of preferred stock. The Common Stock has no preemptive or other subscription rights. The outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue up to 10,000,000 shares of Undesignated Preferred Stock, none of which was issued as of December 31, 1997. The Board, without further action by the holders of Common Stock, may issue shares of Undesignated Preferred Stock in one or more series and may fix or alter the rights, preferences, privileges and restrictions, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation rates, liquidation preferences, conversion rights and the description and number of shares constituting any wholly unissued series of Undesignated Preferred Stock. The Board, without further approval of the holders of Common Stock, may issue shares of Undesignated Preferred Stock with rights that could adversely affect the rights of the holders of Common Stock. The issuance of shares of Undesignated Preferred Stock under certain circumstances could have the effect of delaying or preventing a change of control of the Company or other corporate action. WARRANTS Pursuant to Warrant Agreements dated September 18, 1996, the Company issued the Lender Warrants to certain lenders under the Prior Credit Facility, which entitled the holders to purchase 70,893 shares of Common Stock for $14.11 per share and conferred certain other rights on the holders thereof. As of December 31, 1997, all of the Lender Warrants were exercised, and no other warrants were outstanding. REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement, certain stockholders may require the Company to use its best efforts to register such holders' Company securities (including the Common Stock) under the Securities Act, in each case pursuant to the procedures and subject to restrictions specified in the Registration Rights Agreement. 53 Each party to the Registration Rights Agreement may require the Company to file one registration statement to register securities owned by it for a four-year period (subject to extension under certain limited circumstances). In general, the Company is not required to effect the registrations described above more than once in any nine month period or, if the Company intends in good faith to file a registration statement pertaining to an underwritten public offering by the Company, within 90 days. Also, the Company is not obligated to file more than four registration statements, provided that if the Company effects a registration at the request of a stockholder, no further demand by any other party to such agreement may be made for a period of at least nine months. In addition to the registration rights described above, each holder which is a party to the Registration Rights Agreement may cause the Company to use its best efforts to include such holder's Common Stock in any of the Company's registered offerings ("piggyback offerings") of its Common Stock (other than under Forms S-4 and S-8 of the Securities Act, or under other forms not available for registering sales to the public) (subject to reduction to the extent that the managing underwriter, if any, is of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein). The Registration Rights Agreement provides that the Company is to bear the expenses of registrations described above, other than expenses consisting of underwriting discounts and commissions applicable to securities sold by holders. The Registration Rights Agreement also restricts the transfer of certain shares of Common Stock held by the stockholders party to such agreement prior to the registration and sale (or other registered disposition) of such Common Stock under the Securities Act. RECAPITALIZATION On February 19, 1997, the Company, formerly an Ohio corporation, was incorporated in the State of Delaware. Each outstanding share of common stock and preferred stock, as well as all warrants and options, were exchanged for substantially similar securities of the Delaware corporation. Concurrent with the IPO, all of the Company's existing stockholders agreed to and consummated a recapitalization and simplification of the Company's capital structure (the "Recapitalization"), which included (i) the conversion of all then-outstanding shares of preferred stock into Common Stock, (ii) the exercise or exchange of all warrants for Common Stock, other than the Lender Warrants (see "Description of Capital Stock--Warrants") and those which were cancelled pursuant to their terms by the Offering; and (iii) a 3.53-for-one reverse stock split. Immediately after the Recapitalization but before giving effect to the IPO, the Company had 2,551,690 shares of Common Stock, no shares of preferred stock outstanding, and the Lender Warrants to purchase 70,893 shares of Common Stock, which were subsequently exercised. See "Description of Capital Stock--Warrants". TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The First National Bank of Boston. CERTAIN CERTIFICATE AND BYLAW PROVISIONS AND DELAWARE GENERAL CORPORATION LAW SECTION 203 The provisions of the Company's Certificate and the Bylaws and the provisions of Delaware law summarized in the succeeding paragraphs may be deemed to have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider to be in such stockholder's best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. CLASSIFIED BOARD. The Certificate provides that the Board will be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board will be 54 elected each year. Currently, the size of the Board is fixed at five members, who are divided into three classes serving staggered three-year terms. However, the Company is presently evaluating other director candidates and anticipates that two additional independent, non-management directors will be added to the Board upon the closing of the Offering or as soon thereafter as practicable. The classified board provisions could have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and the stockholders. The Certificate also provides that a director may not be removed from office unless for cause and the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of capital stock (including any warrants with voting rights) entitled to vote. MERGERS AND SALES OF ASSETS. The Certificate provides that except as provided in Section 203 of the General Corporation Law of the State of Delaware (the "GCLSD") any merger or sale of substantially all of the assets of the Company which has not been approved by at least two-thirds of the Board must be approved by the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of capital stock (including any warrants with voting rights) entitled to vote. Such provision may have the effect of preventing a merger or sale of substantially all the Company's assets that a stockholder might consider to be in such stockholder's best interest, including those which might result in a premium over the market price for the shares held by stockholders. LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective upon consummation of the Offering the Certificate will prohibit stockholder action by written consent in lieu of a meeting, and will provide that stockholder action can be taken only at an annual or special meeting of stockholders. Such provision may have the effect of delaying consideration of a stockholder proposal until the next annual meeting, unless a special meeting is called by the Board, the Chairman of the Board, the Chief Executive Officer or President of the Company. ADVANCED NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. Subject to the rules and regulations of the Securities and Exchange Commission regarding the solicitation of proxies, the Bylaws establish certain advance notice procedures with regard to stockholder proposals and the nomination, other than by the direction of the Board or a committee thereof, of candidates for election as directors. The Company may reject a stockholder proposal or nomination that is not made in accordance with such procedures. AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BYLAWS. The Certificate provides that the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of capital stock of the Company (including any warrants with voting rights) then entitled to vote on the matter is required to amend certain provisions of the Certificate, including those provisions relating to the classification of the Board of Directors; the filling of vacancies on the Board; removal of directors; the calling of special meetings of stockholders; the prohibition of stockholder action without a meeting; indemnification of directors, officers and others; the limitation on liability of directors; the approval of any merger or sale of substantially all of the assets of the Company which has not been approved by at least two-thirds of the Board; the Amendment of the Bylaws; and the supermajority voting requirements in the Certificate. The Certificate further provides that the Bylaws may be amended by the Board, except with respect to the authorized number of directors, or by an affirmative vote of the holders of not less than 66 2/3% of the total voting power of all outstanding shares of capital stock of the Company (including any warrants with voting rights) then entitled to vote on the matter. These voting requirements will have the effect of making more difficult any amendment by stockholders, even if a majority of the Company's stockholders believe that such amendment would be in its best interests. DELAWARE GENERAL CORPORATION LAW SECTION 203. The Company is subject to Section 203 of the GCLSD, which imposes restrictions on "business combinations" (as defined therein) with interested stockholders (being any person who acquired 15% or more of the Company's outstanding voting stock). In general, the Company is prohibited from engaging in business combinations with an interested 55 stockholder, unless: (i) before such person became an interested stockholder, the Board approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced (excluding for purposes of determining the number of shares outstanding stock held by directors who are also officers of the Company and by employee stock plans that do not provide employees with the rights to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) on or subsequent to the date on which such person became an interested stockholder, the business combination is approved by the Board and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the Company not owned by the interested stockholder. Under Section 203, the restrictions described above also do not apply to certain business combinations proposed by an interested stockholder following the earlier of the announcement of certain extraordinary transactions involving the Company and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of the Company's directors, if such extraordinary transaction is approved or not opposed by a majority of the directors who were directors prior to any person becoming an interested stockholder during the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors. By restricting the ability of the Company to engage in business combinations with an interested person, the application of Section 203 to the Company may provide a barrier to hostile or unwanted takeovers. VESTING OF MANAGEMENT RIGHTS UPON CERTAIN ACQUISITIONS. The terms of stock option agreements between the Company and certain members of management provide that all unvested options granted thereunder will vest upon either: (i) the acquisition by any one purchaser or group of more than 50% of the voting power of the stock of the Company; (ii) a replacement during any 12 month period of a majority of the Board (whose appointment is not endorsed by a majority of the Board prior to the date of such appointment); or (iii) the acquisition of assets having more than one-third of the total fair market value of the assets of the Company by any person or group of persons (a "Change of Control"). As of December 31, 1997, options to purchase an aggregate of 300,816 shares of Common Stock were unvested and subject to vesting upon a Change of Control, including options to purchase 95,370, 15,342, 32,581, 30,982 and 34,849 shares of Common Stock, by Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively. 56 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 7,236,563 shares of Common Stock. Of these shares, all of the 2,500,000 shares (2,875,000 shares if the Underwriters' over-allotment option is exercised in full) sold in this offering, and the 2,797,423 shares sold in the Company's IPO are freely transferable without restriction if held by holders who are not "affiliates" of the Company (as defined in the Securities Act). The remaining 1,939,140 shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act. These restricted securities were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act. The holders of 1,827,701 of such restricted shares are subject to a 90-day lock-up period following the Offering pursuant to agreements with the Underwriters. Upon the expiration of that lock-up period: (i) all such restricted securities will be available for resale pursuant to limitations of Rule 144; and (ii) the Company, pursuant to its Certificate, may authorize the issuance of additional shares of Common Stock and shares of one or more series of voting preferred stock. The issuance of additional shares of capital stock could result in the dilution of the voting power of the shares of Common Stock purchased in the Offering. In addition, following the expiration of the 90-day lock-up period, pursuant to the Registration Rights Agreement, certain stockholders have the right, subject to the terms and conditions of the Registration Rights Agreement, to require the Company to: (i) effect (in the aggregate) up to four registrations under the Securities Act covering all or any portion of the shares of Common Stock held by such stockholders, provided that if the Company effects a registration at the request of a stockholder, no further demand may be made by any stockholder for a period of at least nine months; and (ii) include all or any portion of such stockholders' shares of Common Stock in any proposed registration by the Company of shares of Common Stock (subject to reduction to the extent that the managing underwriter, if any, is of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein). Factors such as announcements concerning the Company or its competitors, investor perception of the Company, fluctuations in the Company's operating results and general market conditions may cause the market price of the Common Stock to fluctuate significantly. Sales of a substantial number of shares of Common Stock in the public market after the Offering, or the expectation that such sales could occur, could adversely affect the market price of the Common Stock and the Company's ability to raise capital through a subsequent offering of securities. 57 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, BT Alex. Brown Incorporated, Furman Selz LLC, and SBC Warburg Dillon Read Inc., have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
NUMBER OF UNDERWRITER SHARES - ----------------------------------------------------------------------------------------------------- ----------- BT Alex. Brown Incorporated.......................................................................... Furman Selz LLC...................................................................................... SBC Warburg Dillon Read Inc.......................................................................... ----------- Total................................................................................................ 2,500,000 ----------- -----------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company and certain of the Selling Shareholders have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 2,500,000, and the Company and the Selling Shareholders will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 2,500,000 shares are being offered. In connection with this offering, certain Underwriters may engage in passive market making transactions in the Common Stock on the Nasdaq National Market immediately prior to the commencement of sales in this offering in accordance with Rule 103 of Regulation M. Passive market making consists of displaying bids on the Nasdaq National Market limited by the bid prices of independent market makers and making purchases limited by such prices and effected in response in order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. Subject to applicable limitations, the Underwriters, in connection with this offering, may place bids for or make purchases of the Common Stock in the open market or otherwise, for long or short account, or cover short positions incurred, to stabilize, maintain or otherwise affect the pricee of the Common Stock, which may be higher than the price that might otherwise prevail in the open market. There can be no assurance that the price of the Common Stock will be stabilized, or that stabilizing, if commenced, will 58 not be discontinued at any time. Subject to applicable limitations, the Underwriters may also place bids or make purchases on behalf of the underwriting syndicate to reduce a short position created in connection with this offering. The Underwriters are not required to engage in these activities and may end these activities at any time. The Underwriting Agreement contains covenants of indemnity and contribution between the Underwriters and the Company and the Selling Stockholders with respect to certain civil liabilities, including liabilities under the Securities Act. Stockholders of the Company, holding in the aggregate 1,827,701 shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any of such Common Stock for a period of 90 days after the date of this Prospectus without the prior consent of the Representatives of the Underwriters. See "Shares Eligible For Future Sale." SBC Warburg Dillon Read Inc. is the successor firm to Dillon, Read & Co. Inc.; Dillon, Read & Co. Inc. served as an underwriter of the Company's IPO consummated in April 1997. Furman Selz LLC is an affiliate of ING Baring (U.S.) Securities, Inc. and ING (U.S.) Capital Corporation. ING Baring (U.S.) Securities, Inc. received a fee of $23,498 from the representatives of the Company's IPO in April 1997. In addition, ING (U.S.) Capital Corporation received approximately $24.7 million as a result of: (i) being a prior lender under the Company's former senior revolver; (ii) being a previous holder of the Company's senior notes; (iii) net proceeds from the sales of the Company's common shares and warrants; and (iv) receiving a success fee for the completion of the IPO. Additionally, Mitchell I. Quain, an Executive Vice President of Furman Selz LLC, serves as a director of the Company. LEGAL MATTERS The validity of the Common Stock offered by this Prospectus and certain other legal matters will be passed upon for the Company by Spolin & Silverman, Santa Monica, California. Certain legal matters will be passed upon for the Underwriters by Morgan, Lewis & Bockius LLP, Los Angeles, California. EXPERTS The consolidated financial statements of the Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Audio International, Inc. and subsidiary as of December 31, 1996 and 1995 and for each of the two years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Thomas & Thomas, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Act for registration of the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to do not purport to be complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved and each statement shall be deemed qualified by this reference. The Registration Statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the 59 Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the public reference facilities of the Commission's Regional Offices: New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a site on the World Wide Web (http:// www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company is subject to the information requirements of the Exchange Act and in accordance therewith, files reports, proxy statements and other information with the Commission. These reports, proxy statements and other information also are available from the Commission's public reference facilities and its website. So long as the Company is subject to periodic reporting requirements of the Exchange Act, it will continue to furnish the reports, proxy statements and other information required thereby to the Commission. The Company furnishes its shareholders annual reports containing financial statements audited by its independent auditors and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. ------------------------ 60 INDEX TO FINANCIAL STATEMENTS
PAGE --------- DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Report of Independent Accountants........................................................................ F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997............................................. F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997............... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997................................................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............... F-6 Notes to Consolidated Financial Statements............................................................... F-7 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY Report of Independent Accountants........................................................................ F-31 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited).......... F-32 Consolidated Statements of Income for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (Unaudited).......................................................... F-33 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 (Unaudited)....................................................... F-34 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (Unaudited).......................................................... F-35 Notes to Consolidated Financial Statements............................................................... F-36
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DeCrane Aircraft Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 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. PRICE WATERHOUSE LLP Los Angeles, California February 24, 1998 F-2 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1996 1997 --------- --------- ASSETS Current assets Cash and cash equivalents................................................................ $ 320 $ 206 Accounts receivable, net................................................................. 13,185 18,152 Inventories.............................................................................. 19,573 25,976 Prepaid expenses and other current assets................................................ 812 782 --------- --------- Total current assets................................................................... 33,890 45,116 Property and equipment, net................................................................ 12,187 14,054 Other assets, principally intangibles, net................................................. 23,189 39,967 --------- --------- Total assets......................................................................... $ 69,266 $ 99,137 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings.................................................................... $ 1,974 $ 568 Current portion of long-term obligations to unaffiliated lenders......................... 3,004 858 Convertible subordinated notes payable to related parties................................ 2,922 -- Accounts payable......................................................................... 7,420 8,032 Accrued expenses......................................................................... 7,241 6,911 Income taxes payable..................................................................... 843 3,975 --------- --------- Total current liabilities.............................................................. 23,404 20,344 --------- --------- Long-term liabilities Long-term obligations Unaffiliated lenders................................................................... 28,323 37,412 Related parties........................................................................ 6,027 -- Deferred income taxes.................................................................... 3,312 1,758 Minority interest........................................................................ 85 96 --------- --------- Total long-term liabilities............................................................ 37,747 39,266 --------- --------- Commitments and contingencies (Note 18) Mandatorily redeemable common stock warrants............................................... 6,879 -- --------- --------- Stockholders' equity Cumulative convertible preferred stock, $.01 par value (no par value prior to February 19, 1997), 8,314,018 shares authorized; 6,847,705 shares issued and outstanding as of December 31, 1996 (none as of December 31, 1997)....................................... 13,850 -- Undesignated preferred stock, $.01 par value, 10,000,000 shares initially authorized as of February 19, 1997; none issued and outstanding...................................... -- -- Common stock, no par value, 4,253,550 shares authorized; 85,593 shares issued and outstanding prior to February 19, 1997................................................. 216 -- Common stock, $.01 par value, 9,924,950 shares authorized as of February 19, 1997; 5,318,563 shares issued and outstanding as of December 31, 1997 (none as of December 31, 1996).............................................................................. -- 53 Additional paid-in capital............................................................... -- 51,057 Accumulated deficit...................................................................... (12,951) (11,444) Foreign currency translation adjustment.................................................. 121 (139) --------- --------- Total stockholders' equity............................................................. 1,236 39,527 --------- --------- Total liabilities and stockholders' equity........................................... $ 69,266 $ 99,137 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-3 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 --------- --------- ----------- Revenues...................................................................... $ 55,839 $ 65,099 $ 108,903 Cost of sales................................................................. 43,463 49,392 80,247 --------- --------- ----------- Gross profit............................................................ 12,376 15,707 28,656 --------- --------- ----------- Operating expenses Selling, general and administrative expenses................................ 9,426 10,747 15,756 Amortization of intangible assets........................................... 1,115 709 905 --------- --------- ----------- Total operating expenses.................................................. 10,541 11,456 16,661 --------- --------- ----------- Income from operations........................................................ 1,835 4,251 11,995 Other expenses (income) Interest expense Unaffiliated lenders...................................................... 2,628 2,807 2,520 Related parties........................................................... 1,193 1,441 634 Other (income) expenses..................................................... 297 (85) 131 Minority interests.......................................................... 85 193 112 --------- --------- ----------- Income (loss) before provision for income taxes and extraordinary item........ (2,368) (105) 8,598 Provision for income taxes.................................................... 1,078 712 3,344 --------- --------- ----------- Income (loss) before extraordinary item....................................... (3,446) (817) 5,254 Extraordinary loss from debt refinancing, net of income tax benefit........... -- -- 2,078 --------- --------- ----------- Net income (loss)............................................................. (3,446) (817) 3,176 Adjustment to redemption value of mandatorily redeemable common stock warrants.................................................................... 696 (4,320) (2,203) Cumulative convertible preferred stock dividends.............................. (557) (1,220) (442) --------- --------- ----------- Net income (loss) applicable to common stockholders........................... $ (3,307) $ (6,357) $ 531 --------- --------- ----------- --------- --------- ----------- Income (loss) per common share Basic Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .69 Extraordinary loss from debt refinancing.................................. -- -- (.55) --------- --------- ----------- Net income (loss)......................................................... $ (38.45) $ (73.92) $ .14 --------- --------- ----------- --------- --------- ----------- Diluted Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .62 Extraordinary loss from debt refinancing.................................. -- -- (.42) --------- --------- ----------- Net income (loss)......................................................... $ (38.45) $ (73.92) $ .20 --------- --------- ----------- --------- --------- ----------- Pro forma for the Recapitalization and initial public offering, before extraordinary item (Unaudited) Basic................................................................... -- -- $ 1.16 Diluted................................................................. -- -- $ 1.10
The accompanying notes are an integral part of the consolidated financial statements. F-4 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK -------------------------------------------------- NO PAR VALUE $.01 PAR VALUE FOREIGN CUMULATIVE ------------------------ ------------------------ CURRENCY CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- TRANSLATION PREFERRED OF OF PAID-IN ULATED ADJUST- STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT MENT ------------ ----------- ----------- --------- ------------- ----------- --------- ------------- Balance, December 31, 1994..................... $ 5,549 85,593 $ 58 -- $ -- $ -- $ (5,057) $ 216 Net loss.................. -- -- -- -- -- -- (3,446) -- Adjustment to estimated redemption value of mandatorily redeemable common stock warrants.... -- -- -- -- -- -- 696 -- Translation adjustment.... -- -- -- -- -- -- -- 287 ------------ ----------- ----------- --------- --- ----------- --------- ------ Balance, December 31, 1995..................... 5,549 85,593 58 -- -- -- (7,807) 503 Net loss.................. -- -- -- -- -- -- (817) -- Adjustment to estimated redemption value of mandatorily redeemable common stock warrants.... -- -- -- -- -- -- (4,320) -- Issuance of cumulative convertible preferred stock, net............... 8,301 -- -- -- -- -- -- -- Mandatorily redeemable common stock warrants issued pursuant to anti- dilution provisions...... -- -- -- -- -- -- (7) -- Stock option compensation expense.................. -- -- 158 -- -- -- -- -- Translation adjustment.... -- -- -- -- -- -- -- (382) ------------ ----------- ----------- --------- --- ----------- --------- ------ Balance, December 31, 1996..................... 13,850 85,593 216 -- -- -- (12,951) 121 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) -- 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 -- -- Cancellation of mandatorily redeemable common stock warrants.............. -- -- -- -- -- -- 1,143 -- Initial Public Offering Proceeds from the offering, net......... -- -- -- 2,700,000 27 28,229 -- -- Cancellation of mandatorily redeemable common stock warrants upon debt repayment and reclassification of warrants no longer redeemable............ -- -- -- -- -- 1,836 -- -- Common shares issued pursuant to anti- dilution provisions... -- -- -- 50,743 -- 609 (609) -- Cashless exercise of common stock warrants.... -- -- -- 16,130 -- -- -- -- Net income................ -- -- -- -- -- -- 3,176 -- Stock option compensation expense.................. -- -- -- -- -- 240 -- -- Translation adjustment.... -- -- -- -- -- -- -- (260) ------------ ----------- ----------- --------- --- ----------- --------- ------ Balance, December 31, 1997..................... $ -- -- $ -- 5,318,563 $ 53 $ 51,057 $ (11,444) $ (139) ------------ ----------- ----------- --------- --- ----------- --------- ------ ------------ ----------- ----------- --------- --- ----------- --------- ------ TOTAL --------- Balance, December 31, 1994..................... $ 766 Net loss.................. (3,446) Adjustment to estimated redemption value of mandatorily redeemable common stock warrants.... 696 Translation adjustment.... 287 --------- Balance, December 31, 1995..................... (1,697) Net loss.................. (817) Adjustment to estimated redemption value of mandatorily redeemable common stock warrants.... (4,320) Issuance of cumulative convertible preferred stock, net............... 8,301 Mandatorily redeemable common stock warrants issued pursuant to anti- dilution provisions...... (7) Stock option compensation expense.................. 158 Translation adjustment.... (382) --------- Balance, December 31, 1996..................... 1,236 Delaware reorganization and reverse stock split.................... -- Adjustment to estimated redemption value of mandatorily redeemable common stock warrants.... (2,203) Recapitalization Conversion of preferred stock into common stock................. -- Cashless exercise and conversion of warrants.............. 6,103 Cancellation of mandatorily redeemable common stock warrants.............. 1,143 Initial Public Offering Proceeds from the offering, net......... 28,256 Cancellation of mandatorily redeemable common stock warrants upon debt repayment and reclassification of warrants no longer redeemable............ 1,836 Common shares issued pursuant to anti- dilution provisions... -- Cashless exercise of common stock warrants.... -- Net income................ 3,176 Stock option compensation expense.................. 240 Translation adjustment.... (260) --------- Balance, December 31, 1997..................... $ 39,527 --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-5 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Cash flows from operating activities Net income (loss)............................................................. $ (3,446) $ (817) $ 3,176 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization............................................... 4,542 4,343 5,372 Extraordinary loss from debt refinancing.................................... -- -- 2,078 Unrealized loss on forward foreign exchange contracts....................... -- -- 469 Deferred income taxes....................................................... 867 88 (1,281) Other, net.................................................................. 70 188 185 Changes in assets and liabilities Accounts receivable....................................................... 2,256 (3,069) (3,159) Inventories............................................................... (2,962) (2,665) (4,956) Prepaid expenses and other assets......................................... 274 (3) (136) Accounts payable.......................................................... (1,004) 1,891 (361) Accrued expenses.......................................................... 682 2,477 (1,041) Income taxes payable...................................................... 178 525 4,295 --------- --------- --------- Net cash provided by operating activities............................... 1,457 2,958 4,641 --------- --------- --------- Cash flows from investing activities Purchase of stock of Audio International, Inc., net of cash acquired.......... -- -- (23,597) Purchase of net assets of Aerospace Display Systems........................... -- (11,693) -- Purchase of minority stockholder's interest................................... -- (5,207) -- Purchase of net assets and stock of Elsinore Engineering Services and Elsinore Aerospace Services, Inc..................................................... -- (1,300) -- Capital expenditures.......................................................... (1,203) (5,821) (3,842) Other, net.................................................................... (259) 5 (370) --------- --------- --------- Net cash used for investing activities.................................. (1,462) (24,016) (27,809) --------- --------- --------- Cash flows from financing activities Initial public offering and application of the net proceeds Proceeds from sale of common stock in the offering, net of $3,467 for underwriting discounts, commissions and expenses paid in 1997............. -- -- 28,933 Borrowings under new credit facility, net of deferred financing costs of $463...................................................................... -- -- 12,312 Repayment of debt, including $273 in prepayment penalties and expenses...... -- -- (42,160) Financing of acquisitions Revolving line of credit borrowings......................................... -- 6,399 23,597 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...................... 1,972 1,191 2,906 Principal payments on capitalized lease and other long-term obligations....... (1,665) (2,001) (1,675) Proceeds from issuance of cumulative convertible preferred stock, net......... -- 112 -- Payment of deferred financing costs........................................... -- (851) -- Other, net.................................................................... (266) (604) 139 --------- --------- --------- Net cash provided by financing activities............................... 41 21,051 22,957 --------- --------- --------- Effect of foreign currency translation on cash.................................. 33 22 97 --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................ 69 15 (114) Cash and cash equivalents at beginning of period................................ 236 305 320 --------- --------- --------- Cash and cash equivalents at end of period...................................... $ 305 $ 320 $ 206 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-6 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 and high-end corporate jet aircraft industries. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all 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 1997 presentation. 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. 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. 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 cost and are depreciated using the straight-line method over their estimated useful lives, ranging 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. F-7 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER ASSETS Goodwill is amortized on a straight-line basis over periods ranging from fifteen to thirty years. Other intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from ten to twenty years. Revolving credit agreement deferred financing costs are amortized on a straight-line basis over the term of the agreement. Term debt deferred financing costs are amortized using the interest method over the terms of their respective agreements. 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. 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. 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, 1996 and 1997. 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 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 stockholders' equity (deficit). Realized foreign currency exchange gains (losses) included in other expenses (income) in the consolidated statements of operations were $(314,000), $71,000 and $(72,000) for the years ended December 31, 1995, 1996 and 1997, respectively. F-8 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 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 Opinion No. 25, "Accounting for Stock Issued to Employees." Refer to Note 16 for information concerning the pro forma effect on results of operations assuming the fair value method of measuring compensation expense related to the employee stock option plan was utilized as described in SFAS 123. 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. Unbilled accounts receivable were $465,000 and $654,000 at December 31, 1996 and 1997, respectively. Unbilled accounts receivable are expected to be billed during the succeeding twelve-month period. INCOME (LOSS) PER COMMON SHARE Income (loss) per common share are computed pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Note 17). As the Company's historical capital structure is not indicative of its structure after the Company's recapitalization and initial public offering (Note 2), pro forma income per common share is presented for 1997 and reflects the recapitalization, the initial public offering and the application of the proceeds therefrom, as if both had occurred January 1, 1997 (Note 17). 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. 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. The Company is required to adopt SFAS 130 for its fiscal year beginning January 1, 1998; to enhance comparability, reclassification of financial statements for earlier periods is required. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for disclosure about operating in segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The Company is F-9 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) required to adopt SFAS 131 for its fiscal year ending December 31, 1998. Comparative information for earlier years must be restated to conform to the requirements of this standard. NOTE 2 - 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 (the "Recapitalization"). 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 ("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. 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. NOTE 3 - ACQUISITIONS AUDIO INTERNATIONAL On November 14, 1997, the Company purchased all of the outstanding stock of Audio International, Inc. ("Audio International"). 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. 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 F-10 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) 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 (the "Minority Stockholder") for a total purchase price of $5,748,000, including $334,000 of acquisition related costs and expenses (the "Minority Interest Acquisition"). The purchase price consisted of $4,873,000 paid in cash at closing and a $600,000 non-interest bearing obligation payable to the Minority Stockholder. The cash portion of the purchase price was funded with the proceeds from the sale of Preferred Stock and Redeemable Warrants. The acquisition was accounted for as a purchase and the $5,498,000 difference between the purchase price and 25% of the fair value of the net assets acquired was recorded as goodwill and is being amortized over 26 years, representing the remaining useful life of the goodwill recorded upon the initial 75% acquisition in October 1991. The consolidated results of operations for the year ended December 31, 1996 include 100% of the operating results of the subsidiary subsequent to February 20, 1996. For the periods prior to February 20, 1996, the consolidated results of operations include a charge for the Minority Stockholder's 25% ownership interest. For the periods prior to February 20, 1996, the Minority Stockholder, who is also President of the subsidiary, was compensated pursuant to an employment agreement. The employment agreement was cancelled as of February 20, 1996. For the years ended December 31, 1995 and 1996, the Minority Stockholder earned compensation of $851,000 and $22,000, respectively. 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 ("ADS") of Allard Industries, Inc. ("Allard"). The total purchase price was $13,395,000, including $402,000 in acquisition related costs. ADS develops and manufactures dichroic liquid crystal displays and modules for commercial and military avionics systems. The acquisition was funded with the proceeds from the sale of Preferred Stock, convertible subordinated notes and Redeemable Warrants, borrowings under the Company's revolving line of credit and a $2,000,000 non-interest bearing obligation payable to certain Allard stockholders. The acquisition was accounted for as a purchase and the $7,425,000 difference between the purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized over 30 years. The consolidated results of operations for the year ended December 31, 1996 include the operating results of ADS subsequent to September 18, 1996. F-11 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - ACQUISITIONS (CONTINUED) ELSINORE On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc. and the Elsinore Engineering Services Division of Elsinore, L.P. (collectively, "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. PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION AND IPO Unaudited pro forma consolidated results of operations are presented in the table below for the two years ended December 31, 1997 and are pro forma for the Recapitalization, the IPO and the application of the net proceeds therefrom (Note 2). For 1996, the results are also pro forma as if the Audio International, Minority Interest and ADS acquisitions were consummated on January 1, 1996; the pro forma effect of the Elsinore acquisition is not material and, accordingly, is not reflected. For 1997, the results are pro forma as if the Audio International acquisition was consummated on January 1, 1997. Amounts are in thousands, except per share data.
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1996 1997 --------- ----------- Revenues.......................................................... $ 82,939 $ 121,334 Income before extraordinary item.................................. 2,284 5,252 Income applicable to common stockholders, before extraordinary item............................................................ 2,284 5,252 Pro forma income per common share, before extraordinary item Basic......................................................... $ .45 $ .99 Diluted....................................................... .44 .94 Pro forma weighted average number of common shares outstanding Basic......................................................... 5,021 5,304 Diluted....................................................... 5,209 5,606
The above information reflects adjustments for depreciation, amortization, general and administrative expenses, minority interest and interest expense based on the new cost basis and debt structure of the Company. In 1997, income excludes the effect of a $2,078,000 extraordinary loss incurred in connection with the Company's debt refinancing (Note 11). F-12 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS ACCOUNTS RECEIVABLE Accounts receivable is net of an allowance for doubtful accounts of $379,000 and $487,000 at December 31, 1996 and 1997, 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 Three customers each accounted for more than 10% of the Company's consolidated revenues, as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Customer A....................................................... 8.9% 15.8% 19.0% Customer B....................................................... 25.4% 7.7% 1.1% Customer C....................................................... 8.7% 7.2% 11.2%
Complete loss of either Customer A or C could have a significant adverse impact on the results of operations expected in future periods. During the year ended December 31, 1997, Customer A acquired another customer of the Company. The above amounts for Customer A include the Company's revenue from the acquired customer after its acquisition. For the year ended December 31, 1997, revenue from Customer A would have been 20.9% had the acquisition been consummated on January 1, 1997. NOTE 5 - INVENTORIES Inventories are comprised of the following (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Raw material........................................................... $ 12,350 $ 14,224 Work-in process........................................................ 2,717 4,655 Finished goods......................................................... 4,506 7,097 --------- --------- Total inventories.................................................... $ 19,573 $ 25,976 --------- --------- --------- ---------
Included above are costs relating to long-term contracts recognized on the percentage of completion method of $1,378,000 and $125,000 at December 31, 1996 and 1997, respectively. F-13 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment includes the following (amounts in thousands):
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Machinery and equipment.................................................................. $ 16,637 $ 18,151 Tooling.................................................................................. 2,944 3,133 Computer equipment, furniture and fixtures............................................... 2,462 3,660 Land, buildings and leasehold improvements............................................... 1,676 3,580 ---------- ---------- Total cost............................................................................. 23,719 28,524 Accumulated depreciation and amortization.............................................. (11,532) (14,470) ---------- ---------- Net property and equipment........................................................... $ 12,187 $ 14,054 ---------- ---------- ---------- ----------
Property and equipment under capital leases included above consists of the following (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Machinery and equipment.................................................................... $ 920 $ 1,160 Computer equipment, furniture and fixtures................................................. 306 455 --------- --------- Total cost............................................................................... 1,226 1,615 Accumulated depreciation and amortization.................................................. (347) (523) --------- --------- Net property and equipment............................................................. $ 879 $ 1,092 --------- --------- --------- ---------
Depreciation of machinery and equipment under capital leases is included in cost of sales in the consolidated financial statements. On December 12, 1996, the Company purchased all of the manufacturing assets and inventory relating to the cold-heading manufacturing facility of the Qualitronix Division of AMP, Inc. (the "AMP Facility"). The purchase price of $6,802,000 (including $2,433,000 of inventory purchased) consisted of $5,399,000 paid in cash at closing with the balance paid in January 1997. The $2,213,000 difference between the purchase price and the fair value of the individual assets acquired was recorded as an intangible asset and is being amortized over 15 years. F-14 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - OTHER ASSETS Other assets includes the following and is net of accumulated amortization for the respective periods as parenthetically noted (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Goodwill (net of $808 and $1,682).......................................................... $ 19,756 $ 38,592 Deferred financing costs (net of $1,368 and $64) (Note 11)................................. 2,296 399 Other intangibles (net of $164 and $194)................................................... 274 596 Other non-amortizable assets............................................................... 863 380 --------- --------- Other assets, net........................................................................ $ 23,189 $ 39,967 --------- --------- --------- ---------
NOTE 8 - ACCRUED EXPENSES Accrued expenses are comprised of the following (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Salaries, wages, compensated absences and payroll related taxes.............................. $ 2,842 $ 3,410 Other accrued expenses....................................................................... 4,399 3,501 --------- --------- Total accrued expenses..................................................................... $ 7,241 $ 6,911 --------- --------- --------- ---------
NOTE 9 - SHORT-TERM BORROWINGS Short-term borrowings outstanding as of December 31, 1996 and 1997 includes the following (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Promissory note, 15% interest and principal payable as described below.......................... $ 1,250 $ -- Short-term revolving line of credit............................................................. 724 568 --------- --------- Total short-term borrowings................................................................... $ 1,974 $ 568 --------- --------- --------- ---------
The promissory note was issued on December 5, 1996 in conjunction with the Elsinore acquisition and was payable to the former owners. The promissory note, as adjusted (Note 3), was repaid during 1997. The Company's Swiss subsidiary has a short-term revolving line of credit with a Swiss bank under which Swiss franc denominated borrowings of $724,000 and $568,000 were outstanding at December 31, 1996 and 1997, respectively. Interest on the line accrues at the bank's prime rate (5.25% at December 31, 1997) plus 0.25%. The line of credit is guaranteed by the Company. NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES In conjunction with the ADS acquisition, the Company sold 15% convertible subordinated notes ("Convertible Notes") and Redeemable Warrants to a group of investors, who are also related parties F-15 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED) (Note 22). As described in Note 14, $124,000 of the aggregate $3,000,000 proceeds was allocated to Redeemable Warrants in the consolidated financial statements. The corresponding reduction in the recorded principal amount of the notes was treated as debt discount and amortized as interest expense over the life of the notes. The principal balance of the notes, plus accrued interest, was paid with a portion of the IPO proceeds. NOTE 11 - LONG-TERM OBLIGATIONS Long-term obligations outstanding includes the following (amounts in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Senior revolving line of credit............................................................ $ -- $ 36,000 Note payable to Arkansas Development Finance Authority, principal and interest at rates ranging from 5.25% to 6.0%, secured by land, building and equipment...................... -- 712 Capital lease obligations and equipment term financing, with interest at 4.34 % to 18.08%, secured by equipment..................................................................... 662 547 Acquisition financing payable to sellers Payable to Allard stockholders (for the ADS acquisition), due in monthly installments of $56,000 through August 18, 1999........................................................ 1,531 1,011 Payable to Minority Stockholder (for the Minority Interest acquisition), due in monthly installments of $33,000 through December 15, 1997...................................... 383 -- Debt repaid with IPO proceeds Senior revolving line of credit.......................................................... 11,982 -- Senior term notes........................................................................ 16,769 -- Senior subordinated debt payable to related parties (Note 22)............................ 6,027 -- --------- --------- Total long-term obligations............................................................ 37,354 38,270 Less current portion................................................................... (3,004) (858) --------- --------- Long-term obligations, less current portion.......................................... $ 34,350 $ 37,412 --------- --------- --------- ---------
DEBT REPAID WITH IPO PROCEEDS In April 1997, the Company used the net proceeds from the IPO (Note 2), together with approximately $12,775,000 of proceeds from borrowings under a new 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. F-16 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED) SENIOR CREDIT FACILITY Concurrent with the completion of the IPO, the Company obtained a new credit agreement with a group of banks for a $40 million senior revolving line of credit, expiring in April 2002 (the "Credit Facility"). The Credit Facility was amended in November 1997 in conjunction with the Audio International acquisition to provide a $60 million revolving line of credit. Borrowings under the Credit Facility are secured by assets totaling $96,122,000 as of December 31, 1997. At December 31, 1997, additional borrowings of $24,000,000 were available under the Credit Facility. In February 1998, the Credit Facility was further amended to provide for a $75 million revolving line of credit. The Company, at its option, may elect to pay interest on Credit Facility borrowings based on either the prime rate or Interbank Offered Rate (IBOR) plus defined margins. The Company is 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. Interest rate margins and commitment fee rates are reset quarterly, based upon a defined leverage ratio. The maximum interest rate margins are 0.75% above the prime rate or 2.00% above the IBOR rate. The Credit Facility contains certain restrictive covenants which require the Company to: (i) maintain certain defined financial ratios such as interest coverage, leverage and working capital, and minimum levels of net worth; and (ii) limit capital expenditures, including capital lease obligations, and additional indebtedness which may be incurred. The Credit Facility also prohibits the Company from paying any cash dividends on its common stock. ARKANSAS DEVELOPMENT FINANCE AUTHORITY The note was assumed in conjunction with the Audio International acquisition and is guaranteed by its former stockholders. The acquisition agreement provides that the Company must obtain a release of the former stockholders' guarantees. The Company is evaluating various alternatives including repayment of the note by borrowing under the Credit Facility. The note is classified as a long-term obligation as of December 31, 1997. ACQUISITION FINANCING PAYABLE TO SELLERS In conjunction with the Minority Interest Acquisition and the ADS acquisition, the sellers provided financing that is payable in monthly installments over an eighteen-month and a three-year period, respectively. The Minority Stockholder and ADS payment obligations are non-interest bearing; original issue discounts of 9.75% and 11.5%, respectively, are being amortized over the payment obligation terms. Unamortized debt discounts were $264,000 and $100,000 as of December 31, 1996 and December 31, 1997, respectively. F-17 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED) AGGREGATE MATURITIES The aggregate maturities of long-term obligations are as follows as of December 31, 1997 (amounts in thousands):
YEAR ENDING DECEMBER 31, 1998................................................................................................. $ 942 1999................................................................................................. 633 2000................................................................................................. 46 2001................................................................................................. 17 2002................................................................................................. 36,728 Thereafter........................................................................................... 4 --------- Total aggregate maturities......................................................................... 38,370 Less unamortized debt discount..................................................................... (100) --------- Total long-term obligations...................................................................... $ 38,270 --------- ---------
NOTE 12 - INCOME TAXES Income (loss) before income taxes and extraordinary item was taxed under the following jurisdictions (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Domestic.......................................................................... $ (2,534) $ (855) $ 7,509 Foreign........................................................................... 166 750 1,089 --------- --------- --------- Total........................................................................... $ (2,368) $ (105) $ 8,598 --------- --------- --------- --------- --------- ---------
F-18 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 - INCOME TAXES (CONTINUED) The provisions for income taxes are as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Current U.S. federal...................................................................... $ 60 $ 269 $ 3,231 State and local................................................................... 24 194 968 Foreign........................................................................... 127 161 426 --------- --------- --------- Total current................................................................... 211 624 4,625 --------- --------- --------- Deferred U.S. federal...................................................................... 751 70 (1,021) State and local................................................................... 226 21 (279) Foreign........................................................................... (110) (3) 19 --------- --------- --------- Total deferred.................................................................. 867 88 (1,281) --------- --------- --------- Total provision U.S. federal...................................................................... 811 339 2,210 State and local................................................................... 250 215 689 Foreign........................................................................... 17 158 445 --------- --------- --------- Total provision................................................................. $ 1,078 $ 712 $ 3,344 --------- --------- --------- --------- --------- ---------
Deferred tax liabilities (assets) are comprised of the following (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Gross deferred tax liabilities Tax effect on earnings of subsidiary not consolidated for tax purposes........ $ 2,431 $ 2,688 $ 2,688 Depreciable and amortizable assets............................................ 781 991 996 Other......................................................................... 367 279 409 --------- --------- --------- Gross deferred tax liabilities.............................................. 3,579 3,958 4,093 --------- --------- --------- Gross deferred tax (assets) Inventory..................................................................... (1,376) (1,798) (2,811) Loss carryforwards............................................................ (1,391) (1,238) (865) Accrued expenses.............................................................. (220) (605) (697) State income taxes............................................................ -- -- (194) Allowance for doubtful accounts............................................... (41) (68) (159) Other......................................................................... (122) -- (184) --------- --------- --------- Gross deferred tax (assets)................................................. (3,150) (3,709) (4,910) --------- --------- --------- Deferred tax assets valuation allowance......................................... 2,681 3,063 2,575 --------- --------- --------- Net deferred tax liability.................................................... $ 3,110 $ 3,312 $ 1,758 --------- --------- --------- --------- --------- ---------
F-19 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 - 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 DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Income tax (benefit) at U.S. statutory rates......................................... $ (805) $ (36) $ 2,923 Increase (decrease) resulting from Tax on earnings of subsidiary not consolidated for tax purposes.................... 977 92 -- Book benefit not provided (provided) for net operating loss carryforwards.......... 773 172 (488) Amortization of assets and other expenses not deductible for income tax purposes... 68 137 441 State income taxes, net of federal benefit......................................... 16 157 482 Lower tax rates on earnings of foreign subsidiaries................................ (11) (65) (116) Other, net......................................................................... 60 255 102 --------- --------- --------- Income tax at effective rates.................................................... $ 1,078 $ 712 $ 3,344 --------- --------- --------- --------- --------- ---------
Approximately $2,543,000 of the Company's loss carryforwards remained at December 31, 1997 for federal income tax purposes. The carryforwards expire in varying amounts through 2012. No benefit for the remaining loss carryforwards has been recognized in the consolidated financial statements. The amount of loss carryforwards that may be utilized in the future are subject to limitations because of the occurrence of a change in control of the Company, as defined in the Internal Revenue Code. A change in control occurred during 1996 as a result of certain equity transactions and upon completion of the IPO. The amount of loss carryforwards that may be used in the future is limited to approximately $800,000 in each year for federal income tax purposes until fully utilized. The deferred tax asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount of federal and state tax loss carryforwards that has been utilized to reduce 1997 current income taxes. 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 13 - 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 loss of $316,000 and $487,000 for the years ended December 31, 1996 and 1997, respectively (none in the year ended December 31, 1995). At December 31, 1997, the Company has twelve open forward exchange contracts with one of its senior lenders to purchase a total of CHF 9,836,000 for $7,200,000 at rates ranging between 1.341 and 1.391 CHF per U.S. dollar. Settlement of the contracts is to occur in twelve equal monthly amounts of $600,000 from January 15, 1998 through December 15, 1998. As of December 31, 1997, the Company has recognized in cost of sales an unrealized market value loss of $469,000 on the open contracts. F-20 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The Company believes exposure to derivative credit losses is minimal in the event of nonperformance by the senior lender because any amounts due, but not paid, to the Company by the senior lender could be offset against the Company's principal and interest payments to the lender. NOTE 14 - MANDATORILY REDEEMABLE COMMON STOCK WARRANTS Mandatorily redeemable common stock warrants (the "Redeemable Warrants") were issued in conjunction with various debt and equity transactions. During 1997, all Redeemable Warrants were either exercised or cancelled in conjunction with the Recapitalization and IPO (Note 2). The table below summarizes the transactions during the three-year period ended December 31, 1997 (amounts in thousands, except share data).
REDEEMABLE WARRANTS ---------------------- NUMBER OF COMMON AMOUNT SHARES --------- ----------- Balance, December 31, 1994................................................................ $ 2,329 446,296 Adjustment to estimated redemption value.................................................. (696) -- --------- ----------- 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. During the years ended December 31, 1995 and 1996, the Company increased (decreased) by $(696,000) and $4,320,000, respectively, the amount ascribed to the Redeemable Warrants 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. F-21 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 - CUMULATIVE CONVERTIBLE PREFERRED STOCK As of December 31, 1996, the number of cumulative convertible preferred shares authorized to be issued consisted of 8,314,018 shares in various series ("Preferred Stock"). All Preferred Stock was without par value. As of December 31, 1994, 1995 and 1996, there were 4,022,705, 4,022,705 and 6,847,705 shares outstanding, respectively. At December 31, 1996, the Company also had Preferred Stock warrants outstanding to purchase a total of 52,784 preferred shares at an exercise price of $1.263 per share. On February 19, 1997, the Company reorganized as a Delaware corporation. In conjunction with the reorganization, the Company established a $.01 par value for its Preferred Stock and increased the number of preferred shares authorized to 18,314,018 shares, which includes 10,000,000 shares of a newly designated series of preferred stock. As part of the Recapitalization, which occurred concurrent with the IPO, all issued and outstanding shares of Preferred Stock were converted into .28357 of a share of common stock. The Recapitalization also provided for the cashless exercise and conversion of all Preferred Stock warrants 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 22). 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 22). Proceeds from the sale aggregating $124,000 were ascribed to the Redeemable warrants to reflect their estimated fair market value o the issuance date. The proceeds from the sale, net of issuance costs of $137,000, were used to fund the ADS Acquisition. NOTE 16 - COMMON STOCK At December 31, 1996 the Company was authorized to issue 4,253,550 common shares, without par value and, in addition to the Redeemable Warrants, had issued non-redeemable warrants to purchase a total of 9,355 common shares at an exercise price of $4.454 per share. 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. As described in Note 2, 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. F-22 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 - COMMON STOCK (CONTINUED) The Company has a qualified stock option plan for key employees under which options to purchase common shares may be granted. The plan permits the granting of incentive stock options, as defined by Section 422 of the Internal Revenue Code, non-qualified stock options, restricted stock options and stock appreciation rights. The plan expires in 2003. Options generally vest in equal installments over five years from the date of grant and remain exercisable until December 31, 2002. The following table summarizes the status of the Company's stock option plan at December 31, 1995, 1996, and 1997 and the activity for the three years ended December 31, 1997:
1995 1996 1997 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ----------- --------- ----------- --------- ----------- Options outstanding at beginning of year..................................... 185,029 $ 0.529 208,423 $ 0.529 355,001 $ 1.724 Granted................................... 37,573 0.529 147,031 3.413 163,662 15.574 Cancelled................................. (14,179) 0.529 (453) 0.529 (17,403) 6.228 --------- --------- --------- Options outstanding at end of year........ 208,423 0.529 355,001 1.724 501,260 6.089 --------- --------- --------- --------- --------- --------- Options exercisable at end of year........ 85,581 0.529 141,845 0.633 200,444 0.921 --------- --------- --------- --------- --------- ---------
The following table summarizes information about stock options outstanding and stock options exercisable at December 31, 1997:
OPTIONS OUSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED- RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE EXERCISE PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE - ------------------- --------------- ----------------- -------------- --------------- -------------- $0.529 - $1.234 303,998 7.0 years $ 0.724 194,556 $ 0.622 7.053 - 16.75 197,262 9.7 years 14.357 5,888 10.802 --------------- --------------- 501,260 8.1 years 6.089 200,444 0.921 --------------- --------------- --------------- ---------------
The Company believes the per share exercise price of options granted through February 1996 and subsequent to January 1997 approximated the fair market value of the underlying common stock on the grant date. The exercise price of certain options granted from February 1996 to January 1997 were deemed to be below the fair market value of the underlying common stock on the grant date and such difference is being recognized as additional compensation expense in the consolidated financial statements on a straight line basis over the vesting period of the underlying options. Compensation expense recognized was $158,000 and $240,000 for the years ended December 31, 1996 and 1997, 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 F-23 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 - COMMON STOCK (CONTINUED) with the method of SFAS 123, the Company's net income (loss) and net income (loss) per common share would have been as follows (amounts in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Net income (loss) As reported.................................................................... $ (3,446) $ (817) $ 3,176 Pro forma...................................................................... (3,446) (822) 3,129 Net income (loss) per common share Basic As reported.................................................................. (38.45) (73.92) .14 Pro forma.................................................................... (38.45) (73.98) .13 Diluted As reported.................................................................. (38.45) (73.92) .20 Pro forma.................................................................... (38.45) (73.98) .19 Weighted-average fair value of options granted Compensatory stock options..................................................... -- 5.91 5.70 Non-compensatory stock options................................................. 0.10 0.10 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 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED) Income (loss) per common share ("EPS") have been computed pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which became effective after December 15, 1997; all periods prior thereto have been restated to conform with the provisions of this statement. F-24 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED) (CONTINUED) The following table provides a reconciliation of both income (loss) before extraordinary item and the number of common shares used in the computations of "basic" EPS, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and "diluted" EPS, which includes all such shares (amounts in thousands, except per share data).
YEAR ENDED DECEMBER 31, 1997 -------------------------- PRO FORMA AS FOR RE- 1995 1996 REPORTED CAPITALIZATION --------- --------- ----------- AND IPO ------------- (UNAUDITED) Income (loss) applicable to common shares - Numerator Before extraordinary item..................................... $ (3,446) $ (817) $ 5,254 $ 6,154 Adjustment to Redeemable Warrant redemption value............. 696 (4,320) (2,203) -- Preferred Stock dividends..................................... (557) (1,220) (442) -- --------- --------- ----------- ------------- Income (loss) applicable to common shares (basic)........... (3,307) (6,357) 2,609 6,154 Preferred Stock dividends..................................... -- -- 442 -- --------- --------- ----------- ------------- Income (loss) applicable to common shares (diluted)......... $ (3,307) $ (6,357) $ 3,051 $ 6,154 --------- --------- ----------- ------------- --------- --------- ----------- ------------- Shares - Denominator Weighted average common shares outstanding (basic)............ 86 86 3,803 5,304 Add dilutive effect of Preferred Stock outstanding prior to conversion............. 1,141 1,710 559 -- Common stock options........................................ -- 188 302 302 Warrants outstanding prior to cancellation, conversion or exercise.................................................. 389 660 228 -- Less antidilutive effect of potential common shares......... (1,530) (2,558) -- -- --------- --------- ----------- ------------- Weighted average common shares outstanding (diluted)...... 86 86 4,892 5,606 --------- --------- ----------- ------------- --------- --------- ----------- ------------- EPS - Income (loss) before extraordinary item Basic......................................................... $ (38.45) $ (73.92) $ .69 $ 1.16 Diluted....................................................... (38.45) (73.92) .62 1.10
Pro forma for Recapitalization and IPO assumes each occurred on January 1, 1997 (Note 2). Therefore, pro forma income per common share, before extraordinary item, is computed using pro forma income before adjustment to redemption value of Redeemable Warrants and preferred stock dividends. Pro forma income before extraordinary item also reflects the sale by the Company of 2,700,000 shares of common stock in the IPO and the application of the net proceeds therefrom. F-25 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18 - COMMITMENTS AND CONTINGENCIES LITIGATION The Company is a party to a license agreement with McDonnell Douglas Corporation (now part of The Boeing Company) pursuant to which the Company may request certain data in order to design and market modifications to aircraft manufactured by McDonnell Douglas. The agreement provides that the Company will pay McDonnell Douglas a royalty of five percent of the net sales price of all modifications sold by the Company for which the Company has requested data from McDonnell Douglas. The Company has requested data for a single modification, which modification the Company believes is exempt from the obligation to pay royalties under the agreement. In 1996, McDonnell Douglas made a demand for $650,000 for royalties. The Company does not believe that it is obligated to McDonnell Douglas in any amount. However, there can be no assurance that the Company will not be required to pay royalties to McDonnell Douglas. Certain subsidiaries of the Company have recently been served in an action filed in federal court by American International Airways, Inc., relating to the conversion and modification of two Boeing 747 aircraft from passenger to freighter configuration. No specific amount of damages is sought. The events in question occurred prior to the Company's purchase of the relevant businesses from its prior owner; the Company intends to deny any liability, and further believes that it is indemnified with respect to any such liabilities. The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of these matters, as well as the matters discussed in the preceding paragraphs, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. LEASE COMMITMENTS The Company leases certain facilities and equipment under various capital and operating leases. Certain leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 1997 (amounts in thousands):
CAPITAL OPERATING LEASES LEASES ----------- ----------- Year ending December 31, 1998.................................................................. $ 318 $ 2,909 1999.................................................................. 203 2,732 2000.................................................................. 50 2,274 2001.................................................................. 21 1,855 2002.................................................................. 17 1,771 2003 and thereafter................................................... 9 5,547 ----- ----------- Total minimum payments required....................................... 618 17,088 ----------- ----------- Less amount representing future interest cost......................... (71) ----- Recorded obligation under capital leases............................ 547 ----- -----
F-26 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Total rental expense charged to operations for the years ended December 31, 1995, 1996 and 1997 was $1,531,000, $1,614,000 and $2,065,000, respectively. NOTE 19 - CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION During the three years ended December 31, 1997, the Company paid the following amounts in cash (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Interest........................................................................... $ 3,275 $ 2,983 $ 2,842 Income taxes....................................................................... 33 132 300
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES Certain noncash investing and financing transactions occurred during the three years ended December 31, 1997, as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Debt incurred for the acquisition of machinery and equipment....................... $ 33 $ 414 $ 182 Financing provided by sellers in connection with acquisitions...................... -- 3,492 -- Liabilities assumed in connection with acquisitions................................ -- 2,687 2,581
The Recapitalization and IPO described in Note 2 included a series of noncash transactions. F-27 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20 - 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 (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Revenues Gross revenues United States.......................................................... $ 54,394 $ 64,383 $ 109,490 Western Europe......................................................... 9,388 10,882 12,240 ----------- ----------- ----------- Total gross revenues................................................. 63,782 75,265 121,730 ----------- ----------- ----------- Less interarea transfers United States.......................................................... (814) (1,496) (2,448) Western Europe......................................................... (7,129) (8,670) (10,379) ----------- ----------- ----------- Total interarea transfers............................................ (7,943) (10,166) (12,827) Net revenues United States.......................................................... 53,580 62,887 107,042 Western Europe......................................................... 2,259 2,212 1,861 ----------- ----------- ----------- Total net revenues................................................... $ 55,839 $ 65,099 $ 108,903 ----------- ----------- ----------- ----------- ----------- ----------- Income from operations United States............................................................ $ 1,354 $ 3,727 $ 10,833 Western Europe........................................................... 501 746 1,572 Interarea eliminations................................................... (20) (222) (410) ----------- ----------- ----------- Total income from operations........................................... $ 1,835 $ 4,251 $ 11,995 ----------- ----------- ----------- ----------- ----------- ----------- Consolidated assets United States............................................................ $ 34,425 $ 67,889 $ 98,076 Western Europe........................................................... 6,490 6,015 6,421 Interarea eliminations................................................... (4,586) (4,638) (5,360) ----------- ----------- ----------- Total consolidated assets.............................................. $ 36,329 $ 69,266 $ 99,137 ----------- ----------- ----------- ----------- ----------- -----------
Interarea sales are accounted for at prices that the Company believes would be equivalent to unaffiliated customer sales. Interarea transfers and eliminations reflect the shipment of raw component parts between areas. Operating income excludes net interest expense, other income (expense) and minority interests that are directly attributable to the related operations. Corporate assets are included with United States assets. EXPORT REVENUES Consolidated revenues include export revenues of $5,161,000, $6,484,000 and $12,430,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Export revenues are primarily derived from sales to customers located in Western Europe, the Far East and Canada. F-28 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 21 - 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 $148,000, $151,000 and $157,000 for the years ended December 31, 1995, 1996 and 1997, 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 during the year ended December 31, 1997. No matching contributions were made to the plan during the years ended December 31, 1995 and 1996. The costs associated with administering the plan were not significant for any period presented. NOTE 22 - 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):
DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Senior Subordinated Lenders Interest and advisory fees Earned during the period....................................................... $ 912 $ 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
F-29 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 22 - RELATED PARTY TRANSACTIONS (CONTINUED) Each related party is described below: 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, 11, 14, 15 and 16). 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 2). 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, 14, 15 and 16). 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 2). F-30 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Audio International, Inc. North Little Rock, Arkansas We have audited the accompanying consolidated balance sheets of Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and the related consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits of the consolidated financial statements referred to in the preceding paragraph provide a reasonable basis for our opinion. In our previously issued auditors' reports dated April 4, 1996, and February 21, 1997, we did not express an opinion on the consolidated statements of income, stockholders' equity, or cash flows for the year ended December 31, 1995, since we had not audited such statements. In accordance with your subsequent instructions, we have now audited the consolidated statement of income, stockholders' equity, and cash flows for the year ended December 31, 1995, in accordance with generally accepted auditing standards. Accordingly, our present opinion on these financial statements, as presented herein, is different from that expressed in our previous reports. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 12, the Company prepared its financial statements for years prior to 1995 on the income tax basis of accounting. Effective January 1, 1995, the Company adopted generally accepted accounting principles for the preparation of its financial statements, and accordingly, appropriate adjustments have been made to retained earnings as of January 1, 1995. THOMAS & THOMAS Little Rock, Arkansas February 21, 1997 (Except for paragraph 3 above, as to which the date is December 17, 1997) F-31 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1995 1996 --------- --------- SEPTEMBER 30, 1997 --------------- (UNAUDITED) ASSETS Current assets Cash in financial institutions............................................. $ 3 $ 46 $ 311 Repurchase agreements...................................................... 471 1,543 467 Receivables Trade, net............................................................... 633 1,207 2,526 Employees and other...................................................... 29 13 10 Inventories................................................................ 831 1,503 1,538 Prepaid income taxes....................................................... 55 -- -- Deferred income taxes...................................................... 30 38 350 --------- --------- ------- Total current assets..................................................... 2,052 4,350 5,202 Property and equipment, net.................................................. 1,243 1,299 1,538 Other assets Other investments.......................................................... -- 100 100 Utility deposits........................................................... 1 1 1 --------- --------- ------- Total assets............................................................. $ 3,296 $ 5,750 $ 6,841 --------- --------- ------- --------- --------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Construction contract payable.............................................. $ 269 $ -- $ -- Accounts payable, trade.................................................... 438 426 272 Accrued expenses........................................................... 154 312 785 Income taxes payable....................................................... -- 817 471 Current portion of long-term debt.......................................... 39 44 45 --------- --------- ------- Total current liabilities................................................ 900 1,599 1,573 --------- --------- ------- Long-term debt, excluding current portion.................................... 579 724 702 Deferred income taxes........................................................ 31 23 36 --------- --------- ------- Total liabilities........................................................ 1,510 2,346 2,311 --------- --------- ------- Stockholders' equity Common stock, $1 par value, 1,000 shares authorized, 129 shares issued and outstanding.............................................................. -- -- -- Additional paid-in capital................................................. 601 601 601 Contributed capital........................................................ 90 90 90 Retained earnings.......................................................... 1,095 2,713 3,839 --------- --------- ------- Total stockholders' equity............................................... 1,786 3,404 4,530 --------- --------- ------- Total liabilities and stockholders' equity............................. $ 3,296 $ 5,750 $ 6,841 --------- --------- ------- --------- --------- -------
The accompanying notes are an integral part of these financial statements. F-32 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- (UNAUDITED) Sales and service revenues, net....................................... $ 5,182 $ 10,134 $ 7,535 $ 11,162 Cost of sales and service............................................. 2,710 4,667 3,527 6,180 --------- --------- --------- --------- Gross profit........................................................ 2,472 5,467 4,008 4,982 Selling, general and administrative expenses.......................... 2,174 2,926 1,959 3,230 --------- --------- --------- --------- Operating income.................................................... 298 2,541 2,049 1,752 Other income (expense) Investment income................................................... 15 32 18 31 Interest expense.................................................... (28) (45) (34) (31) Gain (loss) on disposal of assets, net.............................. (38) 11 5 (2) Other............................................................... -- 5 6 -- --------- --------- --------- --------- Income before income taxes........................................ 247 2,544 2,044 1,750 Provision for income taxes............................................ 66 926 733 624 --------- --------- --------- --------- Net income........................................................ $ 181 $ 1,618 $ 1,311 $ 1,126 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-33 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK ------------------------ ADDITIONAL NUMBER OF PAID-IN CONTRIBUTED RETAINED SHARES AMOUNT CAPITAL CAPITAL EARNINGS TOTAL ----------- ----------- ------------- --------------- ----------- --------- Balance, December 31, 1994.................. 100 -- $ 1 $ 90 $ 853 $ 944 Restatement of beginning balance............ -- -- -- -- 61 61 Issuance of common stock.................... 29 -- 600 -- -- 600 Net income.................................. -- -- -- -- 181 181 --- --- ----- --- ----------- --------- Balance, December 31, 1995.................. 129 -- 601 90 1,095 1,786 Net income.................................. -- -- -- -- 1,618 1,618 --- --- ----- --- ----------- --------- Balance, December 31, 1996.................. 129 -- 601 90 2,713 3,404 --- --- ----- --- ----------- --------- Net income (Unaudited)...................... -- -- -- -- 1,126 1,126 --- --- ----- --- ----------- --------- Balance, September 30, 1997 (Unaudited)..... 129 -- $ 601 $ 90 $ 3,839 $ 4,530 --- --- ----- --- ----------- --------- --- --- ----- --- ----------- ---------
The accompanying notes are an integral part of these financial statements F-34 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS YEAR ENDED DECEMBER ENDED 31, SEPTEMBER 30, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities Net income............................................................ $ 181 $ 1,618 $ 1,311 $ 1,126 --------- --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities (Gain) loss on disposal of assets, net.............................. 38 (11) (2) 5 Depreciation........................................................ 94 151 81 104 (Increase) decrease in operating assets Accounts receivable, trade........................................ (103) (573) (763) (1,319) Accounts receivable, employee and other........................... (22) 16 16 3 Inventories....................................................... (472) (672) (578) (35) Prepaid income taxes.............................................. (55) 55 55 -- Deferred income taxes............................................. -- (8) 30 (312) Increase (decrease) in operating liabilities Accounts payable.................................................. 353 (12) 110 (154) Accrued expenses.................................................. 22 158 144 473 Construction contract payable..................................... 269 (269) (269) -- Income taxes payable.............................................. (137) 817 636 (346) Deferred income taxes............................................. 4 (8) (30) 13 --------- --------- --------- --------- Total adjustments, net.......................................... (9) (356) (570) (1,568) --------- --------- --------- --------- Net cash provided by (used by) operating activities................. 172 1,262 741 (442) --------- --------- --------- --------- Cash flows from investing activities Payments for purchase of property and equipment, net.................. (994) (197) (125) (348) Other investments..................................................... -- (100) -- -- Repayments of stockholder loans....................................... (240) -- -- -- Other assets.......................................................... (1) -- -- -- --------- --------- --------- --------- Net cash used by investing activities............................... (1,235) (297) (125) (348) --------- --------- --------- --------- Cash flows from financing activities Proceeds from common stock issuance................................... 600 -- -- -- Payments on long-term debt............................................ (15) (18) (14) (35) Proceeds from issuance of long-term debt.............................. 597 168 152 14 --------- --------- --------- --------- Net cash provided by (used by) financing activities................. 1,182 150 138 (21) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents................ 119 1,115 754 (811) Cash and cash equivalents, beginning of period.......................... 355 474 474 1,589 --------- --------- --------- --------- Cash and cash equivalents, end of period................................ $ 474 $ 1,589 $ 1,228 $ 778 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements F-35 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY Audio International, Inc. (the Company), an Arkansas Corporation, was incorporated January 2, 1987 for the primary purpose of designing, manufacturing and marketing audio and video systems for the aviation industry. On February 16, 1995, the Company formed a new corporation, Audio International Sales, Inc. (a Foreign Sales Corporation), in the Virgin Islands which is a wholly-owned subsidiary of the Company. Foreign sales accounted for approximately 7.2% and 6.9% of total revenues for the years ended December 31, 1995 and 1996, and approximately 6.2% and 13.9% of total revenues for the nine months ended September 30, 1996 and 1997, respectively. CONSOLIDATION The accompanying financial statements present the consolidated accounts of the Company and its wholly-owned subsidiary. Accordingly, the consolidated financial statements include all of the assets, liabilities, income, expenses, and cash flows for these companies. All significant intercompany transactions and balances have been eliminated. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. ALLOWANCE FOR DOUBTFUL ACCOUNTS Bad debts are provided on the allowance method based on historical experience and management's evaluation of outstanding accounts receivable. The balance of the allowance at December 31, 1995 and 1996, was $20,000, and at September 30, 1997 was $174,000. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Major renewals and betterments are capitalized while replacements, maintenance, and repairs which do not improve or extend the life of an asset are expensed. Property and equipment is depreciated over the estimated useful lives of the various assets using the straight-line method for financial statement purposes. INCOME TAXES Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Current income taxes are based on taxable income for federal and state tax reporting purposes. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, management considers all highly liquid debt instruments, including repurchase agreements, with an original maturity of three months or less to be cash equivalents. F-36 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Current operations are charged with all research, engineering, and product development expenses which amounted to approximately $376,000 and $640,000 for the years ended December 31, 1995 and 1996, and approximately $428,000 and $742,000 for the nine months ended September 30, 1996 and 1997, respectively. WARRANTY RESERVE The financial statements include product warranty reserves of approximately $25,000 and $62,000 at December 31, 1995 and 1996, and $109,000 at September 30, 1997. The reserve, which is classified as a current liability for financial statement purposes, is based upon estimates of future costs associated with fulfilling warranty obligations. ADVERTISING EXPENSE Advertising expenditures, including production cost related to various units utilized for demonstrations and display, are expensed as incurred. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash in financial institutions, repurchase agreements, and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. At times such deposits may be in excess of insurance limits. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts for the year ended December 31, 1995, have been reclassified to conform with the presentation of the December 31, 1996 amounts. The reclassifications have no effect on net income for the years ended December 31, 1995 or 1996. NOTE 2 - REPURCHASE AGREEMENTS The Company is party to a contract with a local bank under which all operating funds on deposit with the bank are invested in repurchase agreements on a daily basis. The bank maintains, as collateral F-37 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 2 - REPURCHASE AGREEMENTS (CONTINUED) for the benefit of the Company, certain securities in its investment portfolio. The collateral consists of United States government obligations, obligations of United States government agencies, or other obligations guaranteed by the United States government. The securities are held by an agent bank or registered in the agent's name as an owner or pledgee at the Federal Reserve Bank. Interest, at a rate determined by the bank, is paid on a daily basis. The agreements are repurchased by the bank upon presentation of any check or other withdrawal of funds from the Company's operating account. NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands):
DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- --------------- (UNAUDITED) Raw materials $ 546 $ 863 $ 879 Work-in-process 147 403 492 Finished goods 138 237 167 --------- --------- ------- Total inventories $ 831 $ 1,503 $ 1,538 --------- --------- ------- --------- --------- -------
NOTE 4 - PROPERTY AND EQUIPMENT During 1995 the City of North Little Rock Industrial Development Corporation conveyed title to certain land to the Company for consideration of $10 and an agreement that the Company would locate its new facility on the property. This land, and the related contribution of capital, was recorded for financial statement purposes at its estimated fair market value of $90,000 at the date of receipt. The following is a summary of property and equipment (amounts in thousands):
DECEMBER 31, ESTIMATED -------------------- USEFUL LIVES 1995 1996 ------------ --------- --------- SEPTEMBER 30, 1997 --------------- (UNAUDITED) Land, contributed............................................. -- $ 90 $ 90 $ 90 Building and improvements..................................... 40 years 727 786 915 Machinery and equipment....................................... 3-7 years 536 658 846 Office furniture and equipment................................ 3-7 years 70 96 96 Motor vehicles................................................ 5 years 111 95 90 --------- --------- ------- 1,534 1,725 2,037 Accumulated depreciation.................................... (291) (426) (499) --------- --------- ------- Net property and equipment................................ $ 1,243 $ 1,299 $ 1,538 --------- --------- ------- --------- --------- -------
The Company substantially completed construction of its new facility, and moved its operations from leased facilities, in December 1995. This change in facilities resulted in losses from abandonment of leasehold improvements of approximately $42,000. F-38 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 5 - OTHER INVESTMENTS In December 1996, the Company entered into a contract with an unrelated entity, whereby the Company advanced the entity $100,000 to be used to manufacture and develop certain products for the Company. The advance payment will be recovered through annual discounts on Company purchases of products from the entity over the term of the contract. NOTE 6 - BANK LINE OF CREDIT A revolving line of credit, which bears interest at the lender's prime rate, is provided to the Company under the terms of a credit agreement dated June 15, 1996. The terms of the agreement allow the Company to borrow up to $200,000. The line of credit is secured by amounts on deposit with the financial institution. There was no balance outstanding on this line of credit at December 31, 1995 or 1996, or at September 30, 1997. NOTE 7 - ACCRUED EXPENSES Accrued expenses consist of the following (amounts in thousands):
DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- ----------------- (UNAUDITED) Payroll.......................................................................... $ 52 $ 107 $ 366 Vacation......................................................................... 36 54 54 Payroll taxes withheld and accrued............................................... 33 75 65 Reserve for warranties........................................................... 25 61 109 Other............................................................................ 8 15 191 --------- --------- ----- Total accrued expenses......................................................... $ 154 $ 312 $ 785 --------- --------- ----- --------- --------- -----
NOTE 8 - LONG-TERM DEBT Long-term debt consists of the following (amounts in thousands):
DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- ----------------- (UNAUDITED) Note payable to Arkansas Development Finance Authority; due in annual installments through May, 2011, including interest ranging from 5.25% to 6.0%, secured by property and equipment.............................................. $ 597 $ 750 $ 724 Notes payable to bank; secured by vehicles; payable in monthly installments including interest at 7.3%, through February, 2000............................. 21 18 23 --------- --------- ----- 618 768 747 Current portion.................................................................. (39) (44) (45) --------- --------- ----- Long-term debt, excluding current portion...................................... $ 579 $ 724 $ 702 --------- --------- ----- --------- --------- -----
F-39 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 8 - LONG-TERM DEBT (CONTINUED) During the year ended December 31, 1996, the Company obtained permanent financing, which refinanced its interim note on its new facility. Thus, the note has been classified as long-term debt as of December 31, 1995 and 1996, for financial statement purposes. This debt requires a reserve account for monthly deposits to provide for the next installment of debt service. The balance in this account, which totaled $-0- and $43,000 at December 31, 1995 and 1996, respectively, and $43,000 at September 30, 1997, is included in Cash in Financial Institutions. The terms of the note also require the Company to meet certain restrictive debt covenants, which have been met as of December 31, 1995 and 1996 and September 30, 1997. Cash payments for interest on all debt amounted to $23,000 and $46,000 for the years ended December 31, 1995 and 1996, and $34,000 and $35,000 for the nine months ended September 30, 1996 and 1997, respectively. Maturities of long-term debt, based upon the Company's monthly sinking fund and other debt requirements, is as follows at December 31, 1996 (amounts in thousands):
Year ending December 31, 1997.................................................................................................... $ 44 1998.................................................................................................... 39 1999.................................................................................................... 44 2000.................................................................................................... 41 2001.................................................................................................... 40 Thereafter.............................................................................................. 560 --------- Total................................................................................................. $ 768 --------- ---------
Maturities of long-term debt based upon the Company's monthly sinking fund and other debt requirements, is as follows at September 30, 1997 (amounts in thousands):
Twelve months ending September 30, 1998.................................................................................................... $ 45 1999.................................................................................................... 44 2000.................................................................................................... 43 2001.................................................................................................... 41 2002.................................................................................................... 40 Thereafter.............................................................................................. 534 --------- Total................................................................................................. $ 747 --------- ---------
F-40 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 9 - INCOME TAXES Income tax expense (benefit) is summarized as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 ----- --------- Current: Federal........................................................................................ $ 61 $ 794 State.......................................................................................... 1 149 --- --------- Total current................................................................................ 62 943 --- --------- Deferred: Federal........................................................................................ 4 (14) State.......................................................................................... 0 (3) --- --------- Total deferred............................................................................... 4 (17) --- --------- Total provision for income taxes........................................................... $ 66 $ 926 --- --------- --- ---------
The actual income tax expense differs from "expected" tax expense (computed by applying appropriate U.S. Federal corporate income tax rates to income before income taxes) primarily due to the effects of state income tax, Federal and state tax credits, nondeductible life insurance premiums, Foreign Sales Corporation income exclusions and entertainment expenses. Cash payments for income taxes amounted to $259,000 and $88,000 for the years ended December 31, 1995 and 1996, and $55,000 and $1,302,000 for the nine months ended September 30, 1996 and 1997, respectively. The Company's deferred tax assets and deferred tax liabilities are as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 ----- ----- Current deferred tax assets, net.................................................................. $ 30 $ 38 Noncurrent deferred tax liabilities, net.......................................................... 31 23 --- --- Net deferred tax asset (liability).............................................................. $ (1) $ 15 --- --- --- ---
The Company's deferred tax assets and deferred tax liabilities result primarily from the use of accelerated methods of depreciation for tax purposes; bad debt reserves, accrued warranty expense and accrued vacation expense being recorded for financial statement purposes; and different inventory valuations for tax and book purposes. In assessing of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those F-41 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 9 - INCOME TAXES (CONTINUED) temporary differences become deductible. Based upon the level of historical taxable income, management believes it is more likely than not the Company will realize the benefits of these deductible differences. NOTE 10 - EMPLOYEE BENEFIT PLAN The Company has adopted a retirement plan which qualifies under Section 401(k) of the Internal Revenue Code and therefore includes certain salary deferral features for eligible employees. Employees may elect to contribute up to fifteen percent of their gross earnings to the plan. The Company makes matching contributions equal to employee contributions up to 3% of each participating employee's salary. Matching contributions to the plan were approximately $25,000 and $40,000 for the years ended December 31, 1995 and 1996, and $29,000 and $41,000 for the nine months ended September 30, 1996 and 1997, respectively. NOTE 11 - BUSINESS CONCENTRATIONS The majority of the Company's sales and service revenues are generated through customers in the private aviation industry located throughout the United States. At any given time, certain customers may account for significant portions of the Company's business. The Company's largest six customers accounted for approximately 58% and 63% of net sales for the years ended December 31, 1995 and 1996, and 61% and 64% of net sales for the nine months ended September 30, 1996 and 1997, respectively. NOTE 12 - RESTATEMENT OF BALANCES Effective January 1, 1995, the Company adopted generally accepted accounting principles for the preparation of its financial statements. In previous years, the records and financial statements of the Company were prepared on the income tax basis of accounting. Certain adjustments have been applied to the beginning retained earnings in order to restate amounts in accordance with generally accepted accounting principles. An analysis of these adjustments, and the restated beginning retained earnings, is as follows (amounts in thousands):
January 1, 1995 balance, as previously reported........................................................... $ 853 Adjustments for expense accruals and reserves............................................................. (70) Adjustments for inventory, property and equipment valuations.............................................. 131 --------- January 1, 1995 balance, as restated.................................................................... $ 914 --------- ---------
NOTE 13 - COMMON STOCK ISSUANCE During 1995, the Company and its shareholders entered into an agreement under which twenty-nine shares of the Company's $1 par value capital stock were to be issued to a new shareholder in exchange for consideration of $600,000 deposited with the Company during 1995. In addition, the then existing shareholders of the Company each would sell seven shares of their capital stock to the new F-42 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 13 - COMMON STOCK ISSUANCE (CONTINUED) shareholder, creating a one-third interest for each of the three shareholders. This agreement was consummated February 20, 1996. For comparative financial statement purposes, certain reclassifications have been made to reflect this transaction as of December 31, 1995. Thus, at December 31, 1995 and 1996, one hundred and twenty-nine of the Company's one thousand authorized shares were considered to be issued and outstanding. The stock acquisition agreement contained additional provisions requiring the employment of each of the three shareholders for a minimum of five years from the date of the agreement and various other provisions related to bonus arrangements and fringe benefits. NOTE 14 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT On November 14, 1997, the Company's stockholders entered into an acquisition agreement, under which all shares of the Company were acquired by DeCrane Aircraft Holdings, Inc. F-43 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 The Company.................................... 3 Risk Factors................................... 7 Use of Proceeds................................ 12 Dividend Policy................................ 12 Capitalization................................. 13 Selected Consolidated Financial Data........... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 19 Business....................................... 25 Management..................................... 42 Principal and Selling Stockholders............. 49 Certain Transactions........................... 52 Description of Capital Stock................... 53 Shares Eligible for Future Sale................ 57 Underwriting................................... 58 Legal Matters.................................. 59 Experts........................................ 59 Additional Information......................... 59 Index to Financial Statements.................. F-1
2,500,000 SHARES J COMMON STOCK ------------ PROSPECTUS ------------ BT ALEX. BROWN FURMAN SELZ LLC SBC WARBURG DILLON READ INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all estimated expenses incurred or expected to be incurred by the Registrant in connection with the issuance and distribution of the securities being registered hereby, other than underwriting discounts and commissions.
ITEM AMOUNT - ------------------------------------------------------------- --------------------------------------- SEC Registration Fee......................................... NASD Filing Fee.............................................. Blue Sky Filing Fees and Expenses............................ Printing and Engraving Costs................................. Transfer Agent Fees.......................................... Legal Fees and Expenses...................................... Accounting Fees and Expenses................................. Miscellaneous................................................ Total......................................................
All amounts are estimated except for the SEC Registration Fee and the NASD Filing Fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation contains a provision eliminating or limiting director liability to the Company and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director. The provision does not, however, eliminate or limit the personal liability of a director: (i) for any breach of such director's duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under the Delaware statutory provision making directors personally liable, under a negligence standard, for unlawful dividends or unlawful stock purchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. This provision offers persons who serve on the Board of Directors of the Company protection against awards of monetary damages resulting from breaches of their duty of care (except as indicated above). As a result of this provision, the ability of the Company or a stockholder thereof to successfully prosecute an action against a director for breach of his duty of care is limited. However, the provision does not affect the availability of equitable remedies such as an injunction or recision based upon a director's breach of his duty of care. The Commission has taken the position that the provision will have no effect on claims arising under the Federal securities laws. In addition, the Certificate of Incorporation and the Company's Bylaws provide for mandatory indemnification rights, subject to limited exceptions, to any director or executive officer of the Company who by reason of the fact that he or she is a director or officer of the Company, is involved in a legal proceeding of any nature. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable provisions of GCLSD. The Company may from time to time agree to provide similar indemnifications to certain employees and other agents. The Company also maintains directors' and officers' liability insurance. In addition, the Underwriting Agreement provides for indemnification by the Underwriters of the Registrant, its directors and officers against certain liabilities, including liabilities under the Securities Act of 1933, as amended. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (1) Pursuant to a Securities Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John Hinson, an officer of the Company, the Company sold 75,000 shares of Series C preferred stock for a purchase price of $1.50 per share. The sale of these securities was exempt from registration pursuant to Section 4(2) of the Act. (2) Pursuant to a Securities Purchase Agreement dated as of February 20, 1996 between the Company and Nassau, the Company issued for an aggregate purchase price of $6.5 million: (i) 2,000,000 shares of Series D Preferred Stock, and (ii) warrants to purchase 194,618 shares of Common Stock. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Act. (3) Pursuant to a Securities Purchase Agreement dated September 18, 1996 among the Company, [Nassau and Electra,] the Company sold (i) $2.0 million aggregate principal amount of 15% convertible notes and 49,079 warrants to purchase Common Stock, for a purchase price of $3.0 million, and (ii) 750,000 shares of Series E Preferred Stock and 49,079 warrants to purchase Common Stock, for a purchase price of $3.0 million. The issuance of such securities was exempt from registration under Section 4(2) of the Act. (4) Pursuant to an Amended and Restated Credit Agreement dated as of September 18, 1996 among the Company, ING (U.S.) Capital Corporation and Provident Bank the Company issued to 70,892 warrants to purchase Common Stock as additional consideration for amendments to the Prior Credit Facility. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A filed April 14, 1997) 5.1 Opinion of Spolin & Silverman (re legality) 10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead International, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's Trust f/b/o Michael E. Allard(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela Nazarian, Trustees of the Nazarian Family Trust(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 among the Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I L.L.C. 10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV Partners, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El Segundo, CA(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, ADS Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star Technologies, Inc., Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory Holdings, Inc., Cory Components, Inc., Hollingsead International, Inc., Hollingsead International Limited, The Provident Bank, and Internationale Nederlanden (U.S.) Capital Corporation(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number 6-5752-0002(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components, Number 6-5752-0004(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January 1, 1995 through December 31, 1999(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing Commercial Airplane Group and Tri-Star Electronics International(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o John Allard, The Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David and Angela Nazarian, Trustees of the Nazarian Family Trust, the principal shareholders of Allard, the Company and ADS Acquisition, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition, Inc., William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital Partners L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among the Company, Electra Investment Trust P.L.C. and Electra Associates, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
II-4 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker, Robert Rankin(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the Recapitalization.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997) 10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto. 10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead International, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown, Richard Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997) 10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for real property in Garden Grove California 11.1 Statement regarding computation of per share earnings of the Company* 21.1 List of Subsidiaries of Registrant* 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Spolin & Silverman (included in Exhibit 5.1) 23.3 Consent of Thomas & Thomas 24.1 Power of Attorney (appears on signature page)
II-5 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 27 Financial Data Schedule
- ------------------------ * To be filed by Amendment. (B) FINANCIAL STATEMENT SCHEDULE: Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the Closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES This Amendment to Registration Statement and Power of Attorney, pursuant to the requirements of the Securities Act of 1933, as amended, has been signed on its behalf by the undersigned, thereunto duly authorized, in the State of California, on this 6th day of March, 1998. DECRANE AIRCRAFT HOLDINGS, INC. By: /s/ R. JACK DECRANE ----------------------------------------- R. Jack DeCrane CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints R. Jack DeCrane, R.G. MacDonald and Robert A. Rankin, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to take such actions in, and file with the appropriate authorities in, whatever states said attorneys-in-fact and agents, and each of them, shall determine, such applications, statements, consents and other documents as may be necessary or expedient to register securities of the Company for sale, granting unto said attorneys-in-fact and agents full power and authority to do so and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf. This Registration Statement and Power of Attorney, pursuant to the requirement of the Securities Act of 1933, as amended, have been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ------------------------------ -------------------------- ------------------- /s/ R. JACK DECRANE Chairman of the Board, - ------------------------------ Chief Executive Officer March 6, 1998 R. Jack DeCrane and Director /s/ R. G. MACDONALD - ------------------------------ Vice Chairman of the Board March 6, 1998 R. G. MacDonald and Director Chief Financial Officer, /s/ ROBERT A. RANKIN Secretary and Treasurer - ------------------------------ (principal accounting March 6, 1998 Robert A. Rankin officer)
II-7
SIGNATURE CAPACITY DATE - ------------------------------ -------------------------- ------------------- /s/ JAMES R. BERGMAN - ------------------------------ Director March 6, 1998 James R. Bergman /s/ PAUL H. CASCIO - ------------------------------ Director March 6, 1998 Paul H. Cascio /s/ MITCHELL I. QUAIN - ------------------------------ Director March 6, 1998 Mitchell I. Quain /s/ JONATHAN A. SWEEMER - ------------------------------ Director March 5, 1998 Jonathan A. Sweemer
II-8 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BEGINNING OF COST AND CHARGED TO OTHER BALANCE AT CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD - ------------------------------------------ ------------- ------------- ---------------- ----------- ------------- YEAR ENDED DECEMBER 31, 1995 Allowance for Doubtful Accounts........... $ 243,000 $ 66,000 $ 62,000(A) $ 112,000 $ 259,000 Reserve for excess, slow moving and potentially obsolete material........... $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000 YEAR ENDED DECEMBER 31, 1996 Allowance for Doubtful Accounts........... $ 259,000 $ 68,000 $ 71,000(B) $ 19,000 $ 379,000 Reserve for excess, slow moving and potentially obsolete material........... $ 1,154,000 $ 1,055,000 -- $ 116,000 $ 2,093,000 YEAR ENDED DECEMBER 31, 1997 Allowance for Doubtful Accounts........... $ 379,000 $ 111,000 $ 174,000(C) $ 177,000 $ 487,000 Reserve for excess, slow moving and potentially obsolete material........... $ 2,093,000 $ 1,374,000 $ 59,000(D) $ 162,000 $ 3,364,000
- ------------------------ (A) Comprised of the following: Effect of foreign currency translation; $ 3,000 Recovery of amounts previously written off. 59,000 ------------ $ 62,000 ------------ ------------ (B) Comprised of the following: Effect of foreign currency translation; $ (4,000) Recovery of amounts previously written off; 20,000 Attributable to companies acquired. 55,000 ------------ $ 71,000 ------------ ------------ (C) Attributable to company acquired. (D) Attributable to companies acquired.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A filed April 14, 1997) 5.1 Opinion of Spolin & Silverman (re legality) 10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead International, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's Trust f/b/o Michael E. Allard(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela Nazarian, Trustees of the Nazarian Family Trust(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 among the Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I L.L.C.
EXHIBIT NUMBER DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------------------------- ----------- 10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV Partners, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El Segundo, CA(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, ADS Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star Technologies, Inc., Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory Holdings, Inc., Cory Components, Inc., Hollingsead International, Inc., Hollingsead International Limited, The Provident Bank, and Internationale Nederlanden (U.S.) Capital Corporation(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number 6-5752-0002(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components, Number 6-5752-0004(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory Components, January 1, 1995 through December 31, 1999(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing Commercial Airplane Group and Tri-Star Electronics International(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o John Allard, The Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David and Angela Nazarian, Trustees of the Nazarian Family Trust, the principal shareholders of Allard, the Company and ADS Acquisition, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition, Inc., William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
EXHIBIT NUMBER DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------------------------- ----------- 10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital Partners L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among the Company, Electra Investment Trust P.L.C. and Electra Associates, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker, Robert Rankin(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the Recapitalization.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997) 10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.
EXHIBIT NUMBER DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------------------------- ----------- 10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead International, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939) 10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown, Richard Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997) 10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for real property in Garden Grove California 11.1 Statement regarding computation of per share earnings of the Company* 21.1 List of Subsidiaries of Registrant* 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Spolin & Silverman (included in Exhibit 5.1) 23.3 Consent of Thomas & Thomas 24.1 Power of Attorney (appears on signature page) 27 Financial Data Schedule
- ------------------------ * To be filed by Amendment. EX-1.1 2 EXHIBIT 1.1 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 __________________ Shares DeCrane Aircraft Holdings, Inc. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT __________________, 1998 BT Alex. Brown Incorporated SBC Warburg Dillon Read Inc. Furman Selz LLC As Representatives of the Several Underwriters c/o BT Alex. Brown Incorporated 1 South Street Baltimore, Maryland 21202-3220 Gentlemen: DeCrane Aircraft Holdings, Inc., a Delaware corporation (the "Company"), and certain shareholders of the Company (the "Selling Shareholders") propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of ___________ shares of the Company's Common Stock, $.01 par value (the "Firm Shares"), of which ________ shares will be sold by the Company and ___________ shares will be sold by the Selling Shareholders. The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts to be sold by the Selling Shareholders are set forth opposite their names in Schedule II hereto. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "Sellers." The Company [and] [the] [certain] Selling Shareholders] also propose[s] to sell at the Underwriters' option an aggregate of up to _________ additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company represents and warrants to, and agrees with, each of the Underwriters as follows: (i) A registration statement on Form S-1 (File No. 333- ) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents -2- incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and otherwise) to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries"), other than Tri-Star Technologies ("TST"), has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and, in the case of TST, has been duly formed and is validly existing as a partnership in good standing under the laws of its jurisdiction of formation, with power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified as a foreign corporation, or, in the case of TST, as a foreign partnership, to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of each of the Subsidiaries, and, in the case of TST, all partnership interests, have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding, except as otherwise described in the Prospectus. Except for the partnership interests in TST and the shares of capital stock of each other Subsidiary, neither the Company nor any Subsidiary owns, directly or indirectly, any shares of capital stock of any corporation or has any equity interest in any firm, partnership, joint venture, association, limited liability company or other entity. (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof; and the Shares will be quoted on the Nasdaq National Market as of the Closing Date. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (iv) The Company has all requisite power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by the Company of its obligations under this Agreement have been duly and -3- validly authorized by all requisite corporate action of the Company; and this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as enforceability of the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and except as enforceability of those provisions relating to indemnity may be limited by the Federal securities laws and the principles of public policy. (v) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (vi) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be, stated therein by, and will conform, to the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vii) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial statements -4- and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (viii) There are no statutes or governmental regulations, or any contracts or other documents that are required to be described in or filed as exhibits to the Registration Statement which are not described therein or filed as exhibits thereto; and all such contracts to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute legal, valid and binding agreements of the Company or such Subsidiary and are enforceable against the Company or Subsidiary in accordance with the terms thereof. (ix) Price Waterhouse LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (x) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries or any of their respective executive officers or directors before any court or administrative agency or otherwise which if determined adversely to the Company or any of the Subsidiaries or any of their respective executive officers or directors might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (xi) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement, the interests of the Company or any of the Subsidiaries in such leases are free and clear of all material liens, encumbrances and defects, except as disclosed in the Prospectus, and the Company and the Subsidiaries are in compliance in all material respects with the terms and conditions of such leases. Except for such assets and facilities as are immaterial in the aggregate to the business of the Company and the Subsidiaries taken as a whole, tangible assets and facilities of the Company and the -5- Subsidiaries are adequate, in the reasonable opinion of the Company, for the use to which they are being put or would be put in the ordinary course of business, and the operation and use of such assets and facilities is in compliance with all municipal, county, state and federal laws, regulations, ordinances, standards, orders and other regulations where the failure to comply therewith would have a material adverse effect on the condition (financial or otherwise) or the earnings, business affairs or business prospects of the Company and the Subsidiaries, taken as a whole. (xii) The Company and the Subsidiaries have timely filed all Federal, state, county, local and foreign income tax returns which have been required to be filed and have paid all taxes (whether or not disclosed on such returns) and all assessments received by them or any of them to the extent that such taxes have become due. All tax liabilities have been adequately provided for in the financial statements of the Company. The Company has no knowledge, or any reasonable grounds to know, of any tax deficiencies which would have a material adverse effect on the Company or any of the Subsidiaries taken as a whole. (xiii) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and the Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (xiv) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Charter or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and the Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, -6- or of the Charter or by-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xv) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xvi) The Company and each of the Subsidiaries holds all material licenses, certificates, permits and other approvals from governmental or regulatory authorities, including, without limitation, the Federal Aviation Administration (the "FAA") (collectively, "Permits") which are necessary to the conduct of their businesses; neither the Company nor any of the Subsidiaries has received any notice of proceedings or has any reason to believe proceedings are pending relating to the revocation or modification of any such Permits where the revocation of such Permit would have a material adverse effect on the Company and the Subsidiaries taken as a whole; and the Company and the Subsidiaries have fulfilled and performed in all material respects of their respective obligations with respect to such Permits, and no event has occurred which allows, or after notice or lapse of time or both would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permits which would have a material adverse effect on the Company and the Subsidiaries taken as a whole. (xvii) The Company and the Subsidiaries own or possess adequate patent rights or licenses or other rights to use patent rights, inventions, trademarks, service marks, trade names, copyrights, technology and know-how necessary to conduct the general business now or proposed to be operated by them as described in the Registration Statement; neither the Company nor any of the Subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trademarks, service marks, trade names, copyrights, technology or know-how which, singly or in the aggregate, could materially adversely affect the business, operations, financial condition, income or business prospects of the Company and the Subsidiaries taken as a whole; and, the discoveries, inventions, products or processes of the Company and the Subsidiaries referred to in the Registration Statement do not, to the Company's knowledge, infringe or conflict with any patent or right of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company. -7- (xviii) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on The Nasdaq Stock Market in accordance with Regulation M. (xix) None of the Company or the Subsidiaries is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder, or is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any federal or state statute or regulation limiting its respective ability to incur indebtedness for borrowed money, except statutes or regulations applicable generally to business corporations incorporated or doing business in the various states in which the Company and the Subsidiaries do business. (xx) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxi) The Company and each of the Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xxii) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has -8- occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xxiii) The Company confirms as of the date hereof that it is in compliance with all provisions of Section l of Laws of Florida, Chapter 92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and any similar law, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (xxiv) (A) Neither the Company nor any of the Subsidiaries is engaged in any unfair labor practice which would have a material adverse effect on the Company and the Subsidiaries, taken as a whole; (B) there is, to the Company's knowledge, (I) no unfair labor practice complaint pending or threatened against the Company or any of the Subsidiaries before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collectible bargaining agreements is pending or threatened, (II) no strike, labor dispute, slowdown or stoppage is pending or threatened against the Company or any of the Subsidiaries and (III) (1) no union representation question existing with respect to the employees of the Company or any of the Subsidiaries and, no union organizing activities are taking place, and (2) there has been no violation of any federal, state or local law relating to discrimination in the hiring, promotion or pay of employees, of any applicable wage or hour laws. (xxv) (A) Each of the Company and the Subsidiaries has obtained all permits, licenses and other authorizations that are required under all applicable federal, state, local and foreign environmental laws, including, but not limited to, the Federal Water Pollution Control Act (33 U.S.C. Section 1251 ET SEQ.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 ET SEQ.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Sections 201, 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 ET SEQ.), Clean Air Act (42 U.S.C. Section 7401 ET SEQ.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 ET SEQ.), the appropriate laws of any state in which the Company or any of the Subsidiaries owns or leases real property and any other laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes or under any regulation, code, plan, -9- order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder (collectively, the "Environmental Laws"), except as otherwise set forth in the Registration Statement or to the extent failure to have any such permit, license or authorization, individually, or in the aggregate, does not have a material adverse effect on the Company and the Subsidiaries, taken as a whole; (B) except as described in the Registration Statement, each of the Company and the Subsidiaries is in compliance will all terms and conditions of any required permits, licenses and authorizations, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws, except to the extent failure to comply would not have a material adverse effect on the Company and the Subsidiaries, taken as a whole; and (C) except as disclosed in the Registration Statement, the Company and the Subsidiaries do not have any material liabilities arising under Environmental Laws. (xxvi) (A) There are no past or present events, conditions, circumstances, activities, practices, incidents, actions, or plans relating to the business as presently being conducted by the Company or the Subsidiaries that interfere with or prevent compliance or continued compliance with the Environmental Laws, or which would be reasonably likely to give rise to any legal liability (whether statutory or common law) or otherwise would be reasonably likely to form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study, investigation, remediation or cleanup based on or related to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release into the workplace, the community or the environment of any pollutant, contaminant, chemical or industrial, toxic, or hazardous substance or waste, except for any liabilities or any claims, demands or other actions specified above that are described in the Registration Statement or which will not individually or in the aggregate have a material adverse effect on the Company and the Subsidiaries, taken as a whole, and (B) except as previously disclosed to the Underwriters or their counsel, no asbestos- containing material and no underground or above-ground storage tanks are located on property owned or leased by the Company or the Subsidiaries and none have been previously removed or filled by the Company or the Subsidiaries or, to the best of their knowledge, any predecessor of the Company or the Subsidiaries. (xxvii) Except as disclosed in the Registration Statement, there are no business relationships or related party transactions required to be disclosed therein by Item 404 of Regulation S-K promulgated under the Act. (xxviii) None of the Company and the Subsidiaries, or its executive officers, directors, employees or agents has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, or made any unlawful payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation. -10- (xxix) The Directors' and Officers' Questionnaires delivered by the Company to the Underwriters on or prior to the Closing Date are true and correct in all material respects. (xxx) All documents filed with the Commission conform in all respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Act, as applicable, and the rules and regulations of the Commission thereunder. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder now has and at the Closing Date [and the Option Closing Date, as the case may be] (as such date[s] [is] [are] hereinafter defined) will have good and marketable title to the Firm Shares [and the Option Shares] to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Firm Shares [and Option Shares]; and upon the delivery of, against payment for, such Firm Shares [and Option Shares] pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custodian Agreement referred to below and to perform its obligations under such Agreements; the execution, delivery and performance by such Selling Shareholder of its obligations under this Agreement, Power of Attorney and the Custodian Agreement have been duly and validly authorized by all requisite action (corporate and other) of such Selling Shareholder; and this Agreement, the Power of Attorney and the Custodian Agreement constitutes the legal, valid and binding obligation of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms except as enforceability of the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and except as enforceability of those provisions relating to indemnity may be limited by Federal securities laws and principles of public policy. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable -11- to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder and its affiliates have not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section l are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Firm Shares [and the Option Shares] by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement or the documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption ["Selling Shareholders"] in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Sellers agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $ ______ [net price] per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by each Seller as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and of each of the Selling Shareholders shall be several and not joint. (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with BankBoston, N.A., as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Shareholder for delivery of all Firm Shares [and any Option Shares] to be -12- sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Firm Shares [and any Option Shares] represented by the certificates held in custody for the Selling Shareholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Firm Shares [or the Option Shares] hereunder, certificates for the Firm Shares [or the Options Shares, as the case may be,] shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. (c) [Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company for the shares to be sold by it and to the order of "BankBoston, N.A., as Custodian" for the shares to be sold by the Selling Shareholders, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date.] (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company [and [the] [certain] Selling Shareholders [listed on Schedule III hereto]] hereby grant[s] an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. [The maximum number of Option Shares to be sold by the Company and the Selling Shareholders is set forth opposite their respective names on Schedule III hereto.] The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) -13- only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company, [the Attorney-in-Fact,] and the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. [If the option granted hereby is exercised in part, the respective number of Option Shares to be sold by the Company and each of the Selling Shareholders listed in Schedule III hereto shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule III hereto, adjusted by you in such manner as to avoid fractional shares.] The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company [and the Attorney-in- Fact]. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company [for the Option Shares to be sold by it and to the order of "BankBoston, as Custodian" for the Option Shares to be sold by the Selling Shareholders] against delivery of certificates therefor at the offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland. (e) If on the Closing Date [or Option Closing Date, as the case may be,] any Selling Shareholder fails to sell the Firm Shares [or Option Shares] which such Selling Shareholder has agreed to sell on such date as set forth in SCHEDULE II hereto, the Company agrees that it will sell or arrange for the sale of that number of shares of Common Stock to the Underwriters which represents Firm Shares [or the Option Shares] which such Selling Shareholder has failed to so sell, as set forth in SCHEDULE II hereto, or such lesser number as may be requested by the Representatives. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares -14- are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representative for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, -15- from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 45 days after the close of the period covered thereby, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any -16- securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of ___ days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated. (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Nasdaq National Market. (x) The Company has caused each officer and director and specific shareholders of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Shares or derivative of Common Shares owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated ("Lockup Agreements"). (xi) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company and its affiliates will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be -17- expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Selling Shareholder or request the registration for the offer or sale of any of the foregoing (or as to which the Selling Shareholder has the right to direct the disposition of) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by such Selling Shareholder otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder and its affiliates will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of the Nasdaq National Market; and the expenses, including the fees and disbursements of -18- counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. [The Selling Shareholders have agreed with the Company to reimburse the Company for a portion of such expenses. To the extent, if at all, that any of the Selling Shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata.] The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company and the Subsidiaries. The Sellers shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 1l hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose -19- shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinions of (i) Spolin & Silverman and (ii) Hogan & Hartson L.L.P., counsel for the Company[, and __________, counsel for the Selling Shareholders], dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority and all material governmental authorizations, permits and approvals to own, lease and operate its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries (other than TST) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and, in the case of TST, has been duly formed and is validly existing a partnership in good standing under the laws of the jurisdiction of its incorporation, with all necessary power (corporate and other) and authority and all material governmental authorizations, permits and approvals to own, lease and operate its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business and in good standing in all jurisdictions in which its ownership or leasing of property requires such qualification or the conduct of its business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries, and, in the case of TST, all partnership interests, have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries, and, in the case of TST, all partnership interests, is owned (A) beneficially and (B) free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or any partnership interests or of ownership interests in the Subsidiaries are outstanding, except as otherwise described in the Prospectus. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock, including the Shares to be sold by the Selling Shareholders, -20- have been duly authorized and validly issued and are fully paid and non- assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) All descriptions in the Prospectus of statutes, regulations (including without limitation, those of the Subsidiaries) or legal or governmental proceedings, and the statements under the captions "Risk Factors - Regulation," "Business - Industry Regulation and Approvals," "Description of Capital Stock" and ["Shares Eligible for Future Sale"] insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information presented. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration -21- Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries or any of their respective officers or directors or of which any property of the Company or any of the Subsidiaries is the subject, except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or by-laws of the Company or any of the Subsidiaries, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholders. (xiv) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (xv) The Custodian Agreement and the Power of Attorney executed and delivered by each Selling Shareholder is valid and binding. -22- (xvi) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Closing Date, and the Option Closing Date, as the case may be, free and clear of all liens, encumbrances, equities and claims. (xvii) To the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries is currently in violation of, or in default under, its Certificate of Incorporation, by-laws, Certificate of Limited Partnership or Partnership Agreement, or any indenture, mortgage, deed of trust, lease, bank loan or credit agreement, or any other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their property may be bound or affected (in any respect that is material in light of the financial condition of the Company and the Subsidiaries, taken as a whole). (xviii) Nothing has come to such counsel's attention to give such counsel reason to believe that any of the representations and warranties of the Company contained in the Agreement or in any certificate or document contemplated under the Agreement to be delivered are not true or correct or that any of the covenants and agreements herein contained, or set forth in the Registration Statement, to be fulfilled or complied with by the Company have not been or will not be duly and timely performed, fulfilled or complied with. In rendering such opinion Spolin & Silverman [and Hogan & Hartson LLP] may rely as to matters governed by the laws of states other than Delaware, California or Federal laws on local counsel in such jurisdiction and as to the matters set forth in subparagraphs (xiii), (xiv), (xv) and (xvi) on opinions of other counsel representing the respective Selling Shareholders, provided that in each case Spolin & Silverman [and Hogan & Hartson LLP] shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Spolin & Silverman may state that -23- their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Morgan, Lewis & Bockius LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the State of Delaware. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Morgan, Lewis & Bockius LLP, may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Morgan, Lewis & Bockius LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Price Waterhouse LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. -24- (f) The Representatives shall have received on the Closing Date or the Option Closing Date as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registrations Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the company contained in Section l hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (g) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq National Market. -25- (i) The Lockup Agreements described in Section 4(x) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Morgan, Lewis & Bockius LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholders of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company and the Selling Shareholders, jointly and severally, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company and the Selling -26- Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. In no event, however, shall the liability of any Selling Shareholder for indemnification under this Section 8(a) exceed the proceeds received by such Selling Shareholder from the Underwriters in the offering. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such -27- notice shall not relieve the indemnifying party or parties from any liability which it or they' may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing-interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company [and the Selling Shareholders] in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling -28- Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or, omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholder shall be required to contribute any amount in excess of the lesser of (A) that proportion of the total of such losses, claims, damages or liabilities indemnified or contributed against equal to the proportion of the total Shares sold hereunder which is being sold by such Selling Shareholder, or (B) the proceeds received by such Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. -29- (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (e) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number -30- of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention: _________; with a copy to BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland 21202. Attention: General Counsel; if to the Company or the Selling Shareholders, to DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Ave., Suite 180 El Segundo, California 90245 Attention: ______________________ 11. TERMINATION. This Agreement may be terminated by you by notice to the Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a -31- prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange, the American Stock Exchange or Nasdaq or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on any such exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, [(vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act);] (vii) the suspension of trading of the Company's common stock by the Commission on the Nasdaq National Market or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company, the Selling Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation -32- S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of [Maryland]. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. -33- Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, DECRANE AIRCRAFT HOLDINGS, INC. By: ______________________________________ R. Jack DeCrane Chairman of the Board and Chief Executive Officer Selling Shareholders listed on Schedule II By: ______________________________________ Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written BT ALEX. BROWN INCORPORATED _____________________________________ _____________________________________ As representatives of the several Underwriters listed on Schedule I By: BT Alex. Brown Incorporated By: ____________________________ [Authorized Officer] -34- SCHEDULE I SCHEDULE OF UNDERWRITERS Number of Firm Shares Underwriter to be Purchased ----------- --------------------- BT Alex. Brown Incorporated Furman Selz LLC SBC Warburg Dillon Read Inc. ________ Total ________ -35- SCHEDULE II SCHEDULE OF SELLING SHAREHOLDERS Number of Firm Shares Selling Shareholder to be Purchased ------------------- --------------------- ________ Total ________ -36- SCHEDULE III SCHEDULE OF OPTION SHARES Maximum Number Percentage of Option Shares of Total Number of Name of Seller to be Sold Option Shares - -------------- ---------------- ------------------ ________ Total 100& ----- -37- EX-5.1 3 EXHIBIT 5.1 OPINION OF SPOLIN AND SILVERMAN EXHIBIT 5.1 [LETTERHEAD] March , 1998 DD120.017 DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Ave., Suite 180 El Segundo, Calif. 90245 RE: DECRANE AIRCRAFT HOLDINGS, INC. REGISTRATION STATEMENT ON FORM S-1 (NO. ) Gentlemen: You have requested our opinion as counsel for DeCrane Aircraft Holdings, Inc., a Delaware corporation (the "Company") and the selling shareholders (the "Selling Shareholders"), in connection with the offer and sale by the Company and the Selling Shareholders of shares (the "Shares") of the Company's Common Stock, $0.01 par value per share (the "Offering"), in accordance with the Company's Registration Statement on Form S-1 No. (the "Registration Statement"). In rendering our opinion herein, we have assumed, with your permission: the genuineness and authenticity of all signatures on original documents submitted to us; the authenticity of all documents submitted to us as originals; the conformity to originals of all documents submitted to us as copies or facsimiles; the continued accuracy of all certificates and other documents from public officials dated earlier than the date of this letter; the Registration Statement being declared effective by the Securities and Exchange commission; the issuance by any necessary regulatory agencies of appropriate permits, consents, approvals, authorizations and orders relating to the Offering; the offer and sale of the Shares being made in the manner set forth in the Registration Statement and pursuant to said permits, consents approvals, authorizations and orders; due adoption of resolutions by the Company's Board of Directors approving the offer and sale of the shares, the public offering price and underwriters' discount and commissions and the execution, delivery and performance of the Underwriting Agreement; and the receipt by the Company and the Selling Shareholders of full and valid consideration for the Shares. [LETTERHEAD] DeCrane Aircraft Holdings, Inc. March , 1998 Page 2 Based on the foregoing, it is our opinion that, when issued, the Shares will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to, and the references to this firm contained in, the Registration Statement. Sincerely, EX-10.10 4 EX-10.10.1 FIFTH AMENDED AND RESTATED REGISTRATION EXHIBIT 10.10.1 FIFTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS FIFTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of January 10, 1997, is made by and among DeCrane Aircraft Holdings, Inc., an Ohio corporation (the "Company"), and the several parties named in Schedule I hereto (the "Shareholders"). PRELIMINARY STATEMENTS: A. The Shareholders hold the amounts of Common Shares, without par value ("Common Shares"), Warrants to purchase Common Shares ("Common Warrants"), Series A Convertible Preferred Shares, without par value ("Series A Shares"), Series B Convertible Preferred Shares, without par value ("Series B Shares"), Warrants to purchase Series B Shares (the "Series B Warrants"), Series C Convertible Preferred Shares, without par value ("Series C Shares"), Series D Convertible Preferred Shares, without par value (the "Series D Shares"), Series E Convertible Preferred Shares, without par value (the "Series E Shares") and the other securities set forth opposite their respective names on Schedule I hereto (the Series A Shares, Series B Shares, Series C Shares, Series D Shares and Series E Shares, collectively the "Preferred Stock") (the Common Warrants and Series B Warrants, collectively the "Warrants"). B. The Company and certain of the parties hereto executed that certain Amended and Restated Registration Rights Agreement dated as of October 15, 1991, as amended (the "Amended Registration Rights Agreement"), that certain Second Amended and Restated Registration Rights Agreement dated as of November 2, 1994 (the "Second Amended Registration Rights Agreement"), and that certain Third Amended and Restated Registration Rights Agreement dated as of February 20, 1996 (the "Third Amended and Restated Registration Rights Agreement"), and that certain Fourth Amended and Restated Registration Rights Agreement dated as of September 18, 1996 (the "Fourth Amended Registration Rights Agreement"), governing, among other things, certain matters with respect to the registration of the shares of capital stock of the Company. C. The Company and the parties hereto desire to amend and restate the Fourth Amended and Restated Registration Rights Agreement in its entirety by the execution of this Agreement. AGREEMENT: 1. CERTAIN DEFINITIONS. As used herein, the following terms shall have the following respective meanings: 2 "ADDITIONAL RESTRICTED SECURITIES" shall mean, the Common Warrants and shares of Common Stock now held or hereafter acquired by Internationale Nederlanden (U.S.) Capital Corporation, a Delaware corporation ("ING"), and by The Provident Bank, a banking association organized under the laws of the State of Ohio ("Provident"), and ING's and Provident's successors and assigns. "COMMISSION" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "COMMON STOCK" shall mean the Common Shares as constituted as of the date of this Agreement, and Common Shares issuable upon exercise of the Common Warrants. "CONVERSION SHARES" shall mean shares of Common Stock issued upon conversion of the Preferred Stock and Common Stock issued upon conversion of the Series B Shares issuable upon exercise of the Series B Warrants. "ELECTRA RESTRICTED SECURITIES" shall mean, collectively, Common Shares, Common Warrants, Series B Warrants and Preferred Stock now held or hereafter acquired by Electra Investment Trust PLC, a corporation organized under the laws of the United Kingdom ("EIT") and Electra Associates, Inc. ("Electra") and EIT's and Electra's successors and assigns. "INITIAL PUBLIC OFFERING" shall mean the closing of the initial underwritten public offering for Common Shares of the Company pursuant to a registration statement under the Securities Act. "NASSAU RESTRICTED SECURITIES" shall mean, collectively, Common Shares, Common Warrants, Series D Shares and Series E Shares now held or hereafter acquired by Nassau Capital Partners L.P., a Delaware limited partnership ("Nassau Capital") and NAS Partners I L.L.C., a Delaware limited liability company ("NAS") and Nassau Capital's and NAS's successors and assigns. "PRIMARY RESTRICTED STOCK" shall mean, collectively, the Preferred Stock, the Common Stock and those Common Warrants which are not Electra Restricted Securities, Nassau Restricted Securities or Additional Restricted Securities. For purposes hereof, "Preferred Stock" also shall include the Series B Warrants and the Series B Shares issuable upon exercise of the Series B Warrants. "REGISTRATION EXPENSES" shall mean the expenses so described in Section 8 hereof. 3 "RESTRICTED STOCK" shall mean, collectively, the Electra Restricted Securities, Nassau Restricted Securities, the Primary Restricted Stock, the Additional Restricted Securities and all Common Shares issuable upon exercise of options to purchase the same granted hereafter to R. Jack DeCrane. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SECURITIES PURCHASE AGREEMENT" shall mean the Securities Purchase Agreement of even date herewith among the Company, Nassau Capital, NAS and EIT. "SELLING EXPENSES" shall mean the expenses so described in Section 8 hereof. 2. RESTRICTIVE LEGEND. Each instrument representing the Restricted Stock, except as provided in Section 3 hereof, shall be stamped or otherwise imprinted with a legend substantially in the following form: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." 3. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of any Restricted Stock (other than under the circumstances described in Section 4, 5 or 6 hereof), the holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer of the Restricted Stock, as the case may be, may be effected without registration under the Securities Act. In the event that (but only in the event that) the holder of such Restricted Stock gives such written notice and provides such opinion, if requested by the Company, the holder of such Restricted Stock shall be entitled to transfer such Restricted Stock in accordance with the terms of its notice, PROVIDED, HOWEVER, that no such opinion or documentation shall be required if the notice pertains to distribution by any holder pursuant to subpart (b) or (c) of Section 2 of that certain Fourth Amended and Restated Shareholders Agreement between the parties hereto (the "Shareholders Agreement"). Each instrument for Restricted Stock transferred as above provided shall bear the legend set forth in Section 2, except that such instrument shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale 4 without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The foregoing restrictions on transferability of Restricted Stock shall terminate as to any particular shares of Restricted Stock when such shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition by the seller or sellers thereof set forth in the registration statement concerning such shares. 4. REQUIRED REGISTRATION. (a) At any time, (i) the holders of Electra Restricted Securities constituting at least a majority of the total Electra Restricted Securities outstanding at such time (treating for the purpose of such computation (A) the holders of Preferred Stock as the holders of the Conversion Shares then issuable upon conversion of such Preferred Stock, (B) the holders of Common Warrants if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Warrant, and (C) the holders of Series B Warrants as the holders of the shares of Common Stock then issuable upon exercise of the Series B Warrant and conversion of the Series B Shares issuable thereby), or (ii) the holders of Nassau Restricted Securities constituting at least a majority of the total Nassau Restricted Securities outstanding at such time (treating for the purpose of such computation (A) the holders of Series D Shares as the holders of the Conversion Shares then issuable upon conversion of such Series D Shares, (B) the holders of Series E Shares as the holders of the Conversion Shares then issuable upon conversion of such Series E Shares and (C) the holders of Common Warrants if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Warrant), or (iii) the holders of Primary Restricted Stock constituting at least a majority of the total Primary Restricted Stock outstanding at such time (treating for the purpose of such computation (A) the holders of Preferred Stock as the holders of the Conversion Shares then issuable upon conversion of such Preferred Stock, (B) the holders of Common Warrants if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Warrant, and (C) the holders of Series B Warrants as the holders of the shares of Common Stock then issuable upon exercise of the Series B Warrant and conversion of the Series B Shares issuable thereby) may request the Company to register under the Securities Act all or any portion of the Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Stock, as the case may be, held by such requesting holder or holders for sale in the manner specified in such notice, PROVIDED, HOWEVER, that the only securities which the Company 5 shall be required to register pursuant hereto shall be shares of Common Stock, PROVIDED, FURTHER, HOWEVER, that, in any underwritten public offering contemplated by Section 4, 5 or 6 hereof, other holders of Preferred Stock or Warrants shall be entitled to sell such Preferred Stock or Warrants to the underwriters for conversion or exchange and the sale of the shares of Common Stock issued upon such conversion; PROVIDED FURTHER, HOWEVER, that if the Warrants are to be sold to the underwriters, there shall be deducted from the proceeds due to the selling holder the aggregate exercise price required to be paid by such holder upon exercise of the Warrants. (b) Promptly following receipt of any notice under this Section 4, the Company shall immediately notify (i) any holders of Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Stock from whom notice has not been received and (ii) any other holders of Restricted Stock, and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting holders, the number of shares of Restricted Stock specified in such notice (and in any notices received from other holders within 20 days after their receipt of such notice from the Company). If such method of disposition shall be an underwritten public offering, the Company may designate the managing underwriter of such offering, subject to the approval of the selling holders of Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Stock, as the case may be, requesting registration under the Securities Act, which approval shall not be unreasonably withheld. The Company shall only be obligated to register Nassau Restricted Securities or Primary Restricted Stock pursuant to a demand by each such holder under this Section 4 on one occasion and shall only be obligated to register Electra Restricted Securities pursuant to a demand by such holder under this Section 4 on one occasion. Notwithstanding anything to the contrary contained herein, the obligation of the Company under this Section 4 shall be deemed satisfied only when a registration statement covering all shares of Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Stock specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holder, shall have become effective. (c) The number of shares of Restricted Stock to be included in such an underwriting may be reduced (PRO RATA among the requesting holders based upon the number of shares so requested to be registered, treating for purposes of such computation (i) the holders of Preferred Stock as the holders of the Conversion Shares then issuable upon conversion of such Preferred Stock, (ii) the holders of Common Warrants, if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Common Warrants, and (iii) the holder of the Series B Warrants, if then outstanding, as the holder of the shares of Common Stock then issuable upon exercise 6 of the Series B Warrant and conversion of the Series B Shares issuable thereby) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein; PROVIDED, HOWEVER, if a demand registration is a request by holders of Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities pursuant to subpart (a) of this Section 4 to register and sell Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities, as the case may be, in the Initial Public Offering, and the managing underwriters advise the Company in writing that in their opinion the number of (A) Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities, as the case may be, requested to be included in the offering, (B) securities desired by the Company to be included in such offering and pro rata among the Holders of Nassau Restricted Securities or Electra Restricted Securities, as the case may be, on the basis of the amount of Nassau Restricted Securities or Electra Restricted Securities, respectively, owned by each such holder, and (C) if permitted hereunder, other securities requested to be included in such offering, exceeds the number of securities which can be sold therein without adversely affecting the marketability of the offering, there shall be included in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Nassau Restricted Securities or Electra Restricted Securities, as the case may be, requested to be included in such registration, and PRO RATA among the holders of Nassau Restricted Securities or Electra Restricted Securities, as applicable, on the basis of the amount of Nassau Restricted Securities or Electra Restricted Securities, as the case may be, owned by each such holder, or PRO RATA among the holders of Nassau Restricted Securities and Electra Restricted Securities if such demand registration is a request by holders of Nassau Restricted Securities and holders of Electra Restricted Securities pursuant to subpart (a) of this Section 4 and (iii) third, other securities requested to be included in such registration by holders of the Restricted Stock; PROVIDED, FURTHER, HOWEVER, if a demand registration is a request by holders of Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities pursuant to subpart (a) of this Section 4 to register and sell Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities, as the case may be, subsequent to the Initial Public Offering, and the managing underwriters advise the Company in writing that in their opinion the number of (A) Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Securities, as applicable, requested to be included in the offering, (B) securities desired by the Company to be included in such offering and PRO RATA among the Holders of Nassau Restricted Securities or Electra Restricted Securities, as the case may be, on the basis of the amount of Nassau Restricted Securities or Electra Restricted Securities, as applicable, owned by each such holder, and (C) if permitted hereunder, other securities requested to be included in such offering, exceeds the number of 7 securities which can be sold therein without adversely affecting the marketability of the offering, there shall be included in such registration (i) first, the Nassau Restricted Securities or Electra Restricted Securities, as the case may be, requested to be included in such registration, PRO RATA among the holders of such Nassau Restricted Securities or Electra Restricted Securities, as applicable, on the basis of the amount of Nassau Restricted Securities or Electra Restricted Securities, as the case may be, owned by each holder, or PRO RATA among the holders of Nassau Restricted Securities and Electra Restricted Securities if such demand registration is a request by holders of Nassau Restricted Securities and Electra Restricted Securities pursuant to subpart (a) of this Section 4 (ii) second, the securities the Company proposes to sell, and (iii) third, other securities requested to be included in such registration. (d) Subject to subpart (c) of this Section 4, the Company shall be entitled to include in any registration statement referred to in this Section 4, for sale in accordance with the method of disposition specified by the requesting holders, shares of Common Stock to be sold by the Company for its own account, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Nassau Restricted Securities, Electra Restricted Securities or Primary Restricted Stock to be sold. Except as provided in this paragraph (d), the Company will not effect any other registration of its Common Stock, whether for its own account or that of other holders, from the date of receipt of a notice from requesting holders pursuant to this Section 4 until the completion of the period of distribution of the registration contemplated thereby. (e) Notwithstanding anything to the contrary contained in this Section 4, the Company shall not be required to take any action to effect any registration pursuant to this Section 4: (i) if in the case of the Initial Public Offering, the securities covered by such registration statement will not have an aggregate offering price of at least $25,000,000.00; (ii) if the Company intends in good faith to file a registration statement pertaining to an underwritten public offering of securities for the account of the Company within 90 days after receipt of a notice under Section 4(a), and the Company so notifies the requesting holder of its intention in accordance with Section 6; or (iii) if the holders of a majority of the Additional Restricted Securities have requested pursuant to Section 5 that the Company file a registration statement pertaining to an underwritten public offering of securities at any time 8 within 180 days prior to the receipt by the Company of a notice under Section 4(a). 5. ADDITIONAL REQUIRED REGISTRATION. (a) At any time after such date as the Company has completed a public offering of shares of Common Stock pursuant to an effective registration statement filed under the Securities Act, the holders of the Additional Restricted Securities constituting at least a majority of the total Additional Restricted Securities outstanding at such time (treating for the purpose of such computation the holders of the Additional Restricted Securities as the holders of the shares of Common Stock issuable upon exercise of the Additional Restricted Securities) may request the Company to register under the Securities Act all or any portion of the Additional Restricted Securities held by such requesting holder or holders for sale in the manner specified in such notice, PROVIDED, HOWEVER, that the only securities which the Company shall be required to register pursuant hereto shall be shares of Common Stock, PROVIDED, FURTHER, HOWEVER, that, in any underwritten public offering contemplated by Section 4, 5 or 6 hereof, the holders of Additional Restricted Securities shall be entitled to sell such Additional Restricted Securities to the underwriters for conversion or exchange and the sale of the shares of Common Stock issued upon such conversion; PROVIDED, FURTHER, HOWEVER, that if the Additional Restricted Securities are to be sold to the underwriters, there shall be deducted from the proceeds due to the selling holder the aggregate exercise price required to be paid by such holder upon exercise of the Additional Restricted Securities. (b) Promptly following receipt of any notice under this Section 5, the Company shall immediately notify (i) any holders of Additional Restricted Securities from whom notice has not been received and (ii) any other holders of Restricted Stock, and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting holders, the number of shares of Restricted Stock specified in such notice (and in any notices received from other holders within 20 days after their receipt of such notice from the Company). If such method of disposition shall be an underwritten public offering, the Company may designate the managing underwriter of such offering, subject to the approval of the selling holders of Additional Restricted Securities, which approval shall not be unreasonably withheld. The Company shall be obligated to register Additional Restricted Securities pursuant to a demand by such holder under this Section 5 on one occasion only. Notwithstanding anything to the contrary contained herein, the obligation of the Company under this Section 5 shall be deemed satisfied only when a registration statement covering all of the shares of Common Stock issuable upon exchange of the Additional Restricted Securities specified in notices received as aforesaid, for sale in accordance with the 9 method of disposition specified by the requesting holder, shall have become effective. (c) The number of shares of Restricted Stock to be included in such an underwriting may be reduced (PRO RATA among the requesting holders based upon the number of shares so requested to be registered, treating for purposes of such computation (i) the holders of Preferred Stock as the holders of the Conversion Shares then issuable upon conversion of such Preferred Stock, (ii) the holders of Common Warrants, if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Common Warrants, and (iii) the holder of the Series B Warrants, if then outstanding, as the holder of the shares of Common Stock then issuable upon exercise of the Series B Warrant and conversion of the Series B Shares issuable thereby) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein. (d) The Company shall be entitled to include in any registration statement referred to in this Section 5, for sale in accordance with the method of disposition specified by the requesting holders, shares of Common Stock to be sold by the Company for its own account, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Additional Restricted Securities to be sold. Except as provided in this paragraph (d), the Company will not effect any other registration of its Common Stock, whether for its own account or that of other holders, from the date of receipt of a notice from requesting holders pursuant to this Section 5 until the completion of the period of distribution of the registration contemplated thereby. (e) Notwithstanding anything to the contrary contained in this Section 5, the Company shall not be required to take any action to effect any registration pursuant to this Section 5: (i) if the Company intends in good faith to file a registration statement pertaining to an underwritten public offering of securities for the account of the Company within 90 days after receipt of a notice under Section 5(a), and the Company so notifies the requesting holder of its intention in accordance with Section 6; or (ii) if the holders of a majority of the Nassau Restricted Securities, or the holders of a majority of the Electra Restricted Securities, or the holders of a majority of the Primary Restricted Stock have pursuant to Section 4 requested that the Company file a registration statement pertaining to an underwritten public offering of securities at any time within 180 days prior to the receipt by the Company of a notice under Section 5(a). 10 6. INCIDENTAL REGISTRATION. If the Company at any time (other than pursuant to Section 4 or 5 hereof) proposes to register any of its Common Stock under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Form S-4 or S-8 or another form not available for registering the Restricted Stock for sale to the public), each such time it will give written notice to all holders of outstanding Restricted Stock of its intention to do so. Upon the written request of any such holder, given within 30 days after receipt of any such notice, to register any of its Restricted Stock (which request shall state the intended method of disposition thereof), the Company will use its best efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed, all to the extent requisite to permit the sale or other disposition by the holder (in accordance with its written request) of such Restricted Stock so registered. In the event that any registration pursuant to this Section 6 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 6 to register Restricted Stock shall specify that either (i) such Restricted Stock is to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration or (ii) such Restricted Stock is to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. The number of shares of Restricted Stock to be included in such an underwriting may be reduced (PRO RATA among the requesting holders based upon the number of shares so requested to be registered, treating for purposes of such computation (A) the holders of Preferred Stock as the holders of the Conversion Shares then issuable upon conversion of such Preferred Stock, (B) the holders of Common Warrants, if then issued and outstanding, as the holders of the shares of Common Stock issuable upon exercise of the Common Warrants, and (C) the holder of the Series B Warrants, if then outstanding, as the holder of the shares of Common Stock then issuable upon exercise of the Series B Warrant and the conversion of the Series B Shares issuable thereby) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold therein. Notwithstanding anything to the contrary contained in this Section 6, in the event that there is a firm commitment underwritten offering of securities of the Company pursuant to a registration statement covering Restricted Stock and a selling holder of Restricted Stock does not elect to sell such holder's Restricted Stock to the underwriters of the Company's securities in connection with such offering, such holder shall refrain from selling such Restricted Stock so registered pursuant to this Section 6 during the period of distribution of the Company's securities by such underwriters and the period in which the 11 underwriting syndicate participates in the aftermarket; PROVIDED, HOWEVER, that such holder shall, in any event, be entitled to sell such holder's Restricted Stock in connection with such registration commencing on the 90th day after the effective date of such registration statement. 7. REGISTRATION PROCEDURES AND EXPENSES. (a) If and whenever the Company is required by the provisions of Section 4, 5 or 6 hereof to use its best efforts to effect the registration of any of the Restricted Stock under the Securities Act, the Company will, as expeditiously as possible: (i) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4 or 5 hereof, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (i) above and to comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (iii) furnish to each seller and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons may reasonably request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (iv) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or blue sky laws of such jurisdictions as the sellers of Restricted Stock or, in the case of an underwritten public offering, the managing underwriter, shall reasonably request; (v) immediately notify each seller under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; upon the occurrence of 12 any such event, the Company shall, as promptly as reasonably practicable, prepare a post-effective amendment to the registration statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to purchasers of the Restricted Stock, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. (vi) use its best efforts (if the offering is underwritten) to furnish, at the request of any seller, on the date that Restricted Stock is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus, and each amendment or supplement thereof, comply as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need express no opinion as to financial statements contained therein), and (C) to such other effects as may reasonably be requested by counsel for the underwriters or by such seller or its counsel, and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as such underwriters or seller may reasonably request; and (vii) make available for inspection by each seller, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. (b) For purposes of paragraphs (i) and (ii) above and of Section 4(c) hereof, the period of distribution of Restricted 13 Stock in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock in any other registration shall be deemed to extend until the earlier of the sale of all Restricted Stock covered thereby or nine months after the effective date thereof. (c) In connection with each registration hereunder, the selling holders of Restricted Stock will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as shall be necessary in order to assure compliance with federal and applicable state securities laws. (d) In connection with each registration pursuant to Section 4, 5 or 6 hereof covering an underwritten public offering, the Company and the selling holders of Restricted Stock agree to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of the Company's size and investment stature, provided that such agreement shall not contain any such provision applicable to the Company which is inconsistent with the provisions hereof. 8. EXPENSES. (a) All expenses incurred by the Company in complying with Sections 4, 5, 6 and 7 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and fees and expenses of one counsel for the sellers of Restricted Stock but excluding any Selling Expenses, are herein called "Registration Expenses". All underwriting discounts and selling commissions applicable to the sale of Restricted Stock are herein called "Selling Expenses". (b) The Company will pay all Registration Expenses in connection with each registration statement filed pursuant to Section 4, 5 or 6 hereof. All Selling Expenses in connection with any registration statement filed pursuant to Section 4, 5 or 6 hereof shall be borne by the holders of Restricted Stock sold pursuant to such registration statement, PRO RATA in proportion to the number of securities of each such holder included in such registration. 9. INDEMNIFICATION. (a) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 4, 5 or 6 hereof, the Company will indemnify and hold harmless each seller of such Restricted Stock thereunder and each underwriter of Restricted Stock thereunder 14 and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such seller, such underwriter or such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 4, 5 or 6 hereof, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer or director or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, PROVIDED, HOWEVER, that such seller will be 15 liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus, PROVIDED, FURTHER, HOWEVER, that the liability of each seller hereunder shall not exceed the proceeds received by such seller from the sale of Restricted Stock covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under this Section 9. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, PROVIDED, HOWEVER, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) Notwithstanding the foregoing, in any such action, any indemnified party shall have the right to retain its own counsel, but the fees and disbursements of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party shall have failed to retain counsel for the indemnified person as aforesaid or (ii) the indemnifying party and such indemnified party shall have mutually agreed to the retention of such counsel. It is understood that the indemnifying party shall not, in connection with any action or related actions in the same jurisdiction, be liable for the fees 16 and disbursements of more than one separate firm qualified in such jurisdiction to act as counsel for the indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. The indemnifying party shall not, except with the consent of the indemnified party, enter into any settlement that does not include as a term thereof an unconditional release of the indemnified party from all liability with respect to the applicable claim. (e) If the indemnification provided for in the first two paragraphs of this Section 9 is unavailable or insufficient to hold harmless an indemnified party under such paragraphs in respect of any losses, claims, damages or liabilities or actions in such proportion as appropriate to reflect the relative fault of the Company, on the one hand, and the sellers of such Restricted Stock, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give the notice required under such paragraphs, then the relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the sellers of such Restricted Stock, on the other hand, and to the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph were determined by PRO RATA allocation (even if all of the sellers of such Restricted Stock were treated as one entity for such purpose) or by any other method of allocation which did not take account of the equitable considerations referred to above in this paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or action in respect thereof, referred to above in this paragraph, shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph, the sellers of such Restricted Stock shall not be required to contribute any amount in excess of the amount, if any, by which the total price at which the Common Stock sold by each of them was offered to the public exceeds the amount of any damages which they otherwise have been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 17 (f) The indemnification of underwriters provided for in this Section 9 shall be on such other terms and conditions as are at the time customary and reasonably required by such underwriters, in which event the indemnification of the sellers of Restricted Stock in such underwriting shall at the sellers' request be modified to conform to such terms and conditions. Upon the reasonable request of any stockholder selling Restricted Stock pursuant to a registration statement or any underwriter of such stock, the Company shall obtain an insurance policy covering the risks described above in this Section 9 in an amount and with a deductible reasonably requested by such seller or underwriter and naming such seller, any underwriter of such stock and any person controlling such seller or underwriter as beneficiaries. The costs of obtaining and maintaining any such insurance shall be borne by the Company. 10. CHANGES IN COMMON STOCK. If, and as often as, there are any changes in the Common Stock by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed. 11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each other party hereto as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Amended and Restated Articles of Incorporation or Code of Regulations of the Company, or any provision of any indenture, agreement or other instrument to which it or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, fraudulent conveyance and other similar laws and principles of equity affecting creditors' rights and remedies generally. 18 12. MISCELLANEOUS. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the holders of Restricted Stock (or any portion thereof) as such shall be for the benefit of and enforceable by any subsequent holder of any Restricted Stock (or of such portion thereof), subject to the provisions respecting the minimum numbers or percentages of shares of Primary Restricted Stock, Additional Restricted Securities, Nassau Restricted Securities or Electra Restricted Securities (or of such portion of each) required in order to be entitled to certain rights, or take certain actions, contained herein. (b) All notices, requests, consents and other communications shall be in writing delivered in person or by facsimile or duly sent by first-class registered or certified mail, postage prepaid, addressed as follows: (i) if to the Company, at 155 Montrose West Avenue, Suite 210, Copley, Ohio 44321, facsimile number: (216) 668-2518, Attention: Chief Executive Officer; and (ii) if to any holder of Restricted Stock, to such holder at his or its respective addresses and facsimile numbers set forth in Schedule I attached hereto, or, in any such case, at such other address, addresses, facsimile number or numbers as shall have been designated by notice in writing by such holder to the others. Each holder of Restricted Stock agrees to have at all times an address and a facsimile number for notices hereunder. All such notices and communications shall be deemed to have been received (A) in the case of personal delivery, on the date of such delivery, (B) in the case of facsimile delivery, upon confirmation of delivery and (C) in the case of mailing, on the fifth business day following such mailing. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of California. (d) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in their entirety all previous agreements and understandings, including, without limitation, the Registration Rights Agreement, dated July 23, 1990, the Amended Registration Rights Agreement, the Second Amended Registration Rights Agreement, and the Third Amended and Restated Registration Rights Agreement, and may not be modified or amended except in writing. The Company shall not grant any rights to register any of its 19 capital stock in addition to the rights granted in this Agreement to any party without amending this Agreement. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. SECURITIES MATTERS. To the extent required, the Company will, and will cause each of its subsidiaries to, comply in all material respects with the reporting requirements of the Securities Act and the 1934 Act, or successor rules thereto or otherwise. The Company will cooperate with each holder of securities in supplying such information as may be requested by such holder to comply with the Securities Act or 1934 Act, including Rule 144 and Rule 144A, or successor rules thereto or otherwise. IN WITNESS WHEREOF, the Company and the parties hereto have executed this Third Amended and Restated Registration Rights Agreement as of the day and year first above written. DeCRANE AIRCRAFT HOLDINGS, INC. By: /s/ ----------------------------------------- R. Jack DeCrane, Chief Executive Officer BANC ONE CAPITAL PARTNERS, L.P. By: /s/ ----------------------------------------- BOCP Corporation, General Partner, By Authorized Signatory BRANTLEY VENTURE PARTNERS II, L.P By: /s/ ----------------------------------------- Paul H. Cascio, General Partner /s/ ------------------------------------------- R. JACK DeCRANE, in his individual capacity DSV PARTNERS, IV By: DSV Management, Ltd. By: /s/ ----------------------------------------- James R. Bergman, General Partner ELECTRA INVESTMENT TRUST, P.L.C. By: /s/ ----------------------------------------- Its: ----------------------------------------- INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By: /s/ ----------------------------------------- Its: ----------------------------------------- ELECTRA ASSOCIATES, INC. By: /s/ ----------------------------------------- Its: ----------------------------------------- THE PROVIDENT BANK By: /s/ ----------------------------------------- Its: ----------------------------------------- NASSAU CAPITAL PARTNERS L.P. By: NASSAU CAPITAL L.L.C. General Partner By: /s/ ----------------------------------------- Its: ----------------------------------------- NAS PARTNERS I L.L.C. By: /s/ ----------------------------------------- Its: ----------------------------------------- Schedule I
Warrants to Purchase Warrants to Series A Series B Series B Series C Series D Series E Common Common Preferred Preferred Preferred Preferred Preferred Convertible Shares Shares Shares Shares Shares Shares Shares Preferred Shares ------ ----------- --------- --------- ----------- --------- ---------- ---------------- Banc One Capital Partners, L.P. -- 343,569 -- -- -- -- -- -- 300 Crescent Court Suite 1600 Dallas, TX 75201 Fax: (214) 979-4355 Brantley Venture 38,076 17,228 101,244 955,996 30,008 603,712 -- -- Partners II, L.P. 20600 Chagrin Blvd. Suite 1150 Cleveland, Ohio 44122 Fax: (216) 668-2518 R. Jack DeCrane 230,770 4,455 -- -- -- -- -- -- 4966 Tulip Drive Akron, OH 44313 (216) 668-2518 DSV Partner, IV 13,174 5,960 35,030 330,775 13,446 1,347,987 -- -- 620 Newport Center Dr. Suite 990 Newport Beach, CA 92660 Fax: (714) 760-6947 Electra Investment 10,327 942,705 27,459 259,283 8,152 279,479 -- 500,000 Trust, P.L.C. 65 Kings Way London, England WC2B6QT Fax: (171) 242-3429 Electra Associates, Inc. 1,493 119,581 3,969 37,478 1,178 40,397 -- -- 65 Kings Way London, England WC2B6QT Fax: (171) 242-3429 Internationale Nederlanden -- 411,645 -- -- -- -- -- -- (U.S.) Capital Corporation 135 East 57th Street New York, NY 10021 Fax: (212) 593-3562 The Provident Bank -- 137,215 -- -- -- -- -- -- 1800 Provident Tower East Fourth Street Cincinnati, OH 45202 Fax: (513) 579-2858 Nassau Capital Partners -- 911,284 -- -- -- -- 1,989,114 991,124 L.P. 22 Chambers Street Princeton, NJ 08542 Fax: (609) 924-8887 NAS Partners I L.L.C. -- 5,777 -- -- -- -- 10,886 8,876 22 Chambers Street Princeton, NJ 08542 Fax: (609) 924-8887 Richard G. MacDonald -- -- -- -- -- 30,000 -- -- Chuck H. Becker -- -- -- -- -- 20,000 -- -- Robert A. Rankin -- -- -- -- -- 15,000 -- -- John R. Hinson -- -- -- -- -- 10,000 -- -- John Schnepf 8,000 -- -- -- -- -- -- --
RIDER TO FIFTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT 14. EXTENSION OF REQUIRED REGISTRATION AND ADDITIONAL REQUIRED REGISTRATION TIME PERIODS. Notwithstanding any other provision of this Agreement, the rights granted pursuant to Sections 4 and 5 shall terminate on the fourth anniversary of the funding of the proceeds by the Company following the effectiveness of the registration statement filed by the Company for the Initial Public Offering of the Company's Common Stock; provided, however, that the demand rights under either Section 4 or Section 5 shall be extended for an additional year (or years) in the event that (i) a notice has been given under either such section which did not result in a registration statement covering all shares of the securities specified in any such notice having become effective or (ii) a shareholder was unable to give a demand notice as a result of Section 15. 15. TIME BETWEEN REQUIRED REGISTRATION AND ADDITIONAL REQUIRED REGISTRATION NOTICES. Notwithstanding any other provisions of this Agreement, no holder of any securities of the Company shall have the right to give any demand notice pursuant to Section 4 or Section 5 during the 9 month period following the date of any registration statement filed as a result of any other demand notice given pursuant to Section 4 or Section 5 of this Agreement. 16. HOLDBACK PERIOD. In the event that at the time of receipt by the Company of any notice pursuant to either Section 4 or Section 5 of this Agreement, the Company shall be in possession of material non public information which it reasonably and in good faith after consulting counsel deems it has a bona fide business purpose for maintaining as confidential, the Company may so notify the party to this Agreement from whom such notice was received and thereby delay the performance of the Company's obligations for a period not to exceed 90 days. EX-10.35 5 EXHIBIT 10.35.2 AMENDMENT #2 TO LOAN AGREEMENT EXHIBIT 10.35.2 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT This Amendment No. 2 to Loan and Security Agreement (this "Amendment") is made as of February 6, 1998, among DeCrane Aircraft Holdings, Inc., a Delaware corporation ("Borrower"), Bank of America National Trust and Savings Association, successor-by-merger to Bank of America Illinois, individually as a lender ("BoA") and as agent ("Agent"), Comerica Bank - California ("Comerica"), Mellon Bank, N.A. ("Mellon"), and Sumitomo Bank of California ("Sumitomo"; Sumitomo, BoA, Comerica and Mellon being collectively referred to as "Lenders"). Reference is made to that certain Loan and Security Agreement dated as of April 15, 1997 among Borrower, Agent and Lenders (as amended or otherwise modified to the date hereof, the "Loan Agreement"; capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement). Borrower has requested that all of the Lenders agree to amend the Loan Agreement in certain respects. NOW, THEREFORE, Agent, Lenders and Borrower agree as follows: 1. AMENDMENTS TO LOAN AGREEMENT. Subject to the conditions precedent set forth in Section 4 of this Amendment, the Loan Agreement is hereby amended as follows: 1.1. The definition of the term "Maximum Revolving Loan Amount" in SECTION 1.1 of the Loan Agreement is hereby amended by adding the following sentence to the end of such definition: "Upon the satisfaction of the conditions precedent set forth in that certain Amendment No. 2 to Loan and Security Agreement dated as of February 6, 1998 among Borrower, Agent and Lenders ("Amendment No. 2"), each Lender's then existing Maximum Revolving Loan Amount shall automatically reduce on the last day of each calendar month commencing January 31, 1999 by such Lender's Pro Rata Share (determined immediately prior to the applicability of this sentence with respect to any Lender for any applicable date) of $500,000." 1.2. The definition of the term "Revolving Credit Amount" in SECTION 1.1 of the Loan Agreement is hereby amended and restated as follows: "Revolving Credit Amount" means the maximum amount of Revolving Loans which Lenders will make available to Borrower. Prior to the satisfaction of the conditions precedent set forth in Amendment No. 2, the Revolving Credit Amount shall be equal to $60,000,000. Upon the satisfaction of the conditions precedent set forth in Amendment No. 2, the Revolving Credit Amount shall be equal to $75,000,000, subject to automatic reduction by $500,000 on the last day of each calendar month commencing January 31, 1999. The Revolving Credit Amount shall be subject to reduction pursuant to SECTION 2.1.2." 1.3. New SECTION 4.25 is hereby added to the Loan Agreement, which section shall read as follows: "4.25 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive review and assessment of the computer applications of the Borrower and its Subsidiaries with respect to, among other things, computer application errors (including date-sensitive functions) anticipated to occur in connection with the advent of the calendar year 2000 (herein, the "Year 2000 Problem"). As a result of the foregoing review and assessment, the Borrower and its Subsidiaries are taking certain steps, including the upgrading of substantially all existing software to newer, off-the-shelf integrated manufacturing and business application software which will be year 2000 compliant by early 1999. Based on the foregoing, the Companies reasonably believe that the Year 2000 Problem will not result in a material adverse change in the Companies' business condition (financial or otherwise), operations, properties or prospects, in each case measured against the Companies taken as a whole, or ability to repay Liabilities." 1.4. Subject to automatic reduction in accordance with the Loan Agreement as amended hereby, the Maximum Revolving Loan Amount of each Lender shall be amended and restated as set forth on the signature pages to this Amendment. 2. CONDITIONS PRECEDENT. The amendments to the Loan Agreement set forth in Section 1 of this Amendment shall become effective as of the date of this Amendment upon the satisfaction of the following conditions precedent: 2.1. Borrower shall have executed and delivered to Agent for distribution to the Lenders amended and restated Revolving Credit Notes in form and substance substantially similar to Revolving Credit Notes previously executed by the Borrower in connection with the execution of the Loan Agreement, each in an amount equal to each Lender's then existing Maximum Revolving Loan Amount; 2.2. The Subsidiaries of Borrower shall have executed and delivered a certain Reaffirmation of Guaranties, in the form of EXHIBIT A to this Amendment; -2- 2.3. No Event of Default or Unmatured Event of Default shall have occurred and be continuing; 2.3. Borrower shall have delivered to Agent a certificate in form and substance satisfactory to Agent of Borrower's Secretary or an Assistant Secretary as to Borrower's certificate of incorporation and by-laws, the incumbency of Borrower's officers and corporate resolutions adopted by Borrower's board of directors with respect to this Amendment; 2.5. Agent shall have received an opinion of Borrower's legal counsel, in form and substance substantially similar to a legal opinion delivered by such counsel to Agent in connection with the execution and delivery of the Loan Agreement; and 2.6. Agent shall have received, for the benefit of the Lenders based on each Lender's pro rata share of the increase in the Revolving Credit Amount pursuant to the terms of this Amendment, an amendment fee in the amount of $30,000. 3. LOAN REALLOCATION. Effective immediately upon satisfaction of the conditions precedent set forth in Section 2, (i) each of BoA and Sumitomo shall be deemed automatically to have sold and assigned to Comerica and Mellon, without recourse and without representation and warranty, and each of Comerica and Mellon shall be deemed automatically to have purchased and assumed from BoA and Sumitomo, that interest in Revolving Loans funded by BoA and Sumitomo immediately prior to the satisfaction of such conditions precedent so that, after giving effect to such purchase and sale, the ratio of the amount of Revolving Loans funded by each Lender to the aggregate outstanding amount of Revolving Loans equals such Lender's Pro Rata Share after giving effect to the amendments contemplated by this Amendment and (ii) upon request by Agent, each of Comerica and Mellon shall promptly wire transfer to Agent for further reallocation to BoA and Sumitomo immediately available funds requested by Agent in full satisfaction of the purchases and sales contemplated by the preceding clause (i). 4. MISCELLANEOUS. 4.1. EXPENSES. Borrower agrees to pay on demand all costs and expenses of Agent (including Attorneys' Fees) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. In addition, Borrower agrees to pay, and save Agent and each Lender harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment, the borrowings under the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided in this Section 4.1 shall survive any termination of this Amendment or the Loan Agreement as amended hereby. 4.2. GOVERNING LAW. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois. -3- 4.3. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. 4.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan Agreement shall remain in full force and effect and is hereby ratified in all respects. On and after the effectiveness of the amendments to the Loan Agreement accomplished hereby, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference to the Loan Agreement in any note and in any Related Agreements, or other agreements, documents or other instruments executed and delivered pursuant to the Loan Agreement, shall mean and be a reference to the Loan Agreement, as amended by this Amendment. 4.5. SUCCESSORS. This Amendment shall be binding upon Borrower, each Lender, Agent and their respective successors and assigns, and shall inure to the benefit of Borrower, each Lender, Agent and their respective successors and assigns. -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered at Chicago, Illinois as of the date first above written. DECRANE AIRCRAFT HOLDINGS, INC., as Borrower By /s/ ------------------------------------- Its ------------------------------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, successor-by-merger to Bank of America Illinois, as Agent By /s/ ------------------------------------ Its ----------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, successor-by-merger to Bank of America Illinois, as a Lender By /s/ ------------------------------------ Its ----------------------------------- Maximum Revolving Loan Amount: $27,000,000 -5- COMERICA BANK - CALIFORNIA, as a Lender By______________________________________ Its_____________________________________ Maximum Revolving Loan Amount: $18,000,000 -6- MELLON BANK, N.A., as a Lender By______________________________________ Its_____________________________________ Maximum Revolving Loan Amount: $18,000,000 -7- SUMITOMO BANK OF CALIFORNIA, as a Lender By______________________________________ Its_____________________________________ Maximum Revolving Loan Amount: $12,000,000 -8- EX-10.37 6 EXHIBIT 10.37 STOCK PURCHASE SALES AGREEMENT Exhibit 10.37 STOCK PURCHASE AND SALE AGREEMENT This Stock Purchase and Sale Agreement ("Agreement") is made and entered into by and among Robert S. Brown, Rick Marsh and Wayne Richie, the shareholders (the "Shareholders") of Audio International, Inc. ("AI") and DeCrane Aircraft Holdings, Inc. ("DAH"), based on the following facts: Shareholders own all of the outstanding stock of AI (the "Stock"); and desire to sell 100% of the Stock to DAH; DAH desires to purchase 100% of the Stock from the Shareholders on the terms and conditions of this Agreement. Based on the foregoing facts and circumstances, the parties hereby agree as follows (capitalized terms being used herein as defined where noted in Schedule A): 1. STOCK TO BE PURCHASED AND SOLD; PURCHASE PRICE. 1.1 PURCHASE AND SALE OF STOCK. At the Closing, DAH shall purchase from the Shareholders 100% of the Stock for the amount specified in Section 1.2. Attached as Exhibit 1.1 is a list of the Shareholders which reflects the percentage of the aggregate payments to be made pursuant to Sections 1.2.1 and 1.2.2 to each of the Shareholders. Each of the Shareholders, jointly and severally, hereby agrees to indemnify and hold DAH harmless from any and all loss, damage, claim or expense, resulting from any claim by any Shareholder or the successor or heir of any Shareholder that the percentage received by the Shareholder or such successor or heir is not correct as a percentage of the aggregate amount paid. 1.2 PURCHASE PRICE OF THE STOCK. 1.2.1 At the Closing, DAH shall make federal funds and wire transfers to each of the Shareholders, to accounts designated by the Shareholders on Exhibit 1.2.1 hereto the aggregate sum of $24 million; 1.2.2 On March 31, 1999 and March 31, 2000, the Shareholders shall receive such additional payments as are required pursuant to the Earnout Agreement, attached as Exhibit 1.2.2. 1 2. REPRESENTATIONS AND WARRANTIES. 2.1 BY DAH. Except as set forth on Schedule 2.1, the representations and warranties of DAH, contained in this Agreement, including those contained in this Section 2.1, are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date. DAH hereby represents and warrants to the Shareholders the following: 2.1.1 ORGANIZATION. DAH is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own, lease and operate its properties and conduct its business as now being conducted. DAH is duly qualified to do business and in good standing in Delaware and California. Except as set forth on Schedule 2.1.1, DAH has not received any written notice or assertion within the last three years from any governmental official of any jurisdiction to the effect that DAH is required to be qualified or otherwise authorized to do business in any other jurisdiction, in which DAH, has not qualified or obtained such authorization. Attached hereto as Exhibit 2.1.1 are complete and correct copies of DAH's certificate of incorporation and by-laws as in effect on the date hereof, and DAH is not in default in the performance, observation or fulfillment of any provision of its articles of incorporation or by-laws. 2.1.2 AUTHORIZATION. DAH has all requisite corporate power and authority to enter into this Agreement and the other Transaction Documents to which DAH is a party, perform its obligations hereunder and thereunder and consummate the transactions contemplated hereby and thereby. All necessary corporate action has been taken by DAH with respect to the execution and delivery of this Agreement and the other Transaction Documents to which DAH is a party, the consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which DAH is a party, constitute valid and binding obligations of DAH, enforceable against DAH, in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance and moratorium laws and other laws of general application affecting the enforcement of creditors' rights generally. 2.1.3 LITIGATION. There is no claim, litigation, action, suit, proceeding, investigation or inquiry, administrative or judicial, pending or, to the knowledge of DAH, threatened against DAH, at law or in equity, before any federal, state or local court or regulatory agency, or other governmental authority, which might have an adverse effect on DAH's ability to perform any of its obligations under this Agreement or upon the consummation of the transactions contemplated by this Agreement. 2.1.4 BROKERS AND FINDERS. Except as disclosed in Schedule 2.1.4, neither DAH nor any of its officers, directors or employees, has engaged any broker or finder or incurred any liability for any brokerage fees, commissions, finders' fees or similar fees or expenses and no broker or finder has acted directly or indirectly for DAH in connection with this Agreement or the transactions contemplated hereby. 2 2.1.5 SEC REPORTS, FINANCIAL STATEMENTS OBLIGATIONS AND LIABILITIES. Since April 16, 1997, DAH has filed all required forms, reports and documents with the Securities and Exchange Commission (the "SEC") required to be filed by it pursuant to the federal securities laws and the SEC rules and regulations thereunder, all of which forms, reports and documents have complied in all material respects as of the respective filing dates, or, in the case of the S-1 Registration Statement effective April 16, 1997 as of such date (the "Registration Statement"), with all applicable requirements of the Securities Act of 1933 (the "Securities Act") and the Securities and Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations promulgated thereunder. None of such forms, reports or documents, including without limitation, any exhibits, financial statements or schedules included therein, at the time filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. DAH's forms, reports and documents filed by DAH with the SEC under the Exchange Act since April 16, 1997 are hereinafter collectively referred to as the "DAH 34 Act Reports." The "DAH Financial Statements" means the consolidated financial statements of DAH and its subsidiaries included in the Registration Statement and the DAH 34 Act Reports. Each of the consolidated balance sheets of DAH in the DAH Financial Statements (including the related notes and schedules) fairly present the consolidated financial position of DAH and its consolidated subsidiaries as of their respective dates and each of the consolidated statements of income, stockholders' equity and the cash flows of DAH and its consolidated subsidiaries in the DAH Financial statements (including the related notes and schedules) fairly present the results of operations, shareholders' equity and cash flows of DAH and its consolidated subsidiaries (subject, in the case of unaudited statements to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. DAH, on a consolidated basis, does not have any material debt, liability, or obligation (whether accrued, absolute, contingent, by guarantee, indemnity, or otherwise, and whether due or to become due) nor has there been any occurrence which involves material liability of a type required to be disclosed in the DAH Financial Statements or the notes thereto, except those (i) disclosed in the DAH Financial Statements, the Registration Statement or the DAH 34 Act Reports, or (ii) incurred in the ordinary course of business since December 31, 1996. 2.1.6 ABSENCE OF CERTAIN EVENTS. Except as disclosed in Schedule 2.1.7 and in the DAH 34 Act Reports, since December 31, 1996, there has not been any event, circumstance or condition that has had or is reasonably likely to have a DAH Material Adverse Effect, and (iii) DAH and its subsidiaries have not introduced any principle or practice of accounting. 3 2.1.7 COMPLETE DISCLOSURE. No representation or warranty made by DAH in this Agreement, and no exhibit, schedule, statement, certificate or other writing furnished to the Shareholders by or on behalf of DAH pursuant to this Agreement or in connection with the transactions contemplated hereby or thereby, contains or will contain, any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. 2.2 THE SHAREHOLDERS. Except as set forth on Schedule 2.2, the representations and warranties of the Shareholders, contained in this Agreement, including those contained in this Section 2.2, are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date. The Shareholders represent and warrant to DAH the following: 2.2.1 CORPORATE ORGANIZATION. AI is a corporation duly organized, validly existing and in good standing under the laws of the State of Arkansas, and has all requisite corporate power and authority to own, lease and operate its properties and conduct its business as now being conducted. AI is duly qualified to do business and in good standing in each jurisdiction listed on Schedule 2.2.1, and neither the nature of the business conducted by it nor the property it owns, leases or operates requires it to qualify to do business as a foreign corporation in any other jurisdiction. Except as set forth on Schedule 2.2.1, AI has not received any written notice or assertion within the last three years from any governmental official of any jurisdiction to the effect that AI is required to be qualified or otherwise authorized to do business therein, in which AI has not qualified or obtained such authorization. Attached as Schedules 2.2.1 are complete and correct copies of AI's articles of incorporation and by-laws as in effect on the date hereof, and AI is not in default in the performance, observation or fulfillment of any provision of either of its articles of incorporation or by-laws. 2.2.2 CAPITALIZATION AND SECURITY HOLDERS. The authorized capital stock of AI consists solely of 1,000 shares of Common Stock, $1.00 par value ("AI Common Shares"); AI has issued and outstanding 129 AI Common Shares, constituting all of the issued and outstanding shares of capital stock of any class of AI; all outstanding AI Common Shares have been validly issued and are fully paid and non-assessable and free of preemptive rights; there are no outstanding subscriptions' options, warrants, puts, calls, agreements, understandings, or other commitments or rights of any type relating to the issuance, sale or transfer by AI of any securities of AI, nor are there outstanding any securities which are convertible into or exchangeable for any shares of capital stock of AI; and AI has no obligation of any kind to issue any additional securities. Schedule 2.2.2 accurately sets forth the names and addresses of, the number of AI Common Shares held at the date of this Agreement of record and/or beneficially by, and any AI Common Shares to be issued, sold or otherwise transferred at or prior to the Closing Date to, each and every shareholder of AI. All of such AI Common Shares are owned free and clear of all liens, charges, claims, encumbrances, pledges, security interests, equities and restrictions whatsoever. 4 2.2.3 AUTHORIZATION OF THE SHAREHOLDERS. Each of the Shareholders has all requisite power, authority and legal capacity and is competent to execute and deliver this agreement, and the other Transaction Documents to which he is a party, perform his obligations hereunder and thereunder and consummate the transactions contemplated hereby. This Agreement constitutes, and the other Transaction Documents to which the Shareholders are parties when executed and delivered by the Shareholders will constitute, valid and binding obligations of the Shareholders, enforceable against the Shareholders in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance and moratorium laws and other laws of general application affecting the enforcement of creditors' rights generally. 2.2.4 FINANCIAL STATEMENTS. Attached hereto as Schedule 2.2.4 are (i) the balance sheets of AI as at December 31, 1996, 1995 and 1994 and September 30, 1997, (ii) the related statements of income for the years ended December 31, 1996, 1995 and 1994 and the nine months ended September 30, 1997, and (iii) the related statements of retained earnings and cash flows for the years ended December 31, 1996 and 1995 (all of such documents referred to collectively as the "Financial Statements"). The 1996 Financial Statements reflect all year-end adjustments reflected in the audited consolidated financial statements of AI. The Financial Statements (i) are true, correct and complete in all material respects, (ii) have been prepared from and are in accordance with the books and records of AI, (iii) have been prepared using an accrual basis method and FIFO inventory cost flow assumptions, (iv) are in conformity with generally accepted accounting principles applied on a consistent basis for such periods, and (v) fairly present the financial position of AI as of the dates stated and the results of operations and cash flows of AI for the periods then ended in accordance with such practices. On the date of this Agreement, AI does not have any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheets in the Financial Statements. Since September 30, 1997, there has been no material adverse change in the financial condition, operations, business or prospects taken as a whole of AI from that set forth in the Financial Statements dated as of September 30, 1997. 2.2.5 ABSENCE OF CERTAIN CHANGES IN EVENTS. Except as set forth on Schedule 2.2.5, since December 31, 1996, there has not been: (a) Any material adverse change in the business operations, assets, properties or rights, prospects or condition (financial or otherwise) of AI or, any occurrence, circumstance, or combination thereof which reasonably could be expected to result in any such material adverse change (a "Material Adverse Effect"); 5 (b) Any material increase in amounts payable by AI to or for the benefit of, or committed to be paid by AI: (A) to or for the benefit of (x) any person listed on Schedule 2.2.5(b) (each a "Restricted Employee") or (y) in the aggregate, all shareholders, directors, officers, partners, consultants, agents and employees, in any capacity, of AI who are not listed on Schedule 2.2.5(b) (the "Non-Restricted Employees") or (B) in any benefits granted under any bonus, stock option, profit sharing, pension, retirement, deferred compensation, insurance, or other direct or indirect benefit plan, payment or arrangement made to, for the benefit of, or with (x) any Restricted Employee or (y) in the aggregate, all Non-Restricted Employees; (c) Any transaction entered into or carried out by AI other than in the ordinary and usual course of business; (d) Any borrowing or agreement to borrow funds; any incurring of any assumption, guarantee or other obligation or liability, contingent or otherwise except current liabilities incurred in the usual and ordinary course of business or those not exceeding at any one time outstanding $50,000; (e) Any material change made by AI in the methods of doing business, or other than such changes required by GAAP, any change in the accounting principles or practices of AI with respect to the Financial Statements or the method of application of such principles or practices; (f) Other than those which are involuntary and in amounts which are not material, any mortgage, pledge, lien, security interest, hypothecation, charge or other encumbrance imposed or agreed to be imposed on or with respect to the real (the "Real Property") or tangible or intangible personal property of AI (the "Personal Property") (collectively the "Property"); (g) Any sale, lease or other disposition of or any agreement to sell, lease or otherwise dispose of any of the material properties or assets of AI, other than sales of finished goods in the usual and ordinary course of business for AI's scheduled prices; (h) Any purchase of or any agreement to purchase capital assets for an amount in excess of $50,000 for any one such purchase or $100,000 for all such purchases made by AI on behalf of AI or any lease or any agreement to lease, as lessee, any capital assets with payments over the term thereof to be made by AI exceeding an aggregate of $50,000 for any one lease or $100,000 in the aggregate; (i) Any loan or advance made by AI to any individual, firm, corporation or other entity except for advances not material in amount made in the usual and ordinary course of business to employees; 6 (j) Any modification, waiver, change, amendment, release, rescission or termination of, or accord and satisfaction with respect to, any material term, condition or provision of any material contract, agreement, license or other instrument to which AI is a party, other than any satisfaction by performance in accordance with the terms thereof in the usual and ordinary course of business; (k) Any delay or postponement (beyond normal practice) by AI on behalf of AI of the payment of material Accounts Payable or other material liabilities of AI; or (l) Any other event or condition of any character which has had a Material Adverse Effect or may reasonably be expected to result in a Material Adverse Effect. 2.2.6 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule 2.2.6, AI has no material liability or obligation of any nature (whether liquidated, unliquidated, accrued, absolute, known or unknown, contingent or otherwise and whether due or to become due) except: (a) those set forth or reflected in the September 30, 1997 Balance Sheet which have not been paid or discharged since the date thereof; (b) those arising under agreements or other commitments expressly identified in any Schedule hereto; and (c) current liabilities incurred in or as a result of the conduct of its business in the ordinary and usual course consistent with past practice since September 30, 1997, which are completely and accurately reflected on its books and records and which are not inconsistent with the other representations, warranties and agreements of AI and the Shareholders, set forth in this Agreement or in the other Transaction Documents. 2.2.7 TAXES. Except as set forth on Schedule 2.2.7, AI has filed all Federal, State and local tax returns. AI has filed, when due, all federal, state and local tax returns; all amounts payable pursuant to such returns by AI for taxes through the Closing Date have been or will be paid or adequately provided for as reserves in the financial statements of AI. No deficiency for any material amount of tax has been asserted or assessed by a taxing authority against AI. Except as reserved for in the Closing Date Balance Sheet, there will not be any amount owing for taxes, penalties or interest. 7 2.2.8 COMPLIANCE WITH LAW. (a) Each of AI and the Shareholders, is in compliance in all material respects (with respect to the business of AI) with all applicable laws, statutes, orders, rules, regulations, policies or guidelines promulgated, or judgments, decisions or orders entered, by any federal, state, local or foreign court or governmental authority or instrumentality relating to AI or any of its businesses or properties. (b) AI is in compliance in all material respects with all federal, state and local laws, ordinances, rules and regulations pertaining to environmental matters, including solid waste disposal, toxic substances, hazardous substances, hazardous materials, hazardous waste, toxic chemicals, pollutants, contaminants and air or water pollution and to the storage, use, handling, transportation, discharge and disposal (including spills and leaks) of gaseous, liquid, semi-solid or solid materials. AI has not, and to the best knowledge of AI and the Shareholders, no third party has, disposed or discharged any chemicals, oil or solid wastes on any part of the Real Property or any other any property owned, operated, leased or used by AI. There are no underground storage tanks located on any part of the Real Property or any other property owned, operated, leased or used by AI. (c) Schedule 2.2.8(c) contains a complete copy of the repair station approval. AI maintains all franchises, licenses, permits, consents, authorization, approvals, and certificates of any regulatory, administrative or other agency or body, to the extent reasonably necessary to conduct the business of AI (collectively, the "Permits"). Each of the Permits is currently valid and in full force and effect and, to the best knowledge of AI and its Shareholders, closing of and the transactions contemplated by this Agreement will not result in the termination of any Permit. AI is not in material violation of any of the Permits and there is no pending or, to the knowledge of AI and its Shareholders, threatened proceeding which could result in the revocation, cancellation or inability of AI to renew or transfer any Permit. (d) To the best of the knowledge of AI and the Shareholders, except as set forth in Schedule 2.2.8(d), the business of AI) has not been charged with, or given notice of any material violation of, any applicable law. 2.2.9 PROPRIETARY RIGHTS. AI has full right, title and interest to all patents, patent applications, trademarks, tradenames, service marks, copyrights, trade secrets, inventions, know-how and other similar rights ("Intellectual Property") which are material to the operation of the business of AI. AI conducts its business without conflict or infringement with any intellectual property claimed or held by others. 8 2.2.10 RESTRICTIVE DOCUMENTS OR LAWS. With the exception of the matters listed on Schedule 2.2.10, AI, (with respect to the business of AI), is not a party to or bound under any certificate, mortgage, lien, lease, agreement, contract, instrument, vote, which materially adversely affects, (i) the condition, financial or otherwise, of AI or the Property; (ii) the continued operation by DAH of the business of AI after the Closing Date on substantially the same basis as said business was theretofore operated; or (iii) the consummation of the transactions contemplated in this Agreement. 2.2.11 INSURANCE. AI has been and is insured with respect to its property and the conduct of its business in such amounts and against such risks as are sufficient for compliance with law and as it in good faith deems to be adequate to protect its properties and businesses in accordance with normal industry practice. Schedule 2.2.11 is a true, correct and complete list of all insurance policies and bonds in force in which AI is named as an insured party, as respects the business of AI, or for which AI has been charged or has paid any premiums. Except as disclosed in Schedule 2.2.11, all such policies or bonds are currently in full force and AI has not received any notice from any such insurer with respect to the cancellation of any such Insurance. AI will continue all of such insurance in full force and effect up to and including the Closing Date. All premiums due and payable on such policies have been paid. AI is not a co-insurer under any term of any Insurance policy. 2.2.12 BANK ACCOUNTS, DEPOSITORIES AND POWERS OF ATTORNEY. Schedule 2.2.12 is a true, correct and complete list of the names and locations of all banks or other depositories in which AI maintains accounts or safe deposit boxes, and the names of the persons authorized to draw thereon, borrow therefrom or have access thereto. No person or entity holds a power of attorney on behalf of AI. 2.2.13 REAL PROPERTY. Except as set forth in Schedule 2.2.13, and except with respect to real property leased pursuant to the Real Property Leases listed on Schedule 2.2.13, AI has no real property. The Property which is real property constitutes all of the Real Property now used in and necessary for the conduct of the business of AI as presently conducted. All such properties are held free and clear of all mortgages, pledges, liens, security interests, encumbrances and restrictions of any nature whatsoever. Schedule 2.2.13 contains a complete and accurate legal description of each parcel of Real Property owned or used by AI in the conduct of its business. Except as set forth in Schedule 2.2.13; all real property, buildings and structures owned or used by AI and material to the operation of its business is suitable for the purpose or purposes for which it is being used, and is in such condition and repair as to permit the continued operation of said businesses. To the best knowledge of AI and the Shareholders none of the Real Property, buildings or structures is in need of material maintenance or repairs except for ordinary, routine maintenance and repairs. To the best knowledge of AI and the Shareholders, there are no material structural defects in the exterior walls or the interior bearing walls, the foundation or the roof of any plant, building, garage or other such structure owned, leased or used by AI and the electrical, plumbing and heating systems, and the air conditioning system, if any, of any such plant, building, garage or structure are 9 in reasonable operating condition in light of their age and prior use. The utilities servicing the real property owned, leased or used by AI are adequate to permit the continued operation of the business of AI and to the best knowledge of AI and the Shareholders there are no pending or threatened zoning, condemnation or eminent domain proceedings, building, utility or other moratoria, or injunctions or court orders which would materially effect such continued operation. Schedule 2.2.13 lists, and AI have furnished or made available to DAH copies, if any of, all engineering, geologic and environmental reports prepared by or for AI with respect to the Real Property owned, leased or used by AI. 2.2.14 PERSONAL PROPERTY. Except as set forth in Schedule 2.2.14, and except with respect to personal property leased pursuant to the Personal Property Leases listed on Schedule 2.2.14, AI has good, valid and marketable title to all of its assets and properties which are Personal property of every kind, nature and description, tangible or intangible wherever located, including all property and assets which are personal property shown or reflected on the September 30, 1997 Balance Sheet. The Personal Property constitutes all of the personal property now used in and necessary for the conduct of the business of AI as presently conducted, and is held free and clear of all mortgages, pledges, liens, security interests, encumbrances and restrictions of any nature whatsoever. Except as set forth in Schedule 2.2.14 no financing statement naming AI as debtor has been filed in any jurisdiction, and AI is not a party to or bound under any agreement or legal obligation authorizing any party to file any such financing statement. Schedule 2.2.14 contains a complete and accurate description of all tangible Personal Property having an individual value of $5,000 or more owned or used by AI in the conduct of its business. Schedule 2.2.14 contains a complete and accurate description of all machinery, equipment, tooling, parts, furniture, supplies and other tangible Personal Property having an individual value of $5,000 or more owned or used by AI. Schedule 2.2.14 contains a complete and accurate description of all automobiles, trucks and other vehicles owned or used by AI. Except as noted on Schedule 2.2.14 as unsuitable, all machinery and equipment and tangible personal property owned or used by AI and material to the operation of the business is suitable for the purpose or purposes for which it is being used, and is in such condition and repair as to permit the continued operation of said business. None of such machinery or equipment is in need of material maintenance or repairs except for ordinary, routine maintenance and repairs. 2.2.15 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 2.2.15, the operations of AI are in material compliance with all occupational health and safety acts and all environmental laws and regulations of all federal, state and local governmental or regulatory bodies having jurisdiction over AI. Without limiting the generality of the foregoing, and by way of example only, except as set forth on Schedule 2.2.15: 10 (a) There has not been, and is not occurring, any Release of any Hazardous Substance on any real property owned or used by AI. For purposes of this Agreement, the terms "Release" and "Hazardous Substance" shall have the same meanings as those terms are given in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), except that for purposes of this Agreement petroleum (including crude oil or any fraction thereof) shall be deemed a Hazardous Substance. (b) AI has never sent a Hazardous Substance to a site which, pursuant to CERCLA or any similar state law, (A) has been placed, or is proposed to be placed, or, to the best knowledge of AI or Shareholders, may in the future be placed, on the "National Priorities List" of hazardous waste sites or on any similar list of any federal, state or local governmental agency, including the Comprehensive Environmental Response, Compensation and Liability System list for potential hazardous waste sites, or (B) is subject to a claim, an administrative order or other request to take "removal" or "remedial" action (as defined under CERCLA) or to pay for any costs relating to such site. (c) AI has never been or is currently in violation of any provision of the Toxic Substances Control Act or the regulations promulgated thereunder. (d) AI is not involved in any suit or has received notice of any claim relating to personal injuries from exposure to Hazardous Substances. 2.2.16 BROKERS, FINDERS. Except as set forth on Schedule 2.2.16, the transactions contemplated herein were not submitted to AI by any broker or other person entitled to a commission or finder's fee thereon, and were not with the consent of AI submitted to DAH by any such broker or other person. Except as set forth on Schedule 2.2.16, neither AI nor any of its offices, directors or employees has engaged any broker or finder or incurred or taken any action which may give rise to any liability against itself or the Property for any brokerage fees, commissions, finders fees or similar fees or expenses and no broker or finder has acted directly or indirectly for AI in connection with this Agreement or the transactions contemplated hereby. No investment banking, financial advisory or similar fees have been incurred or are or will be payable by AI in connection with this Agreement or the transactions contemplated hereby. 2.2.17 LEGAL PROCEEDINGS, ETC. Except as set forth on Schedule 2.2.17, there is no claim, litigation, action, suit or proceeding, administrative or judicial, filed, pending or, to the knowledge of AI and the Shareholders, threatened against AI or the Shareholders or involving the Property, this Agreement or the transactions contemplated hereby, at law or in equity, before any federal, state or local court or regulatory agency, or other governmental authority, including any unfair labor practice or grievance, proceedings or claim. Except as disclosed in Schedule 2.2.17, neither the Shareholders nor AI is subject to any judgment, order or decree, or, to the best knowledge of the Shareholders, any governmental restriction applicable to AI, the Shareholders, or AI which has a reasonable probability of having a Material Adverse Effect, or which 11 materially adversely affects the ability of AI to conduct business in any area. 2.2.18 NO CONFLICT OR DEFAULT. Neither the execution and delivery of this Agreement or any other Transaction Document, nor compliance with the terms and provisions hereof or thereof, including the consummation of the transactions contemplated hereby and thereby, will (a) violate in any material respect any statute, regulation or ordinance of any governmental authority, or (b) conflict with or result in the breach of any term, condition or provision of the articles of incorporation or bylaws of AI or of any agreement, deed, contract, mortgage, indenture, writ, order, decree, legal obligation or instrument (with respect to the business of AI) to which AI or any of the Shareholders, is a party or by which AI or any of the Shareholders or any part of the Property is or may be bound, or (c) constitute a material default (or an event which with the lapse of time or the giving of notice, or both, would constitute a material default) thereunder, or (d) result in the creation or imposition of any material lien, charge, encumbrance, or restriction of any nature whatsoever with respect to any part of the Property, or (e) give to others any interest or rights, including rights of termination, acceleration or cancellation in or with respect to any part of the Property or the business of AI. 2.2.19 LABOR RELATIONS. Schedule 2.2.19 sets forth all collective bargaining or other labor agreements to which AI is bound and the Shareholders have previously delivered to DAH true, correct and complete copies of each such agreement. There is no labor strike, dispute, slowdown or stoppage, or any union organizing campaign, or petition for certification actually pending or, to the best knowledge of the Shareholders, threatened against or involving AI. Schedule 2.2.19 sets forth all pending grievances and arbitration proceedings against AI arising out of or under a collective bargaining or other labor agreement. No collective bargaining or other labor agreement is currently being negotiated by AI. AI has not experienced any work stoppage or other material labor difficulty over the past three years. No such agreement which is binding on AI restricts it from relocating or closing any or all of its operations. 2.2.20 EMPLOYEE BENEFIT PLANS. (a) Except as set forth in Schedule 2.2.20, AI does not currently sponsor, maintain or contribute, or has within the past 3 years sponsored, maintained or contributed to, to any pension, retirement, profit-sharing, deferred compensation, bonus, stock option or other incentive plan, or any other employee benefit program, arrangement, agreement or understanding, or medical, vision, dental or other health plan, or life insurance or disability plan, or any other employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not any such employee benefit plan is otherwise exempt from the provisions of ERISA, and whether or not formal or informal, written or oral, and whether or not legally binding. All such plans, funds or programs sponsored, maintained or contributed to by AI currently or within the past 3 years, whether or not listed on Schedule 2.2.20, are hereinafter referred to as the "Employee Benefit Plans"). For the purpose of this Section 2.2.20, the term "AI" shall include all "affiliates" of AI, whether or 12 not incorporated, as such term is used in Section 407(d)(7) of ERISA. (b) Full payment has been made of all amounts which AI is required, under applicable law or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan to which it is a party, to have paid as contributions to or benefits under any Employee Benefit Plan as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. AI has made adequate provision in its financial statements for liabilities to meet current contributions or benefit payments. (c) AI has performed all obligations required to be performed by it under the Employee Benefit Plans. AI has not engaged in any transaction with respect to the Employee Benefit Plans which would subject AI or DAH to a tax, penalty or liability for a prohibited transaction under section 406, 407 or 502(i) of ERISA or Section 4975 of the Code, nor have either of AI's or AI' directors, officers, partners, employees or agents, to the extent they or any of them are fiduciaries with respect to such Employee Benefit Plans, breached any of their responsibilities or obligations imposed upon fiduciaries under Title I of ERISA or which would result in any claim being made under or by or on behalf of any such Employee Benefit Plans by any party with standing to make such claim. AI will not have any plan or commitment, whether formal or informal, written or oral, and whether or not legally binding, to modify or change any Employee Benefit Plan in any material manner prior to the Closing Date. AI and any "administrator(s)" (as described in Section 3(16)(A) of ERISA) of the Employee Benefits Plans have complied in all material respects with the applicable requirements of ERISA, the Code and all other statutes, orders, rules or regulations, specifically including material compliance with all reporting and disclosure requirements of Part 1 of Title 1 of ERISA and of the Code in a timely and accurate manner, and no penalties have been or will be imposed, nor is AI, AI or any administrator liable for any penalties imposed, under ERISA, the Code or otherwise with respect to the Employee Benefit Plans or any related trusts of AI. AI is not delinquent in the payment of any federal, state or local taxes with respect to the Employee Benefit Plans. There is no pending litigation, arbitration, or disputed claim, settlement adjudication or proceeding with respect to the Employee Benefit Plans, and none of AI, AI or any administrator is aware of any threatened litigation, arbitration or disputed claim, adjudication proceeding, or any governmental or other proceeding, or investigation with respect to the Employee Benefit Plans or with respect to any fiduciary or administrator thereof (in their capacities as such), or any party-in-interest thereto (with respect to their relationship as such). There is no "defined benefit plan" within the meaning of Section 414(j) of the Code or Section 3(35) of ERISA to which AI has been a party or has been required to make any contributions at any time during the last ten (10) years. There is no multiemployer plan to which AI has been a party or has been required to make any contributions at any time during the last ten (10) years. 13 (d) The Shareholders have delivered or caused to be delivered to DAH prior true, accurate and complete copies of (A) all Employee Benefit Plans and any related trust agreements, custodial agreements, investment management agreements, insurance contracts or policies, and administrative service contracts, all as in effect, together with all amendments thereto which will become effective at a later date; (B) the latest Summary Plan Description and any modifications thereto for each Employee Benefit Plan requiring same under ERISA; (C) the Summary Annual Report for the current and prior fiscal years for each Employee Benefit Plan requiring same under ERISA; (D) each Form 5500 and/or Form 990 series filing (including required schedules and financial statements) for the current and prior fiscal years for each Employee Benefit Plan required to file such form; and (E) the most recent actuarial evaluation, analysis or other report issued with respect to any Employee Benefit Plan. None of AI or any officer, partner, employee representative or agent of either of them, has made any written or oral representations or statements to any current or former employees, dependents, participants or beneficiaries or other persons which are inconsistent in any material manner with the provisions of these documents. (e) With respect to any of AI's employee welfare plans (as defined in Section 3(1) of ERISA and including those Employee Benefits Plans which qualify as such) which are "group health plans" under Section 162(k) or Section 4980B of the Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"), as amended to date), there has been timely compliance in all material respects with all requirements imposed thereunder, as and when applicable to such plans, so that AI has (or will incur any) loss, assessment, penalty, loss of federal income tax deduction or other sanction, arising on account of or in respect of any failure to comply with any COBRA benefit continuation requirement, which is capable of being assessed or asserted directly or indirectly against AI, or against DAH or DAH or any of their respective subsidiaries or other member of DAH's corporate control group, with respect to any such plan. 2.2.21 CONTRACTS AND COMMITMENTS. Schedule 2.2.21 is a list of all contracts, agreements, contract rights, leases, license agreements, franchise rights and agreements, policies, purchase and sales orders, quotations and executory commitments, instruments, guaranties, indemnifications, arrangements, obligations and understandings (written or oral) to which AI is a party and which involve the payment by or to AI in the aggregate of $100,000 or more during any year (the "Material Contracts"). The Material Contracts are valid and binding, in full force and effect and enforceable against AI in accordance with their respective provisions. AI has not assigned, mortgaged, pledged, encumbered, or otherwise hypothecated any of its right, title or interest under any Real Property Lease, any Personal Property Lease, or any Material Contract. AI is not in violation of, in default in respect of, nor has there occurred an event or condition which, with the passage of time of giving of notice (or both) would constitute a violation or default of any Material Contract; and, there are no facts or circumstances which would reasonably indicate that AI (or any other party) will be or may be in violation of or in default in respect 14 of any Material Contract, subsequent to the date hereof. No notice has been received by AI claiming any such default by AI or indicating the desire or intention of any other party thereto to amend, modify, rescind or terminate the same. 2.2.22 ACCOUNTS RECEIVABLE. All of the accounts and notes receivable, investments, deposits and prepaid expenses of AI as of September 30, 1997 are set forth on Schedule 2.2.22. All such accounts receivable, arising between the date hereof and the Closing Date (in each case net of allowances for doubtful accounts as disclosed on such Schedule, (a) are or will be valid and subsisting, (b) represent or will represent sales actually made, (c) arose or will arise in the ordinary and usual course of the business of AI and (d) to the extent not collected prior to the Closing Date, will be collectible according to their terms within 180 days after the date of the Closing Date. 2.2.23 INVENTORIES. Schedule 2.2.23 completely and accurately lists of all raw materials, supplies, parts, work-in-process, and finished goods inventory and other inventory owned by AI and the accurate cost of such inventory as of September 30, 1997. Except as set forth in Schedule 2.2.23, the inventories except for amounts which in the aggregate are not material, of AI (i) consist of a quality and quantity usable and saleable in the ordinary and usual course of business, except for items of obsolete materials and materials of substandard quality, all of which have been written off or written down on the books of AI to net realizable value prior to September 30, 1997 and (ii) have been priced at the lower of cost or market on a FIFO basis. The quantities of all material portions of each type of inventory (whether raw materials, work-in-process, or finished goods) are not excessive, but are reasonable and warranted in the present circumstances of AI; and all material portions of work-in-process and finished goods inventory is free of any material defect or other deficiency. Notwithstanding the foregoing, quantities of raw materials, work in process and finished goods may be present which, in the aggregate, are not material in the dollar amount for which said items are carried on the books and which items cannot be used as a result of specification changes of which AI has not been notified by AI's customer. 2.2.24 BACKLOG. All unfilled orders to purchase goods of AI as of September 29, 1997 are set forth in Schedule 2.2.24 and are firm and binding commitments (subject to cancellation rights set forth therein) of the respective purchasers (assuming that such purchaser has properly authorized by all requisite corporate or, if not a corporation, by all other requisite action and has properly executed and delivered such purchase order, which, is the case) to purchase the goods indicated. 2.2.25 BOOKS OF ACCOUNT; RECORDS. Except as disclosed in Schedule 2.2.25, the general ledgers, books of account and other financial records of AI are complete and correct, have been maintained in accordance with generally accepted accounting principles and practices and the matters contained therein are appropriately and accurately reflected in the Financial Statements in all material respects. 15 2.2.26 OFFICERS, PARTNERS, EMPLOYEES AND COMPENSATION. Schedule 2.2.26 sets forth the name of all directors, partners and officers of AI, their respective terms of office, the total salary, bonus payments, fringe benefits and perquisites each received in each of the last 3 fiscal years ended December 31, 1996, and changes to the foregoing which have occurred since December 31, 1996; such Schedule also lists and describes the current base salary, bonus payments, fringe benefits and perquisites of any other employee, agent or representative of AI whose total current salary, bonus or other compensation exceeds $50,000 annually during any of the last 3 fiscal years ended December 31, 1996, and changes to the foregoing since December 31, 1996. There are no other material forms of compensation paid to any such director, officer or employee of AI. The provisions for wages and salaries accrued on the September 30, 1997 Balance Sheet are adequate for salaries and wages, including accrued vacation pay, for the period up through the date thereof, and AI has accrued on its books and records all obligations for wages and salaries and other compensation to its employees, including, but not limited to, vacation pay and sick pay, and all commissions and other fees payable to agents, salesmen and representatives. AI will file any and all payroll tax returns due through the Closing Date and pay or reserve on the Closing Date Balance Sheet all payroll taxes due for any and all AI employees. Except as set forth on Schedule 2.2.26, AI has not become obligated, directly or indirectly, to any shareholder, director, officer or partner of AI or any member of their families, except for current liability for employment compensation. Except as set forth on Schedule 2.2.26, no shareholder, director, officer, partner, agent or employee of AI holds any position or office with or has any financial interest, direct or indirect, in any supplier, customer or account of, or other outside business which has transactions with AI. AI, nor, any third party, has taken any action with respect to any shareholder, director, officer, partner, employee or representative of AI to attempt to induce or which would influence any such person not to become associated with DAH from and after the Closing Date or from serving DAH in a capacity similar to the capacity presently held. To the best of the knowledge of the Shareholders, no employee of AI has a present intention to leave the employ of AI or has taken any action directed towards leaving the employ of AI. Except as set forth on Schedule 2.2.26, no former employee of AI is currently or intends to enter into competition with the business of AI. 2.2.27 CREDIT TERMS; PRODUCT WARRANTIES. The aggregate amount of losses and expenses incurred by reason of allowances, customer dissatisfaction or liabilities arising under AI's warranties and guarantees during the three years ended December 31, 1996 are completely accounted for in the financial statements of AI for such years and there has been no materially adverse change in that experience since said date. Except as set forth on Schedule 2.2.27, AI has conducted all qualification inspections and quality conformance inspections required by the specifications for products of AI included on qualified products lists in material compliance with the requirements of such specifications, and all products shipped have been in material conformance with such specifications. 16 2.2.28 CONTRACTS WITH AFFILIATES. Any contract, commitment, lease, permit or other instrument, agreement, understanding or obligation (each a "Commitment") between AI and any affiliate including each Shareholder), is the equivalent of an "arms-length" transaction with a third party, and each such Commitment is described on Schedule 2.2.28 hereto. 2.2.29 GOVERNMENT CONTRACTS. AI is not a party to, nor is it bound, nor does it have any liability, with respect to any Government Contracts. For purposes of this Section 2.2.29, the term "Government" means any agency, division, subdivision, audit group, or procuring office of the federal government, including the employees or agents thereof; the term "Transferor" means AI and its subsidiaries, divisions, affiliates, joint venturers, agents, employees, officers and directors; the term "Government Contract" means any prime contract, subcontract, basic ordering agreement, letter contract, purchase order or delivery order of any kind, including all amendments, modifications and options thereunder or relating thereto, between the Transferor and any of the Government, any prime contractor of the Government, any subcontractor of such a prime contractor or any subcontractor of another subcontractor, however far removed from the prime contractor such subcontractor may be, (A) currently in force; (B) which, within the three years preceding the date of this Agreement, expired or were terminated; or (C) for which final payment was received within the three years preceding the date of this Agreement; and the term "Bid" means any outstanding quotation, bid or proposal submitted by Transferor to the Government, any proposed prime contractor of the Government, or any proposed subcontractor. 2.2.30 SOLVENCY. The total assets of each of the Shareholders exceed their respective total liabilities; each of the Shareholders are able to perform their respective financial obligations as performance thereof becomes due. 2.2.31 NO STRATEGIC ALLIANCES. Except as disclosed in Schedule 2.2.31, no agreement or understanding has been entered into between AI and any company which is an arrangement with any other person which involves equity investment or ownership, a joint venture or revenue or profit sharing a "Strategic Alliance." An arrangement for a preferred supplier relationship which does not have any of the characteristics described in the foregoing sentence is not a strategic alliance. 2.2.32 PAYMENTS AND EXPENDITURES. Except as set forth in Schedule 2.2.32 since June 30, 1997, AI has not made (i) any payment or incurred any liability on behalf of any Shareholder, (ii) made any payment to or on behalf of any Shareholder except for the Shareholder's salary and expense reimbursements made in the ordinary course of business, (iii) not paid any amount not in the ordinary course of AI's business, or (iv) not made any capital expenditure in excess of $100,000 in the aggregate. 2.2.33 COMPLETE DISCLOSURE. No representation or warranty 17 made by AI or any of the Shareholders in this Agreement, and no exhibit, schedule, statement, certificate or other writing furnished to DAH by or on behalf of AI or any of the Shareholders pursuant to this Agreement or in connection with the transactions contemplated hereby or thereby, contains or will contain, any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein and therein not misleading. Without limiting the foregoing, to the extent applicable, no representation or warranty made in any of Sections 2.2.4 through 2.2.32 would differ in any material respect if the representation contained information concerning AI's wholly owned subsidiary, Audio International Sales, Inc. 3. COVENANTS. 3.1 COVENANTS OF THE SHAREHOLDERS. 3.1.1 COVENANT AGAINST DISCLOSURE. Other than in the ordinary course of business of AI and except for professional advisors (including attorneys, accountants and investment bankers) who agree to maintain the confidentiality of such information, each of the Shareholders agree not to (a) disclose to any person, association, firm, corporation or other entity (other than DAH) or those designated in writing by DAH) in any manner, directly or indirectly, any information or data relevant to the business of AI, whether of a technical or commercial nature, or (b) use, permit or assist, by acquiescence material or otherwise, any person, association, firm corporation or other entity (other than DAH or those designated in writing by DAH) to use, in any manner, directly or indirectly, any such information or data, excepting only use of such data or information as is at the time generally known to the public and which did not become generally known through any breach of any provision of this Section 4.2.2. 3.1.2 COVENANT AGAINST HIRING. Each of the Shareholders understands that it is essential to the successful operation of the business to be acquired hereunder that DAH retain substantially unimpaired AI's operating organization. Each of the Shareholders agrees not to purposefully take any action which would induce any current employee or representative of AI not to become or continue as an employee. Without limiting the generality of the foregoing, the Shareholders shall not, whether directly or indirectly through any subsidiary or affiliate, employ, whether an employee, officer, director, agent, consultant or independent contractor, or enter into any partnership, joint venture or other business association with, any current employee, partner, representative, or manager of AI, for a period of the 12 months, after such person ceases or has ceased, for any reason, to be an employee, representative, partner, or manager of AI; provided, however, that Wayne Richie may hire any person (i) who is terminated by AI or (ii) who prior to being solicited for employment by Wayne Richie, voluntarily terminates his or her employment with AI. 18 3.1.3 INJUNCTIVE RELIEF. Each of the Shareholders acknowledges and agrees that DAH's remedy at law for any breach of any of such Shareholders obligations under Subsections 3.1.1 and 3.1.2 hereof would be inadequate, and agrees and consents that temporary and permanent injunctive relief may be granted in a proceeding which may be brought to enforce any such provision without the necessity of proof of actual damage. The rights and remedies conferred upon DAH under this Section, or by any instrument or law shall be cumulative and may be exercised singularly or concurrently. 3.1.4 CONDUCT OF BUSINESS OF AI PRIOR TO CLOSING DATE. Each of the Shareholders agrees that on and after the date hereof and prior to the Closing Date: (a) The business and operations, activities and practices of AI shall be conducted only in the ordinary course of business and consistent with past practice; (b) No change shall be made in the articles of incorporation or bylaws of AI, except as is necessary to comply with Section 7.2(a) hereof; (c) No change shall be made in the number of shares of authorized or issued capital stock of AI; nor shall any option, warrant, call, right, commitment or agreement of any character be granted or made by AI relating to its equity; (d) No dividend shall be declared or paid or other distribution (whether in cash, stock, property or any combination thereof) or payment declared or made in respect of the AI Common Shares by AI nor shall AI purchase, acquire, redeem or split, combine or reclassify any shares of the capital stock of AI; (e) The Shareholders shall, directly or indirectly, solicit or encourage (including by way of furnishing any non-public information concerning the business, properties or assets of AI), or enter into any negotiations or discussions concerning, any Acquisitions Proposal (as defined below). Any Shareholder will notify DAH promptly by telephone, and thereafter promptly confirm in writing, if any such information is requested from, or any Acquisition Proposal is received by AI or Shareholder. As used in this Agreement, "Acquisition Proposal" shall mean any proposal received by AI or any Principal Shareholder prior to the Closing Date for a merger or other business combination involving AI or for the acquisition of, or the acquisition of a substantial equity interest in, or a substantial portion of the assets of AI other than the one contemplated by this Agreement. 19 (f) Except as set forth in Schedule 3.1.4(f), Shareholder will not permit AI to: (A) incur, become subject to, or suffer, or agree to incur, become subject to or suffer, any obligation or liability (absolute or contingent) except current liabilities incurred, and obligations entered into in the ordinary course of business; (B) discharge or satisfy any lien or encumbrance or pay any obligation or liability (absolute or contingent) other than liabilities payable in the ordinary course of business; (C) mortgage, pledge or subject to lien, charge or any other encumbrance, any of the Property or agree so to do; (D) sell or transfer or agree to sell or transfer any of its assets, or cancel or agree to cancel any debt or claim, except in each case in the ordinary course of business; (E) consent or agree to a waiver of any right of substantial value; (F) enter into any transaction other than in the ordinary course of its business; (G) increase the rate of compensation payable or to become payable by it to any Restricted Employee over the rate being paid to such Restricted Employee at September 30, 1997; (H) increase the rate of compensation payable or to become payable by it to any officer, partner, employee or agent of AI not listed on Schedule 2.2.5(b) (a "Non-Restricted Employee") over the rate being paid to such Non-Restricted Employee at September 30, 1997, other than in the ordinary course of business and in accordance with AI's past practice; (I) terminate any material contract, agreement, license or other instrument to which it is a party; (J) through negotiation or otherwise, make any commitment or incur any liability or obligation of a material nature to any labor organization; (K) make or agree to make any accrual or arrangement for or payment of bonuses or special compensation of any kind to any Restricted Employee; (L) make or agree to make any accrual or 20 arrangement for or payment of bonuses or special compensation of any kind to any Non-Restricted Employee, other than in the ordinary course of business and in accordance with AI's practice; (M) directly or indirectly pay or make a commitment to pay any severance or termination pay to any Restricted Employee; (N) directly or indirectly pay or make a commitment to pay any severance or termination pay to any Non-Restricted Employee, other than in the ordinary course of business and in accordance with AI's past practice; (O) introduce any new method of management, operation or accounting with respect to its business or any of the assets, properties or rights applicable thereto other than changes required by GAAP; (P) offer or extend more favorable prices, discounts or allowances than were offered or extended regularly on and prior to September 30, 1997, other than in the ordinary course of business; and (Q) make capital expenditures in excess of $100,000 in the aggregate, or make any commitments for such capital expenditures. (R) Enter into any Strategic Alliance. (g) Each of the Shareholders will use their respective reasonable efforts to preserve AI's business organization materially intact, to keep available to AI the present service of AI's employees; and to preserve for AI the good will of its suppliers, customers and others with whom business relationships exist; and (h) None of the Shareholders will take, agree to take or permit to be taken any action or do or permit to be done anything in the conduct of the business of AI, or otherwise, which would be contrary to or in breach of any of the terms or provisions of this Agreement or which would cause any of the representations or warranties of AI or the Shareholders contained herein to be or become untrue in any material respect. 3.1.5 INSPECTION OF BOOKS AND RECORDS. From the date of this Agreement until the Closing Date, AI shall make or cause to be made available to DAH for examination the Property and all corporate records, minute books, share records, treasury shares, tax returns, books of account, contract, agreements, commitments, records and its documents of every character relating to AI and its business and shall permit DAH and its representatives, attorneys, accountants and agents to have access to and to copy, at DAH's expense, the same at all reasonable times, so as to allow DAH to confirm compliance with covenants and satisfaction of conditions hereunder. 3.1.6 FURTHER ASSURANCES. On and after the Closing Date, the 21 Shareholders shall prepare, execute and deliver, at DAH's expense, such further instruments of conveyance, sale, assignment or transfer, and shall take or cause to be taken such other or further action as DAH shall reasonably request at any time or from time to time in order to perfect, confirm or evidence in DAH title to all or any part of the Stock or to consummate, in any other manner, the terms and conditions of this Agreement. 3.1.7 PRESS RELEASES AND ANNOUNCEMENTS. Neither AI, any Principal Shareholder, DAH nor DAH shall issue any press release or announcement relating to the subject matter of this Agreement without the prior written approval of the other parties hereto; PROVIDED, HOWEVER that DAH may make any public disclosure it believes in good faith is required by law (in which case he or it will advise the other parties hereto prior to making the disclosure). 3.1.8 BANKRUPTCY. Neither AI nor any Principal Shareholder shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to either of them or seeking to adjudicate either of them bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to either of them or for all of any substantial part of either of their assets; (ii) neither AI nor any Shareholder shall make a general assignment for the benefit of its creditors; (iii) no case, proceeding or other action of a nature referred to in clause (i) above shall be commenced by any person which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed or discharged for a period of 60 days; (iv) no case, proceeding or other action shall be commenced by any person seeking issuance of a warrant of attachment, execution distraint or similar process against all or any substantial part of either of their respective assets which results in the entry of an order for any such relief; and (v) neither AI nor any Shareholder shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), (iii), or (iv) above. 3.1.9 LANDLORD'S CONSENTS, ETC. The Shareholders agree that if the terms of any Agreement relating to the right to use AI's Real Property requires they shall obtain, on or prior to the Closing Date, all consents required from any person whatsoever to effect the transfer to DAH, free and clear of all mortgages, pledges, liens, security interest, encumbrances, restrictions and claims of any nature whatsoever. 3.1.10 DELIVERY OF FINANCIAL STATEMENTS. As soon as reasonably practicable but no later than 10 business days prior to the Closing, the Shareholders shall deliver to DAH the balance sheet of AI as at October 31, 1997 and the related statements of income, retained earnings and cash flows for the period then ended, which shall be true, correct and complete, shall have been prepared from and are in accordance with the books and records of AI and shall have been prepared in conformity with generally accepted accounting principles applied on a consistent basis for such periods using an accrual basis method, and fairly present the financial condition of AI as of the dates stated and the 22 results of operations of AI for the periods then ended in accordance with such practices. Such October 31, 1997 Financial Statements (including all notes accompanying such statements) shall not disclose any event or circumstance materially adversely affecting AI or its businesses. The October 31, 1997 Financial Statements shall upon delivery to DAH become part of the Financial Statements as defined herein for all purposes hereof. 3.1.11 COOPERATION OF SHAREHOLDERS. The Shareholders shall cooperate and shall use their best efforts to have AI's independent certified public accountant deliver to DAH on or before 45 days following the Closing Date, the audited financial statements of AI for periods which are presently unaudited and for which DAH will become obligated to include such statements in DAH's filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. 3.1.12 CLOSING DATE BALANCE SHEET. The Shareholders will cause a balance sheet as of the Closing Date to be delivered to DAH within a reasonable time after the Closing Date (the "Closing Date Balance Sheet") which shall be true, correct and complete, shall have been prepared from and are in accordance with the books and records of AI and shall have been prepared in conformity with generally accepted accounting principles applied on a consistent basis for such periods using an accrual basis method, and fairly present the financial condition of AI as of the date stated on such dates in accordance with such practices. 3.2 COVENANTS OF DAH. On or prior to the Closing Date, DAH covenants shall deliver to the Shareholders, all duly and properly executed, the following: 3.2.1 LEGAL OPINION. The legal opinion referred to in Section 6.2(a). 3.2.2 PAYMENT. The Payment pursuant to Section 1.2.1. 3.2.3 FURTHER ASSURANCES. On and after the Closing Date, DAH shall prepare, execute and deliver, at its expense, such further instruments of conveyance, sale, assignment or transfer, and shall take or cause to be taken such other or further action as the Shareholders shall reasonably request at any time or from time to time in order to perfect, confirm or evidence in DAH title to all or any part of the Stock or to consummate, in any other manner, the terms and conditions of this Agreement. 3.2.4 CONFIDENTIALITY AGREEMENTS. Between the date of this Agreement and the Closing Date, DAH shall continue to be bound by its obligations pursuant to the written confidentiality agreements to which DAH and AI are parties. 23 4. INDEMNIFICATION. 4.1 The Shareholders, with full recourse, hereby indemnify and hold DAH harmless from any and all claim, loss, damage or expense (including attorneys' fees) ("losses") as a result of any breach of any warranty or representation made in this Agreement by the Shareholders. Anything in Section 4.3 to the contrary notwithstanding, no claim may be asserted nor may any action be commenced against the Shareholders for breach of any representation or warranty contained herein, unless written notice of such claim or action is received by the Shareholders describing in detail the facts and circumstances with respect to the subject matter of such claim or action or prior to the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in Section 4.3, irrespective of whether the subject matter of such claim or action shall have occurred before or after such date. 4.2 Without limiting the generality of the foregoing, the Shareholders agree to pay to DAH in immediately available funds within 10 days after notice from DAH to pay, the following amounts: 4.2.1 On or before 180 days following the Closing Date, an amount equal to (i) 100% of any Accounts Receivable of AI owing on the Closing Date which have not been collected on or before 180 days after the Closing Date, less (ii) the amount for doubtful accounts on the Closing Date Balance Sheet of AI. With respect to any such Accounts Receivable, DAH will cause AI, without warranty or recourse, to assign all of its right title and interest in such accounts to the Shareholders in the percentages specified in Exhibit 1.1. 4.2.2 On or before two years and three months following the Closing Date, an amount equal to 100% of the value on the Closing Date Balance Sheet (or if acquired subsequent to the Closing Date at cost) of any Inventory of AI owned by AI on both the Closing Date and the date two years following the Closing Date. With respect to any such Inventory, DAH will cause AI, without warranty or recourse, to transfer all of its right title and interest in such Inventory to the Shareholders in the percentages specified in Exhibit 1.1. Notwithstanding the foregoing, the Shareholders shall not be responsible for indemnification of quantities of raw materials, work in process and finished goods may be present which, in the aggregate, are not material in the dollar amount for which said items are carried on the books and which items cannot be used as a result of specification changes of which AI has not been notified by AI's customer. 4.2.3 On or before each of April 30, 1999 and 2000, an amount equal to 100% of the amount by which the cost to AI for performing warranty work and providing replacement parts and equipment to customers for sales made prior to the Closing Date, PROVIDED, HOWEVER, that no such indemnification shall be required to be made by the Shareholders if adjusted EBIT (as defined in the Earnout Agreement) is equal to or greater than $4 million in each of such years and, FURTHER PROVIDED, that for purposes of this subsection, "warranty work" shall not be deemed to include immaterial expenditures made 24 in connection with product refinement. 4.2.4 Any amounts not paid by the Shareholders pursuant to this Section 4 when due shall bear interest at the highest rate permitted by law. 4.2.5 Subject to the other terms and provisions of this Agreement and the Earnout Agreement, the representations and warranties of the parties hereto contained in Section 2 herein shall survive the Closing and shall remain in full force and effect, regardless of any investigation made by or on behalf of the Shareholders or DAH until April 30, 2000. 4.2.6 The indemnification obligations of the Shareholders hereto shall not be effective until the aggregate dollar amount of all Losses which would otherwise be indemnifiable pursuant to this Section 4.2 exceeds $250,000 (the "Threshold Amount"), and then only to the extent such aggregate amount exceeds the Threshold Amount. In addition, no claim may be made against the Shareholders for indemnification with respect to any individual item of Loss (except for multiple losses which result from breach of the representations the subject matter of each such loss being substantially similar in nature), unless such item exceeds $5,000, nor shall any such item be applied to or considered part of the Threshold Amount. The Indemnification obligations of the Shareholders pursuant to this Section 4.2 shall be effective only until the dollar amount paid, by the Shareholders individually, in respect of the Losses (including those related to all representations and warranties, except as provided below, and those for Sections 4.2.1, 4.2.2, and 4.2.3) indemnified against an amount equal to $500,000 as respects to each Shareholder provided, however that the limitation of the amount of the indemnity if the indemnification results from (i) with respect to the financial statements, any untrue statement of a material fact or failure to state a material fact required to be stated therein or (ii) the breach of any provision in Section 2.2.15 shall be $1,700.000 for each Shareholder, severally and not jointly. In the event of any obligation by the Shareholders to DAH resulting from a determination of actual fraud, there shall be no limitation of dollar amount. Without limiting DAH's rights pursuant to this Section 4, DAH may offset such amounts, if any, as may be owing to the Shareholders pursuant to Sections 1.2.2, 1.2.3 or 1.2.4. 5. CONDITIONS PRECEDENT TO OBLIGATIONS. 5.1 CONDITIONS TO OBLIGATIONS OF DAH. Each and every obligation of DAH to be performed at the Closing Date shall be subject to the satisfaction as of or before the Closing Date of the following conditions (unless waived in writing by DAH): 5.1.1 CONSENTS. AI shall have obtained and delivered to DAH all consents set forth on Schedule 5.1. 5.1.2 OPINION OF COUNSEL. The Shareholders shall have delivered or caused to be delivered to DAH an opinion of counsel for the Shareholders, addressed to DAH and dated the Closing Date, in the form of Exhibit C attached hereto. 25 5.1.3 DELIVERY OF CERTAIN AGREEMENTS BY SHAREHOLDERS. Robert S. Brown and Rick Marsh shall have executed and delivered Employment Agreements to DAH in the form to be agreed upon between DAH and Robert S. Brown and DAH and Rick Marsh. Robert S. Brown and Rick Marsh shall have executed and delivered Covenants Not to Compete to DAH in the form of Exhibit 5.1.3(A) and Wayne Richie shall have executed and delivered a Covenant Not to Compete to DAH in the form of Exhibit 5.1.3(B). 5.1.4 DELIVERY OF STOCK AND RECEIPT OF PAYMENT THEREFOR. The Shareholders shall deliver the stock certificates of AI duly endorsed for transfer by assignments separate from certificates, endorsed in blank with signatures guaranteed by a national bank or member firm of the New York Stock Exchange. 5.1.5 TRADE SECRETS AND CONFIDENTIAL INFORMATION. At the Closing, the Shareholders shall deliver to DAH, reduced to writing as reasonably practical, all trade secret information or other know how of a business or technical nature, which is currently used for the present or then anticipated future business of AI. 5.1.6 EARNOUT AGREEMENT. The Shareholders shall each execute and deliver the Earnout Agreement to DAH. 5.2 CONDITIONS TO OBLIGATIONS OF AI AND THE SHAREHOLDERS. Each and every obligation of the Shareholders, to be performed on or before the Closing Date shall be subject to the satisfaction as of or before such time of the following conditions (unless waived in writing by the Shareholders). 5.2.1 OPINION OF COUNSEL. DAH shall have delivered or caused to be delivered to the Shareholders an opinion of counsel for DAH, addressed to the Shareholders and dated the Closing Date, in form of Exhibit H attached hereto. 5.2.2 DELIVERY OF CERTAIN AGREEMENTS BY DAH. DAH shall cause AI to have executed and delivered Employment Agreements to Robert S. Brown and Rick Marsh in the form to be agreed upon between DAH and Robert S. Brown and DAH and Rick Marsh. DAH shall and shall cause AI to have executed and delivered Covenants Not to Compete in the form of Exhibit 4.1.3(a) to Robert S. Brown and Rick Marsh and the form of Exhibit 4.1.3(b) to Wayne Richie. 5.2.3 PAYMENT. DAH shall have made the payment required pursuant to Section 1.2.1. 5.2.4 EARNOUT AGREEMENT. DAH shall have executed and delivered the Earnout Agreement to each of the Shareholders. 26 6. MISCELLANEOUS PROVISIONS. 6.1 NOTICE. All notices and other communications required or permitted under this Agreement shall be deemed to have been duly given and made, if in writing, and (i) if served by personal delivery to the party for whom intended (which shall include overnight delivery by Federal Express or similar service), (ii) or 3 business days after being deposited, postage prepaid, certified or registered mail, return receipt requested, in the United States mail bearing the address shown in this Agreement for, or such other address as may be designated by writing hereafter by, such party, or (iii) if sent by telecopy to the number showing in this Agreement for, or such other number as may be designated in writing hereafter by, such party and immediately confirmed by sending a copy of such notice by either method described in clause (i) or (ii) above. If to Shareholders: Robert S. Brown 14 Longfellow Little Rock, Arkansas 72207 Telephone: (501) 664-8668 Rick Marsh 4149 Pangeburn Road Heber Springs, Arkansas 72543 Telephone: (501) 362-0029 Wayne Richie 15 Ridgehaven Court Little Rock, Arkansas 72211 Telephone: (501) 224-5252 Fax Number: (501) 228-7311 with copies to: Joseph S. Mowery Giroir, Gregory, Holmes and Hoover, PLC 111 Center Street, Suite 1900 Little Rock, AR 72201 Tel: (501) 372-3000 Fax: (501) 374-2380 If to DAH: DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245 Telephone: (310) 725-9123 Fax: (310) 643-0746 27 and a copy to: Spolin & Silverman 100 Wilshire Boulevard, Suite 940 Santa Monica, California 90401 Attention: Stephen A. Silverman, Esq. Telephone: (310) 576-1221 Fax Number: (310) 576-4844 6.2 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, and the documents referred to herein and therein embody the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, oral or written, relative to said subject matter. 6.3 BINDING EFFECT; ASSIGNMENT. This Agreement and the rights and obligations arising hereunder shall inure to the benefit of and be binding upon AI, its DAH, its successors and permitted assigns, and the Shareholders, their heirs, legal representative and permitted assigns. Neither this Agreement nor any of the rights, interest or obligations hereunder shall be transferred or assigned (by operation of law or otherwise) by any of the parties hereto without the prior written consent of the other party or parties except that DAH shall have the right to assign, in whole or in part, its rights hereunder to one or more affiliates of DAH, which in each case shall be a wholly-owned subsidiary of DAH. Any transfer or assignment of any of the rights, interests or obligations hereunder in violation of the terms hereof shall be void and of no force or effect. 6.4 CAPTIONS. This Agreement and Section headings of this Agreement are inserted for convenience only and shall not constitute a part of this Agreement in construing or interpreting any provision hereof. 6.5 WAIVER; CONSENT. This Agreement may not be changed, amended, terminated, augmented, rescinded or discharged (other than by performance), in whole or in part, except by a writing executed by the parties hereto, and no waiver of any of the provisions or conditions of this Agreement or any of the rights of a party hereto shall be effective or binding unless such waiver shall be in writing and signed by the party claimed to have given or consented thereto. Except to the extent that a party hereto may have otherwise agreed in writing, no waiver by that party of any condition of this Agreement or breach by the other party of any of its obligations or representations hereunder or thereunder shall be deemed to be a waiver of any other condition or subsequent or prior breach of the same or any other obligation or representation by the other party, nor shall any forbearance by the first party to seek a remedy for any noncompliance or breach by the other party be deemed to be a waiver by the first party of its rights and remedies with respect to such noncompliance or breach. 28 6.6 NO THIRD PARTY BENEFICIARIES. Nothing herein, expressed or implied, is intended or shall be construed to confer upon or give to any person, firm, corporation or legal entity, other than the parties hereto, any rights, remedies or other benefits under or by reason of this Agreement. 6.7 COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. The signature page of this Agreement when transmitted by facsimile shall be effective execution and delivery of this Agreement. 6.8 GENDER. Whenever the context requires, words used in the singular shall be construed to mean or include the plural and vice versa, and pronouns of any gender shall be deemed to include and designate the masculine, feminine or neuter gender. 6.9 GOVERNING LAW. This Agreement shall in all respects be constructed in accordance with and governed by the laws of the State of Delaware. 7. TERMINATION. This Agreement may be terminated by the parties and the contemplated transactions abandoned at any time prior to closing, as follows: (a) By the written consent of DAH and a majority of the Shareholders; (b) By either DAH or a majority of the Shareholders, upon written notice of all other parties of this Agreement, at any time after December 15, 1997 if the Closing Date shall not have occurred by such date; provided, however, that the right to terminate this Agreement under this paragraph (b) shall not be available to any party which has intentionally breached this Agreement or whose failure to comply with its covenants and agreements set forth in this Agreement shall have been the primary cause of the Closing not occurring. /s/ - ------------------------------- Robert S. Brown /s/ - ------------------------------- Rick Marsh /s/ - ------------------------------- Wayne Richie 29 DeCrane Aircraft Holdings, Inc. /s/ - ------------------------------- By: 30 SCHEDULE A TO STOCK PURCHASE AND SALE AGREEMENT DEFINITIONS "Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble "AI Common Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 "AI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble "AI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble "Bid". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29 "CERCLA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15 "COBRA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20 "Commitment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.28 "DAH". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Preamble "Employee Benefit Plan". . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20 "ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.20 "Government" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29 "Hazardous substance". . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15 "Material Adverse Effect". . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 "Non-Restricted Employees" . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 "Permits". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.8 "Principal Shareholders" . . . . . . . . . . . . . . . . . . . . . . . .Preamble "Real Property Leases" . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.13 "Real Property". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.13 "Release". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.15 "Restricted Employee". . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 "Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29 "Financial Statements" . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 "Government Contract". . . . . . . . . . . . . . . . . . . . . . . . . . .2.2.29 34 EX-10.38 7 EX-10.38 KILROY REALTY LEASE AGREEMENT Exhibit 10.38 KILROY REALTY, L.P. MODIFIED NET INDUSTRIAL BUILDING LEASE THIS MODIFIED NET INDUSTRIAL BUILDING LEASE (this "Lease") is executed this ____ day of ____________, 1997, between KILROY REALTY, L.P., a Delaware Limited Partnership, KILROY REALTY CORPORATION, a Maryland Corporation, General Partner (hereafter called "Lessor") and HOLLINGSEAD INTERNATIONAL, a California Corporation (hereinafter called "Lessee"). W I T N E S S E T H: Lessor hereby leases to Lessee, and Lessee hires from Lessor, that certain real property ("Real Property") with the improvements comprising approximately fifty-eight thousand three hundred three (58,303) rentable square feet, structures, buildings and fixtures located therein or thereon and all appurtenances thereto (the "Improvements"), with the street address of 12442 Knott Avenue, City of Garden Grove, State of California and more particularly described on Exhibit "A" attached hereto and by this reference made a part hereof, subject to governmental regulations and matters of record, for and during the term of seven (7) years, commencing on November 1, 1997 ("the Commencement Date") and ending on October 31, 2004. The Real Property and the Improvements shall sometimes hereinafter be collectively referred to as the "Premises." It is further mutually agreed between the parties as follows: 1. RENT. Lessee agrees to pay to Lessor as rent for the Premises, payable at such place as may be designated by Lessor in writing, in lawful money of the United States of America, the sum of Thirty-One Thousand Four Hundred Eighty-Three and 62/100 ($31,483.62) Dollars ($0.54 per rentable square foot) per month, in advance, on the lst day of each calendar month occurring after the Commencement Date through April 30, 2001 and the sum of Thirty-Seven Thousand Six Hundred Five and 44/100 ($37,605.44) per month ($0.645 per rentable square foot) from May 1, 2001 through October 31, 2004, as said term is fixed under the preceding paragraph hereof. Lessee's obligation hereunder for the first and last month shall be prorated on the basis of the commencement and expiration, respectively, of Lessee's right of occupancy. 2. SECURITY DEPOSIT. Lessee further agrees to pay to Lessor Thirty-One Thousand Four Hundred Eighty-Three and 62/100 ($31,483.62) Dollars as a security deposit to be held by Lessor as security for the faithful performance by Lessee of all the terms, covenants and conditions of this Lease to be kept and performed by Lessee during the term hereof. If Lessee defaults with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of rent, Lessor may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of rent or any other sum in default, or for the payment of any amount which Lessor may spend or become obligated to spend by reason of Lessee's default, or to compensate Lessor for any other loss or damage which Lessor may suffer by reason of Lessee's default. If any portion of said deposit is so used or applied, Lessee shall within ten (10) days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the security deposit to its original amount and Lessee's failure to do so shall be a material breach of this Lease. Lessor shall not be required to keep this security deposit separate from its general funds, and Lessee shall not be entitled to interest on such deposit. If Lessee shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be -1- returned to Lessee or, at Lessee's option, to the last assignee of Lessee's interest hereunder at the expiration of the Lease term. In the event of termination of Lessor's interest in this Lease, Lessor shall transfer said deposit to Lessor's successor-in-interest. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall thereupon deposit with Lessor additional security so that the amount of deposit held by Lessor shall at all times bear the same proportion to the then current rent as the original security deposit bears to the original monthly rent set forth in paragraph 1, hereof. 3. USE. The Premises are leased to Lessee for the purpose of conducting therein light manufacturing, assembly and distribution of avionic equipment and for any other use which is reasonably comparable and for no other purpose. Lessee covenants and agrees that it shall not use the Premises in a manner which would constitute a nuisance or cause an unreasonable annoyance to any other lessee of Lessor or to Lessor, and that if Lessee violates this covenant, Lessee shall immediately cease and refrain from engaging in such use upon notice from Lessor. 4. EARLY/DELAY IN POSSESSION. Lessee shall be permitted early access to the Premises on October 1, 1997 for the purposes of preparing the building located thereon for occupancy and use by Lessee, including without limitation the installation and electrical hookup of machinery and equipment used in Tenant's business; provided, however, that Lessee's preparation for occupancy and use shall not unreasonably interfere with any ongoing construction of tenant improvements in, and/or the refurbishing of, the building comprising a portion of the Premises. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions hereof but such occupancy shall not advance the Commencement Date or the termination date, and Lessee shall not be required to pay rent for such period of early occupancy. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within one hundred twenty (120) days from said Commencement Date, Lessee may, at Lessee's option, by notice in writing to Lessor within thirty (30) days thereafter, but not subsequent to the date possession of the Premises is tendered to Lessee, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said thirty (30) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 5. WASTE. Lessee shall not commit, or suffer to be committed, any waste upon said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other lessee in the building in which the Premises may be located. 6. COMPLIANCE WITH LAW. Lessor warrants to Lessee that the Premises, in its state existing on the date that the Lease term commences, but without regard to the use for which Lessee will use the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then after written notice from Lessee, Lessor's sole obligation with regard to such warranty is to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not -2- give to Lessor written notice of the violation of this warranty within six (6) months from the later of (a) Lease Commencement Date, or (b) the date Lessee takes actual possession of the Premises, the correction of same shall be the obligation of Lessee at Lessee's sole cost. The warranty contained in this paragraph shall be of no force or effect if, prior to the date of this Lease, Lessee was the owner or occupant of the Premises, and, in such event, Lessee shall correct any such violation at Lessee's sole cost. Lessee shall at its sole cost, comply with all covenants, conditions and restrictions of record or later recorded, and all ordinances, statutes, rules and regulations of any lawful authority (including without limitation the Americans With Disabilities Act) having jurisdiction over Lessee or the Premises now in force or which may thereafter be in force, relating to the use, condition or occupancy of said Premises, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises. If Lessor gives Lessee notice of Lessee's noncompliance with any of the matters or requirements set forth in this paragraph, Lessee shall within a reasonable time period cause said Premises to comply. In the event Lessee does not bring its use, occupancy or the condition of the Premises into compliance within such reasonable time period, Lessor reserves the right, at its option, to do so, and charge the cost and expense thereof to Lessee together with the maximum permissible interest from the date of Lessor's payments, and Lessee promises to and agrees to pay the cost and expense thereof. 7. ALTERATIONS. Except in the event of an emergency, Lessee shall not make or suffer to be made, any alterations, additions or utility installations ("an Alteration") on or about said Premises which violate any ordinance, statute law, rule or regulation (including without limitation the Americans With Disabilities Act). Further, any Alteration on or to the Premises shall not be made without the prior written consent of Lessor. Lessor's prior written consent shall not be necessary for emergency repairs. Unless otherwise agreed in writing by Lessor and Lessee, any Alterations of said Premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Lessor. Lessor shall have the right to increase the security deposit under paragraph 2 hereof in an amount reasonably calculated in good faith by Lessor to cover the cost to repair the altered portion of the Premises to its original condition, and Lessee covenants to immediately remit to Lessor such increased security deposit. Lessee shall furnish Lessor with plans and specifications or other detailed information covering such work, and, upon Lessor's written request, furnish Lessor with a lien and completion bond to insure payment of the costs thereof. Any and all costs of such Alterations, additions or installation shall be borne and paid, on or before the due date, by Lessee. Upon the termination of this Lease for any reason, Lessee shall be required at Lessor's option (to be exercised at any time) to remove said Alterations from the Premises and to restore said Premises to their original condition at the sole cost of Lessee. Upon the failure of Lessee to restore the Premises to their original condition, Lessor may utilize the security deposit or any portion thereof to restore the Premises or correct any loss or damage to the Premises at the sole cost of Lessee. Notwithstanding the foregoing sentence, if Lessee anticipates that it would prefer to leave in place as a part of the Premises any Alteration, then concurrently with Lessee's request for approval of such Alteration, Lessee shall request of Lessor that Lessor consent to such Alteration remaining as a part of the Premises upon the termination of this Lease. Lessor may give or withhold such consent, in whole or part, acting in a commercially reasonable manner. If Lessor does not so consent then Lessee shall comply with the preceding provisions of this paragraph 7. -3- 8. FIXTURES. All signs and all trade fixtures and trade equipment which have been or may be installed, placed or attached in or about the Premises by Lessee shall always remain the property of Lessee and upon termination by expiration of time or otherwise of this Lease, or at any prior time, Lessee shall remove all or any of said signs, trade fixtures and trade equipment so installed, placed or attached provided, however, that any damage caused to the Premises by reason of such removal shall be repaired and paid by Lessee. Lessor may at the termination of this Lease at its option require the removal by Lessee at the expense of Lessee of any signs, trade fixtures, trade equipment or other property installed, placed or attached to, in or about the Premises by Lessee. Any property of Lessee not removed from the said Premises upon the termination of this Lease or within a reasonable time thereafter shall at the option of Lessor be deemed abandoned by Lessee and become the property of Lessor. Any consents to the filing of UCC Financing Statements or similar security instruments may be unreasonably withheld by Lessor in its sole discretion. In the event Lessor consents to any such security instrument being filed with the applicable governmental entity, Lessee shall pay all of Lessor's legal fees incurred in connection therewith. 9. TAXES AND ASSESSMENTS. In addition to the rental hereinbefore provided to be paid, Lessee covenants and agrees to timely reimburse Lessor for all taxes which may be imposed upon the Premises, including the land and improvements constituting the same. Such payment shall be made by Lessee within thirty (30) days after receipt of Lessor's written statement setting forth the amount and the reasonable computation thereof but in no event shall Lessee be required to tender payment for taxes more than thirty (30) days prior to the due date therefor. Lessee's obligation hereunder for the first year and the last year shall be prorated on the basis of the commencement and expiration, respectively, of Lessee's right of occupancy. a. The term "real property tax" shall mean and include any form of assessment, license fee, license tax, business license fee, business license tax, commercial rental tax, levy, charge, penalty, tax or similar imposition, imposed by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Lessor in the Premises, including, but not limited to, the following: (i) any tax on Lessor's right to rent or other income from the Premises or against Lessor's business of leasing the Premises; (ii) any assessment, tax, fee, levy or charge in substitution, partially or totally of any assessments tax, fee, levy or charge previously included within the definition of real property tax, it being recognized by Lessee and Lessor that several modifications of the property law enacted by the voters of the State of California have restricted revenues raised through the property tax and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Lessee and Lessor that all new and increased assessments, taxes, fees, levies and charges and all similar assessments, taxes, fees, levies and charges be included within the definition of "real property tax" for the purpose of this Lease; (iii) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any tax on Lessor's right to receive, or the receipt of, rent or income from the Premises or against Lessor's business of leasing the Premises levied by the state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by -4- Lessor or Lessee of the Premises, or any portion thereof; and (iv) any assessment, tax, fee, levy or charge upon this transaction or any document to which Lessee is a party, creating or transferring an interest or an estate in the Premises. "Real Property tax" shall not include Lessor's federal or state income, franchise, inheritance, gift or estate taxes. b. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel or other basis assessed, tax levied or charged, such proportion to be reasonably determined in good faith by Lessor from the respective valuations assigned in the taxing entity's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. c. Lessee shall pay prior to delinquency or reimburse Lessor for all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere, which taxes shall include taxes of every kind and nature levied and assessed in lieu of, in substitution in whole or in part for, or in addition to, existing or additional personal property taxes, whether or not now customary or within the contemplation of the Lessor or the Lessee. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's personal property. 10. UTILITIES. Lessee shall pay for all sewer, water, gas, heat, light, power, telephone and other utilities and services of every kind supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion (to be determined by Lessor) of all charges jointly metered with other Premises. 11. ACCEPTANCE OF PREMISES. Subject to subparagraphs 37a and 37b below, by entry hereunder, Lessee hereby accepts the Premises in their condition existing as of the Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 12. MAINTENANCE. Lessee shall at its sole cost keep and maintain the Premises and appurtenances and every part thereof (except foundations which Lessor agrees to repair), including windows and skylights, if any, sidewalks adjacent to said Premises, the exterior roof and exterior walls, and any storefront and interior of the Premises in good, safe and sanitary order, condition and repair, hereby waiving all right to make repairs at the expense of Lessor whether or not such right arises by operation of law or otherwise. In the event it becomes necessary to repair or replace the exterior roof, any such work shall be performed in accordance with Lessor's specifications then in effect. Lessor shall have the responsibility to paint the exterior walls of the Premises, at Lessee's sole cost and expense, no more often than every five (5) years from the date of the last such painting. Lessee agrees to promptly reimburse Lessor for all reasonable costs incurred in connection with such painting activity after Lessor shall have -5- given within notice of such costs to Lessee but in no event shall such reimbursement be later than the due date of Lessee's next installment of rent. Except as expressly provided in this Lease, Lessor shall have no duty, obligation or liability whatsoever to care for or maintain the Premises or the building of which the Premises may be a portion, including but not limited to structural or nonstructural portions of the Premises and all adjacent sidewalks, landscaping maintenance, driveways, parking lots, fences and signs located in the areas which are adjacent to and included with the Premises. In the event that by any express provision of this Lease, Lessor agrees to care for, repair or maintain all, or any part of the Premises or the building of which it is a part, such agreement on the part of Lessor shall constitute a covenant only, and no obligation or liability whatsoever shall exist on the part of Lessor to Lessee or any other person by reason thereof unless and until Lessee shall have first served upon Lessor personally a prior thirty (30) day notice in writing specifying with particularity the provision of this Lease whereunder said duty on the part of Lessor is claimed to exist, together with the repairs required to be made by Lessor in the performance of such duty. In the event Lessor fails to make the repairs required to be made by Lessor under the terms of this Lease, Lessee may (but shall be under no obligation to do so) make said repairs and offset the cost thereof against the next installment of rent together with interest at the rate set forth in paragraph 34 below, from the date of Lessee's payments. In the event Lessee fails to make the repairs required to be made by Lessee under the terms of this Lease, Lessor may (but shall be under no obligation to do so) enter upon the Premises and make said repairs and charge the cost thereof to Lessee as part of the next installment of rent together with interest at the rate set forth in paragraph 34 below, from the date of Lessor's payments, and Lessee promises and agrees to pay the cost thereof. 13. CONDITION UPON TERMINATION. On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. In the event Lessee terminates this Lease for any reason whatsoever prior to the expiration of the term hereof, Lessee shall pay Lessor the full cost it would incur in order to return the Premises to its original condition, including repainting, replacement of carpeting and other floor surfaces, replacement of ceiling tile and plumbing fixtures, replacement of landscaping, and any and all additional replacement costs it would incur in restoring the Premises to its original condition, ordinary wear and tear excepted. Any decision to replace or repair any item referenced above shall be made solely at Lessor's reasonable, good faith discretion. 14. LIENS. Lessee shall keep said Premises free of all liens arising out of work done for or debts or taxes incurred by or assessed to Lessee and agrees to hold Lessor harmless therefrom. If Lessor discharges any such lien, Lessee agrees to save Lessor harmless therefrom and to pay Lessor thereon the cost of discharging such lien together with interest at the rate set forth in paragraph 34 below, from the date Lessor discharges such lien together with Lessor's costs and reasonable attorney's fees in -6- connection with the settlement, trial or appeal of any such lien matter, which sum shall be payable with the next installation of rent due. 15. LIABILITY AND INDEMNITY. Lessee covenants and agrees to indemnify, hold harmless, save and defend Lessor from and against any and all loss, damage, claim, cost, charge or expense arising or resulting from: (i) Lessee's use of the Premises; (ii) the conduct of Lessee's business or anything else done or permitted by Lessee to be done in or about the Premises; (iii) any breach or default in the performance of Lessee's obligations under this Lease; or (iv) other acts or omissions of Lessee. Lessee shall defend Lessor against any such loss, damage, claim, cost, charge or expense at Lessee's sole cost and expense with counsel reasonably acceptable to Lessor or, at Lessor's election, Lessee shall reimburse Lessor for any legal fees or costs incurred by Lessor in connection with any such claim. As a material part of the consideration to be rendered to Lessor, Lessee hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause other than Lessor's negligence or willful misconduct and Lessee hereby waives all claims against Lessor and agrees to indemnify Lessor against all claims in respect thereof, except for any claim arising out of Lessor's negligence or willful misconduct. Lessee further covenants and agrees to indemnify, hold harmless, save and defend Lessor from and against any and all claims, liens, liability, loss or damage, including, but not limited to, costs, expenses, and attorneys' fees arising out of Lessee's obligations under the California Occupational Safety and Health Act or any similar laws or statutes pertaining to the provision of a safe place or safe equipment to employees. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, if any, of the building in which the Premises are located. 16. INSURANCE. No use shall be made or permitted to be made of said Premises, nor acts done, which will increase the existing rate of insurance upon the building in which said Premises may be located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell, or permit to be kept, used or sold, in or about said Premises, any article which may be prohibited by standard form of fire insurance policies. Lessee shall at its sole cost assume any increase of fire insurance premiums on the entire building necessitated by reason of the Lessee's occupancy. Lessee shall, at its sole cost, comply with any and all requirements pertaining to the use of said Premises of any insurance organization or company necessary for maintenance of reasonable fire and public liability insurance, covering said building and appurtenances. Lessee hereby waives any and all rights of action or recovery against Lessor for loss of, damage to or destruction of property of Lessee or property of others in custody of Lessee on the Premises occasioned by perils insured in standard fire and extended coverage insurance policies. -7- Lessee shall procure and supply to Lessor a written waiver of subrogation for the benefit of Lessor on all fire and extended coverage insurance policies carried by Lessee insuring Lessee's property at the Premises. Lessee agrees to maintain at its sole cost during the term hereof the following insurance with respect to the Premises and the use thereof, namely: a. Comprehensive public liability and property damage liability insurance (including contractual liability insurance for liabilities assumed under this Lease, and including products and completed operations insurance) with limits of not less than $1,000,000.00 for injuries to or death to any one person and $1,000,000.00 for injuries to or deaths arising out of any one occurrence, and $1,000,000.00 for injury to or destruction of property arising out of any one occurrence, and $3,000,000.00 cumulative from all events. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000.00 per occurrence, and the Lessee shall be liable for such deductible amount. b. Fire and extended coverage insurance covering the Premises in the principal amount of $1,000,000.00. Lessor shall have the option of procuring and providing this fire and extended coverage insurance by written notification to Lessee at the time of execution of this Lease or of execution of any extension thereof in which event Lessee agrees to pay the cost of such insurance in addition to the rental and other costs and considerations set forth elsewhere in this Lease. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000.00 per occurrence, and Lessee shall be liable for such deductible amount. c. Rental value insurance with loss payable to Lessor and any lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor for one (1) year (including all real property taxes, insurance costs and any scheduled rental increases). Said insurance shall provide for one (1) full year's loss of rental revenues from the date of any such loss, and the amount of coverage shall be adjusted annually to reflect the projected rental income, real property taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next twelve (12) month period. d. Boiler and Machinery Insurance in the event pressure vessels are used on the Premises which do not fall within the scope of the extended coverage provisions of the fire insurance policy. Lessor shall have the right to review the amount of insurance coverage annually and to require a higher principal amount of insurance if such a higher limit is recommended by the insurance company or required by a lender whose loan is secured by the Premises. If Lessee fails to procure or maintain the insurance required of Lessee, Lessor may obtain such insurance at Lessor's option and charge Lessee the costs thereof. Each policy of insurance to be obtained by Lessee shall be placed with a company reasonably acceptable to Lessor and shall provide that Lessor is a named insured, and no such policy may be cancelled or coverage reduced without thirty (30) days prior written notice to Lessor and Lessee. Lessee shall furnish Lessor with written evidence satisfactory to Lessor of such insurance prior to occupancy of the Premises and shall deliver to Lessor a renewal certificate of such insurance on or before fifteen (15) days prior to its expiration. -8- 17. WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against under this Agreement, which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 18. LESSOR'S RIGHT OF ENTRY. Lessee shall permit Lessor and its agents to enter into and upon said Premises at all reasonable times to show said Premises to prospective purchasers, lenders or lessees or for the purpose of inspecting the same or for the purpose of maintaining the building in which said Premises are situated, or for the purpose of making repairs, alterations or additions to any other portion of said building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of non-liability for alterations, additions, or repairs, or for the purpose of placing upon the property in which the said Premises are located any usual or ordinary "for sale" signs, without any abatement of rent and without any liability to Lessee for any loss of occupation or quiet enjoyment of the Premises thereby occasioned; and shall permit Lessor, at any time within one hundred eighty (180) days prior to the expiration of this Lease, to place upon said Premises any usual or ordinary "to let" or "to lease" signs, also without abatement of rent or liability to Lessee. 19. SIGNS. Lessor has reserved the exclusive right to the exterior front walls, sidewalls, rear walls, and roof of said Premises, and Lessee shall not place or permit to be placed upon said sidewalls, real wall, or roof, any sign, advertisement, or notice without the prior written consent of Lessor, in its sole but reasonable discretion. 20. ABANDONMENT. Lessee shall not vacate or abandon the Premises at any time during the term hereof. 21. PARTIAL AND TOTAL DESTRUCTION. In the event of (i) a partial destruction of said Premises or the building containing same during said term which requires repairs to either said Premises or said building, or (ii) said Premises or said building being declared unsafe or unfit for occupancy by any authorized public authority for any reason other than Lessee's act, use or occupation, which declaration requires repairs to either said Premises or said building, Lessor shall forthwith make such repairs required, provided such repairs can be made within one hundred twenty (120) days under the laws and regulations of authorized public authorities, but such partial destruction (including any destruction necessary in order to make repairs required by any such declaration) shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall reasonably interfere with the business carried on by Lessee in said Premises. If such repairs cannot be made within one hundred twenty (120) days, Lessor may, at its option, make same within a reasonable time, this Lease continuing in full force and effect and the rent to be proportionately abated, as in this paragraph provided. In the event that Lessor does not so elect to make such repairs which cannot be made within one hundred twenty (120) days, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of either party. In respect to any partial destruction (including any destruction necessary in order to make repairs required by any such declaration) which Lessor is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, -9- Subdivision (2), and Section 1933, Subdivision (4) of the Civil Code of the State of California are waived by Lessee. In the event said destruction or damage is substantial and occurs during the last six (6) months of the term of this Lease, Lessor, at its option, may terminate and cancel this Lease. A total destruction (including any destruction required by an authorized public authority) of either said Premises or said building shall terminate this Lease. 22. CONDEMNATION. If said Premises or any part thereof are taken under the power of eminent domain, this Lease shall terminate as to the part so taken as of the date the condemning authority takes possession thereof. In such event the rent shall be reduced in the proportion that the floor area taken relates to the total floor area prior to the taking. If more than ten (10%) percent of the floor area of the building located on said Premises or more than fifteen (15%) percent of the area leased hereunder but not occupied by any building is taken by condemnation only then, may Lessee, at Lessee's option, terminate this Lease as of the date the condemning authority takes possession of said condemned portion by giving written notice of termination to Lessor within ten (10) days after receiving notice from Lessor that the condemning authority is taking such possession. If Lessee does not terminate this Lease as hereinabove immediately provided, then the rent payable shall be reduced as set forth above. Any compensation awarded as damages for the taking of said Premises or the appurtenances thereto together with any severance damages shall be the sole property of Lessor, except to the extent that any award is made for trade fixtures or equipment of Lessee which are not part of said real property and except to the extent that Lessee may be paid for moving costs. 23. ASSIGNMENT OR SUBLETTING. Lessee shall not, voluntarily or by operation of law, assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises, or suffer any other person (with the exception of the agents, employees and business invitees of Lessee) to occupy or use the Premises, or any portion thereof, without the prior written consent of Lessor, which consent Lessor may not unreasonably withhold. Any attempted assignment, transfer, mortgage, encumbrance, subletting, occupation or use without such consent first had and obtained, shall be void and shall, at the option of Lessor, terminate this Lease. Any cumulative transfer of, in excess of twenty percent (20%) of interests in the partnership, if Lessee is a partnership, or in excess of fifty percent (50%) of the voting power of the corporation, if Lessee is a corporation, shall constitute a transfer for the purpose of this paragraph. Except that in the event that the assignee under an assignment approved by Lessor and/or such assignee's guarantor, is equally financially responsible as Lessee and the Guarantor of this Lease, and such assignee assumes the covenants and conditions of Lessee pursuant to this Lease, then Lessor shall release Lessee and the Guarantor of Lessee's obligations hereunder of their obligations hereunder and under such guaranty. Lessee shall remain obligated under the covenants and conditions of this Lease notwithstanding any such assignment or subletting. A consent to one assignment, transfer, encumbrance, or subletting to, or occupation or use by one person, is not deemed to be a consent to any subsequent assignment, transfer, encumbrance, subletting, occupation or use. Any assignment, transfer, mortgage, encumbrance, or subletting, occupation or use, whether with or without the consent of Lessor, shall automatically terminate any option to extend this Lease, whether or not such option shall have been exercised at the date of such assignment, transfer, mortgage, encumbrance, subletting, occupation or use, provided the extended term resulting from the exercise of such option shall not already have commenced. -10- Lessor and Lessee hereby acknowledge that this Lease shall only confer upon Lessee the right to possess the Premises in accordance with the terms and conditions of this Lease and that Lessee shall not be entitled to any extra rents, charges, profits or other compensation for the assignment upon an assignment or subletting of Lessee's interest in the Premises. Any extra rents, charges, profits, or other compensation for the assignment payable by an assignee or subtenant of Lessee, or of Lessee's successor, shall become the property of, and be payable to, Lessor; but only in the event that the obligations of Lessee hereunder are released by Lessor and Lessee shall no longer be obligated under the covenants and conditions of this Lease. If Lessee shall request the consent of Lessor for any assignment, encumbrance, or subletting or any act Lessee proposes to do, and Lessor in its sole discretion deems it necessary to consult legal counsel in connection therewith, then Lessee shall pay all of Lessor's reasonable attorney's fees actually incurred and paid in connection therewith. 24. LESSEE'S BREACH. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Lessee: a. The abandonment of the Premises by Lessee; b. The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of ten (10) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph; c. The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph b above, where such failure shall continue for a period of thirty (30) days after written notice hereof from Lessor to Lessee; provided, however that if the nature of Lessee's default is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion; d. (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. Provided, however, in the event that any provision of this paragraph is contrary to any applicable law, such provision shall be of no force or effect. e. The discovery by Lessor that any financial statement given to Lessor by Lessee, or any guarantor of Lessee's obligation hereunder was materially false. In the event of any breach by Lessee in the payment of rent or any material breach of any other covenant or condition of this Lease by Lessee not cured prior to the expiration of any applicable cure period, then Lessor besides other rights or remedies it may have, shall have the immediate right of reentry -11- and may remove all personal property from the Premises; such property to be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee. Should Lessor elect to reenter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, relet said Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Lessor in its sole discretion may deem advisable with the right to make alterations and repairs to said Premises. Rental received by Lessor from such reletting shall be applied: first, to the payment of any cost of such reletting; second, to the payment of the cost of any necessary alterations and repairs to the Premises; third, to the payment of any indebtedness other than rent due hereunder from Lessee to Lessor; fourth, to the payment of any rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor and applied in payment of future rent as the same may become due and payable hereunder. Should such rentals received from such reletting during any month be less than that agreed to be paid during that month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor. Such deficiency shall be calculated and paid monthly. Lessee shall also pay to Lessor, as soon as ascertained, the costs and expenses incurred by Lessor in such reletting or in making such alterations and repairs. No such reentry or taking possession of said Premises by Lessor shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Lessee or unless a termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Lessor may at any time thereafter elect to terminate this Lease for any breach in the payment of rent and any material breach of any other covenant or condition of this Lease which is not cured prior to the expiration of any applicable cure period. In addition to any other remedy Lessor may have, if Lessee breaches this Lease and abandons the Premises before the end of the term, or if Lessee's right to possession is terminated by Lessor because of a breach in the payment of rent and any material breach of any other covenant or condition of this Lease which is not cured prior to the expiration of any applicable cure period, then in either such case Lessor may recover from Lessee all damages suffered by Lessor as the result of Lessee's failure to perform its obligations hereunder, including but not limited to the cost of recovering the Premises, and the worth at the time of the award (computed in accordance with paragraph (b) of Section 1951.2 of the California Civil Code) of the amount by which the rent then unpaid hereunder for the balance of the Lease term exceeds the amount of such rental loss for the same period which Lessee proves, could be reasonably avoided by Lessor. The remedies given Lessor under the terms of this Lease shall be cumulative and in addition to any other rights or remedies which Lessor may have at law or otherwise. Lessor reserves the right to continue this Lease in effect for so long as Lessor does not terminate Lessee's right to possession and to enforce all its rights and remedies under this Lease including the right to recover the rent as it becomes due under this Lease in accordance with the provisions of Section 1951.4 of the Civil Code. 25. SUBORDINATION, NONDISTURBANCE AND ATTORNMENT. This Lease is subject and subordinate to: a. The lien of any mortgages, deeds of trust, or other encumbrances ("Encumbrances") of the Improvements and Property; b. All renewals, extensions, modifications, consolidations and replacements of the Encumbrances; and c. All advances made or hereafter to be made on the security of the Encumbrances. -12- Despite any other provision of this paragraph 25, any Encumbrance holder may elect that this Lease shall be senior to and have priority over that Encumbrance whether this Lease is dated before or after the date of the Encumbrance. However, no such subordination shall be effective unless and until Lessor obtains from the holder of the Encumbrance placed against the Premises a nondisturbance agreement in recordable form, providing that in the event of any foreclosure, sale under a power of sale, ground or master lease termination, or transfer in lieu of any of the foregoing, or the exercise of any other remedy under any such Encumbrance: (i) Lessee's use, possession and enjoyment of the Premises shall not be disturbed and this Lease shall continue in full force and effect as long as Lessee is not in default; and (ii) this Lease shall automatically become a lease directly between any successor to Lessor's interest, as Lessor, and Lessee, as if that successor were the Lessor originally named in the Lease. d. If Lessee has received the nondisturbance agreement referred to in the paragraph immediately following 25c, above, Lessee shall, within ten (10) business days after Lessor's request, execute any further instruments or assurances in recordable form that Lessor reasonably considers necessary to evidence or confirm the subordination or superiority of this Lease to any such Encumbrances. Such subordination instrument(s) shall be strictly limited to matters contained in the nondisturbance agreement, and no such instrument may materially increase any of Lessee's obligations or materially decrease any Lessee's rights under this Lease. Lessee's failure to execute and deliver such instrument(s) shall constitute a default under this Lease only if Lessor has first delivered the nondisturbance agreement to Lessee. Lessee covenants and agrees to attorn to the transferee of Lessor's interest in the Premises by foreclosure, deed in lieu of foreclosure, exercise of any remedy provided in any Encumbrance, or operation of law (without any deductions or setoffs) except as expressly provided in this Lease or in any nondisturbance agreement, if requested to do so by the transferee, and to recognize the transferee as the Lessor under this Lease. The transferee shall not be liable for: (i) any acts, omissions, or defaults of Lessor that occurred before the sale or conveyance; or (ii) the return of any security deposit except for deposits actually paid to the transferee and except as expressly provided in this Lease or in any nondisturbance agreement. f. Lessee agrees to give written notice of any default by Lessor to the holder of any Encumbrance. Lessee agrees that, before it exercises any rights or remedies under the Lease, the lienholder or successorlessor shall have the right, but not the obligation, to cure the default within the same time, if any, given to Lessor to cure the default, plus an additional thirty (30) days. Lessee agrees that this cure period shall be extended by the time necessary for the lienholder to begin foreclosure proceedings and to obtain possession of the building or Premises, as applicable. 26. SURRENDER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing sublease or subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subleases or subtenancies. -13- 27. ATTORNEYS' FEES. If either party to this Lease brings an action to enforce the terms hereof or declare rights hereunder the prevailing party in any such action shall be entitled to reasonable attorneys' fees as fixed by the Court incurred in the trial or appeal of such matter. 28. NOTICES. All notices shall be in writing. Notice shall be sufficiently given for all purposes as follows: a. When personally delivered to the recipient, notice is effective on delivery. b. When mailed by certified mail with return receipt requested, notice is effective on receipt if delivery is confirmed by a return receipt. c. When delivered by overnight delivery Federal Express/Airborne/United Parcel Service/DHL Worldwide Express or other commercial delivery service, with charges prepaid or charged to the sender's account, notice is effective on delivery if delivery is confirmed by the delivery service. d. When sent by telex or fax or electronic mail (also known as E-mail, and only available if the recipient has an E-mail address) to the last telex or fax or E-mail number of the recipient known to the party giving notice, notice is effective on receipt as long as (i) a duplicate copy of the notice is promptly given by certified mail or by overnight delivery or (ii) the receiving party or the sending equipment delivers a written confirmation of receipt. Any notice given by telex, fax number or E-mail shall be considered to have been received on the next business day if it is received after 5:00 p.m. (recipient's time) or on a nonbusiness day. e. Any correctly addressed notice that is refused, unclaimed or undeliverable because of an act or omission of the party to be notified shall be considered to be effective as of the first date that the notice was refused, unclaimed or considered undeliverable by the postal authorities, messenger or overnight delivery service. f. Addresses for purposes of giving notice are set forth at the end of this Lease opposite the signatories of the parties hereto. Either party may change its address or telex, fax number, or E-mail address by giving the other party notice of the change in any manner permitted by this paragraph 28. 29. SECURITY. If any security be given by Lessee to secure the faithful performance Of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion be sold, and Lessor shall be discharged from any further liability in reference there to upon such transferees written assumption of liability therefor. 30. WAIVER. The waiver by Lessor or Lessee of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. 31. AUCTIONS. Lessee shall not conduct or cause to be conducted any auction, fire, closing out, going out of, business or bankruptcy sale on said Premises or the appurtenances thereto without the prior written consent of Lessor. 32. BINDING, MODIFICATION, ETC. This Lease shall inure to the benefit of and be binding upon the parties hereto, their heirs, executors, administrators, successors and assigns; provided that no assignee for the benefit of creditors, trustee, receiver or -14- referee in bankruptcy shall acquire any rights under this Lease by virtue of this paragraph; this Lease may be modified in writing only. This Lease constitutes the entire agreement of the parties who acknowledge that no oral or other representations have been made by themselves or any agent of either of them with respect to the condition of said Premises or any obligation of the Lessor hereunder or otherwise. The parties agree to execute any documents necessary to carry this Lease into effect. 33. OVERDUE RENT. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the term of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any other provision of this Lease to the contrary. 34. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Lessee to Lessor which is not paid when due shall bear interest at the rate of twelve percent (12%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Lessee under this Lease. The payment of interest on such past due obligations shall not excuse or cure any default by Lessee under this Lease. In the event the interest rate specified in this Lease is greater than the rate permitted by law, then the interest rate is hereby decreased to the maximum legal interest rate permitted by law. 35. ESTOPPEL CERTIFICATE. a. Lessee shall at any time upon not less than ten (10) days' prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessee or Lessor hereunder, or specifying such defaults if any are claimed; and (iii) such other information reasonably requested by Lessor or a lender to or purchaser from Lessor. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. b. If Lessee fails to deliver such statement within such time, such failure shall be conclusive upon Lessee (i) that this Lease is in full force and effect, without modification except as may be represented by Lessor, (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one (1) month's rent has been paid in advance. -15- c. If Lessor desires to finance, refinance or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. d. Lessee shall be responsible for any and all damages Lessor can reasonably show were caused by or related to Lessee's failure to comply with the time periods set forth in this paragraph 35. 36. UNDERGROUND TANKS. Lessor represents to Lessee that to the best of Lessor's actual knowledge without independent investigation or inquiry, as of the date of this Lease, there are no underground storage tanks upon the Property. Notwithstanding anything to the contrary set forth herein, Lessee shall not install underground or above ground storage tanks as defined by any and all applicable laws of any size or shape in the Premises without the prior consent of Lessor. Lessor shall have the right to condition its consent upon Lessee giving Lessor such assurances that Lessor, in its absolute discretion, deems reasonably necessary to protect itself against potential problems concerning the installation, use, removal and contamination of the Premises as a result of the installation and/or use of said tanks. Upon termination of this Lease, Lessee shall at its sole cost and expenses, remove the tanks from the Premises, remove and replace any contaminated soil (and compact the same as then required by law) and repair any damage to the Premises caused by said installation and/or removal, pursuant to all applicable laws, and the supervisions and approval of Lessor. 37. HAZARDOUS WASTE; ENVIRONMENTAL AND RELATED MATTERS. a. Lessor shall promptly furnish or shall have furnished to Lessee prior to the date hereof copies of any and all environmental site assessments or hazardous substance reports of the Premises prepared by or for Lessor or others within the possession of control of Lessor (the "Reports"). Notwithstanding any of the foregoing, Lessee's obligations hereunder shall be contingent upon Lessee's satisfaction with and approval of the Reports and the environmental condition of the Premises as described in the Reports. If Lessee shall fail to disapprove the Reports and the Premises in writing to be delivered to Lessor within the latter to occur of ten (10) days of the receipt by Lessee of the Reports, or July 11, 1997, then Lessee conclusively shall have been deemed to have approved the Reports and the Premises, and this Lease shall be and remain in full force and effect. If Lessee shall, within the latter of said time periods to disapprove the Reports or the environmental condition of the Premises as described in the Reports, by notice in writing to Lessor, then this Lease shall immediately terminate and neither party shall have any further obligation or liability to the other party hereunder. b. During Lessee's inspection of the Premises prior to the date of execution of this Lease, an objectionable odor existed near the street in front of the building. Representatives of the City of Garden Grove performed maintenance work to the storm drain in front of the building and within the street right of way and a missing cover to a sewer line was installed. Lessee shall have until on or before July 11, 1997 within which to satisfy itself that the objectionable odor problem has been corrected to the satisfaction of Lessee. If Lessee shall fail to disapprove the status of the correction to the odor problem in writing to be delivered to Lessor no later than July 11, 1997, then Lessee conclusively shall have been deemed to have approved the status of the correction of the odor problem, and this Lease shall be and -16- remain in full force and effect. If Lessee shall, on or before July 11, 1997 disapprove the status of correction of the odor problem, by notice in writing to Lessor, then this Lease shall immediately terminate and neither party shall have any further obligation or liability to the other party hereunder. Lessee shall cooperate with Lessor and Lessor shall use Lessor's commercially reasonable best efforts to cause the City of Garden Grove to take such action as may be necessary to correct the said odor problem. c. Lessor warrants and represents to Lessee that, to the best of Lessor's actual knowledge without independent investigation or inquiry, as of the date of this Lease: (i) there has been no release onto our under the Premises or the building of any Hazardous Materials (as defined below) in violation of any Environmental Law; (ii) the Improvements contain no PCBs, PCB-contaminated electrical equipment, or asbestos-containing materials; (iii) Lessor has received no notice that the Premises or the Improvements are in violation of any Environmental Law. d. Lessee, at Lessee's sole cost and expense, shall comply with, and shall not use the Premises or suffer or permit anything to be done in, on, or about the Premises which will in any way conflict with any applicable federal, state and local laws, regulations, ordinances, orders or requirements pertaining to Hazardous Materials, waste disposal, air or water quality, and other environmental and health and safety matters (collectively, "Hazardous Materials Laws"). For purposes of this Lease, the term "Hazardous Materials" means any substance, material, waste, contaminant or pollutant (i) determined by any federal, state or local government agency, court, judicial or quasi-judicial body or legislative or quasi-legislative body to be hazardous, toxic, infectious, radioactive, persistent or bioaccumulative, or to require removal, treatment or remediation; (ii) which results in liability to any person or entity for exposure to or discharge of such substance; or (iii) which becomes subject to any Hazardous Materials Law. e. Lessee shall not cause, suffer or permit any Hazardous Materials to be brought upon, stored, used, generated, released into the environment or disposed of on, under, from, or about the Premises (which for purposes of the Lease includes, but is not limited to, subsurface soil and groundwater), without the prior written consent of Lessor. Excluded from the prohibition contained in this subparagraph are such Hazardous Materials as are necessary or useful to Lessee's business, provided that such Hazardous Materials are generated, stored, used and disposed of in compliance with all applicable Hazardous Materials Laws. f. Promptly upon request therefor, Lessee will provide Lessor with true, correct, complete and legible copies of any environmental site assessments pertaining to the Premises prepared by or on behalf of Lessee; reports filed pursuant to self-reporting requirements under any Hazardous Materials Laws; permits, permit applications, monitoring reports, workplace exposure and community exposure warnings or notices reports, plans or documents in Lessee's possession or control relating to Hazardous Materials on, under or about the Premises. g. Lessee shall notify Lessor in writing immediately upon becoming aware of: (i) any enforcement, cleanup, remediation or other action threatened, instituted or completed by anyone with respect to Hazardous Materials on, under or about the Premises; (ii) any claim threatened or made by any person against Lessee for -17- personal injury, property damage, other losses, contribution, cost recovery, compensation or any other matter relating to Hazardous Materials and the Premises; or (iii) any spilling, leaking, dumping or releasing of Hazardous Materials in, on, under or about the Premises that triggers reporting, disclosure, investigation or cleanup obligations under any Hazardous Materials Law. Lessee shall provide to Lessor as promptly as possible, and in any event within five (5) business days after Lessee first receive or sends the same, copies of all claims, reports, complaints, notices, warnings, correspondence or other documents relating in any way to the foregoing. h. If Hazardous Materials contamination caused, suffered or permitted by Lessee is discovered on, under or about the Premises, Lessee shall, as its sole cost and expense, promptly (i) notify Lessor; (ii) undertake site investigation activities necessary to characterize the nature and extent of such contamination; (iii) prepare and provide to Lessor a cleanup plan to remove or remediate the contamination; and (iv) upon Lessor's approval (and upon the approval of any governmental or regulatory agency overseeing the site investigation or cleanup activities), promptly implement the cleanup plan in accordance with applicable Hazardous Materials Laws. In the event that Lessee fails, after reasonable notice and request therefor by Lessor, to take any of the actions required hereunder Lessor may itself take such action and Lessee shall promptly reimburse Lessor for all costs and expenses Lessor incurs in connection with such action. i. To the fullest extent permitted by law, Lessee will indemnify, hold harmless, protect and defend (with attorneys acceptable to Lessor) Lessor and Lessor's officers, directors, shareholders, employees and agents, and any successors to all or any portion of Lessor's interest in the Premises and their directors, officers, partners, employees, authorized agents, representatives, affiliates and mortgagees, from and against any and all liabilities, losses, damages (including, without limitation, damages for the loss or restriction on use of rentable or usable space or any amenity of the Premises or damages arising from any adverse impact on marketing of space in the Premises), diminution in the value of the Premises, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including, but not limited to, reasonable attorneys' fees and disbursements and court costs and all other professional or consultant's expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the presence, use, generation, storage, treatment, on or off-site disposal, or transportation of Hazardous Materials on, into, from, under, or about the Premises by Lessee, its agents, employees, contractors, licensees or invitees. j. To the fullest extent permitted by law, Lessor will indemnify, hold harmless, protect and defend (with attorneys acceptable to Lessee) Lessee and Lessee's officers, directors, shareholders, employees and agents, and any successors to all or any portion of Lessee's interest in the Premises and their directors, officers, partners, employees, authorized agents, representatives, affiliates and mortgagees, from and against any and all liabilities, losses, damages, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including, but not limited to, reasonable attorneys' fees and disbursements and court costs and all other professional or consultants' expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the breach of the warranty and representation set forth in paragraph 37a, above, or the presence, prior to the date of this Lease of hazardous substances upon or under the Premises. k. Upon the expiration or termination of this Lease, Lessee shall cause to be removed from the Premises all Hazardous Materials brought upon, used, kept or stored in, on, under or about the Premises by Lessee, as well as all receptacles or -18- containers therefor, and shall cause such Hazardous Materials and such receptacles or containers to be stored, treated, transported and/or disposed of in compliance with all applicable Hazardous Materials Laws. Lessee shall, at its sole cost and expense, repair any damage to the Premises resulting from Lessee's removal of such Hazardous Materials and receptacle or containers therefor. Lessee's obligation to pay rent shall continue until such removal by Lessee has been completed to Lessor's satisfaction, notwithstanding the expiration or early termination or cancellation of the term of this Lease. To ensure performance of Lessee's obligations hereunder, Lessor may, at any time within one (1) year of the expiration of this Lease, or upon the occurrence of a material default under this Lease by Lessee, require that Lessee promptly commence and diligently prosecute to completion an environmental evaluation of the Premises. In connection therewith, Lessor may require Lessee, at Lessee's sole cost and expense, to hire an outside consultant satisfactory to Lessor to perform a complete environmental audit of the Premises, an executed copy of which audit shall be delivered to Lessor within thirty (30) days after Lessor's request therefor. If Lessee or the environmental audit discloses the existence of Hazardous Materials on, under, or about the Premises, Lessee will, at Lessor's request, prepare and submit to Lessor within thirty (30) days after such request a comprehensive clean-up plan, subject to Lessor's approval, specifying the actions to be taken by Lessee to return the Premises to the condition existing prior to the introduction of such Hazardous Materials. Upon Lessor's approval of such clean-up plan, Lessee will, at Lessee's sole cost and expense, without limitation on any rights and remedies of Lessor under this Lease, immediately implement such plan and proceed to clean up such Hazardous Materials in accordance with all Hazardous Materials Laws as required by such plan and this Lease. l. The obligations in this paragraph 37 shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations hereunder unless it specifically states Lessor's intentions to release Lessee with respect thereto. 38. RECORDATION OF SHORT FORM. Either party may record a short form of this Lease stating only that the Premises have been leased on the date hereof and that any subsequent purchaser of the Premises or any part thereof shall be bound by all the terms hereof. 39. GOVERNING LAW. This Lease shall be governed by and enforced in accordance with the laws of the State of California. 40. HEADINGS. Paragraph headings are not a part of this Lease. 41. LESSEE'S BUILDING IMPROVEMENTS PROVIDED BY LESSOR a. Lessor agrees, at Lessor's expense, as soon as practical after executing this Lease, to cause the preparation of construction drawings and specifications, to secure requisite building permits, and to construct the following tenant improvements: (i) Enclosed and air-condition the warehouse area under and above the mezzanine by constructing a dry wall at and above the mezzanine line, across the entire width of the building. Said wall to provide for appropriate man door access and interior windows at mutually agreeable locations. Interior walls and t-bar ceiling of these areas to be painted white. First floor area to be dust sealed and second floor area to be covered with industrial grade tile. -19- (ii) Refurbish existing office area including: 1. New carpet and tile. (Lessee's choice of color) 2. New paint. (Lessee's choice of color) 3. Repair or replace damaged ceiling tiles and vents where necessary; but the replacement or repair of individual tiles will not result in a color mismatch between existing and new or replaced tiles. (iii) Duplicate existing restroom in warehouse area as shown on the attached Exhibit "A." b. Lessor agrees to pursue such construction diligently to completion but shall be under no liability for damage, costs or expense resulting from delays occasioned by acts of God, of the government, of the elements, public enemy, or by fire, flood, storm, earthquake, freight embargoes, inability to obtain labor or materials, strikes, boycotts, delays by contractors or subcontractors for any of the above or any other causes, delays by Lessee in approving either materials or colors which Lessee has the right to approve, or by other causes beyond Lessor's control. c. Upon the termination or cancellation of this Lease for any reason, expiration, failure to extend or default by Lessee, the building improvements shall remain the property of Lessor and Lessee shall not be obligated or entitled to remove them unless notified, in writing prior to construction, by Lessor to the contrary. 42. OPTION TO EXTEND LEASE. In the event that Lessee shall not be in default in the performance of any term or condition of this Lease, then upon the expiration of the Lease term, Lessee shall have the option to extend the Lease for an additional term of five (5) years. Lessee's rights to exercise the option are contingent upon Lessee not being in default in the performance of any term or condition of this Lease or if in default, Lessee shall have cured the same prior to the deadline for exercising the extension option. During the extension period, all the terms and conditions of this Lease shall remain in effect except that the base rental for the extension period will be determined as set forth in paragraph 43, entitled "Rent Determination for Extended Period," and the rental commencing on the thirty-first (31st) month of the extended period will be adjusted as provided in paragraph 44, entitled "Rental Escalations." The option must be exercised by Lessee, if at all, prior to a date which shall be six (6) months prior to the expiration of the Lease term, by notice to Lessor stating that Lessee is exercising its option to extend. Such exercise of the option shall automatically extend the term of the Lease upon the terms and conditions herein set forth, and no further writing need be executed by Lessee or Lessor, except that no term extension shall occur or take effect if, prior to its commencement, Lessee shall have assigned or sublet (by operation of law or otherwise and with or without Lessor's consent) this Lease or the Premises. Once exercised, Lessee shall not have the right to revoke its election to exercise the option. In the event that the option is not exercised as provided for herein within the time provided for, the option shall expire, and Lessee shall have no further right to renew or extend the Lease. 43. REM DETERMINATION FOR EXTENDED PERIOD. Prior to the commencement of the extended period, the base rental initially payable for such period shall be determined as follows: a. Lessee shall, not less than six (6) months nor more than one (1) year before expiration of the initial term, give Lessor written notice of its desire to determine Rent for the -20- extended period. Lessor and Lessee shall have thirty (30) days after Lessor receives such notice to agree in writing to said Rent, which writing signed by each party shall constitute an amendment to this Lease determining the Rent and extending the term in conformity with this Lease. b. If Lessor and Lessee shall fail to reach an agreement as provided in subparagraph 43a, the option to extend shall terminate unless within ten (10) business days after the expiration of the thirty (30) day notice specified in paragraph 43a, Lessee shall give Lessor a notice of its desire to determine the such Rent by appraisement, designating a qualified appraiser for the purpose. Unless, within ten (10) business days after receipt of such notice, Lessor shall designate a qualified appraiser, it shall be deemed to have accepted the qualified appraiser designated by Lessee. For purposes hereof, the term "qualified appraiser" shall mean a Member of the Appraisal Institute with not less than five (5) years' experience in appraising commercial rental properties in Orange County in the State of California and without financial, family, or business connections with either Lessor or Lessee, or any affiliate of Lessor or Lessee, or the officers, directors or employees of any of them. The appraiser or appraisers so appointed shall, within forty-five (45) days of his appointment or of the later of the appointments, submit to Lessor and Lessee appraisal(s) of the Rent for the Extended Term, expressed in terms of a fair monthly rental value in the context of a five (5) year lease, on substantially the terms made herein applicable to the extended term for the then use of the Premises. The Rent for the Extended Term shall be either (i) the amount of the appraisal of the single appraiser; or (ii) where there are two appraisers, the agreed appraisal, if both appraisers are in agreement, or, if they are not in agreement, the average of the two appraisals if the higher does not exceed the lower by more than five percentage (5%) of the lower. If the appraisals determined by the two appraisers hereinbefore appointed differ by more than five percent (5%), then the two appraisers shall appoint a third qualified appraiser who shall submit to Lessor and Lessee within the next ensuing forty-five (45) days an appraisal of the fair rental value of the Premises. The Rent for the Extended Term shall be the average of all three appraisals, unless one appraisal exceeds or is less than an average of the two closer appraisals by more than ten percent (10%), in which case such appraisal will be discarded and the Rent for the Extended Term shall be the average of the two closer appraisals. c. When the Rent for the Extended Term shall have been determined as aforesaid, the Lease shall be amended to reflect said monthly rent payable for the extended term. d. The cost of the appraisal procedure shall be divided equally between the parties. e. Time is of the essence as to the exercise of the extension option by Lessee and of the appraisal procedures specified in this paragraph 43; any failure by Lessee to meet the deadlines herein specified, unless the delay shall have been contributed to by Lessor's actions or omissions, shall terminate this option to extend. f. In no event shall such adjusted monthly rent be less than the rent payable for the month immediately preceding the date of such rent adjustment. 44. RENTAL ESCALATIONS. The amount of the rental payable during the extension period of this Lease shall be subject to adjustment effective the first day of the thirty-first (31st) month of the -21- extension period. Such adjustment will be made by dividing the amount of monthly rental payable on the first day of the extension period by the figure shown in the Consumer's Price Index for All Urban Consumers for the Los Angeles-Anaheim-Riverside area (1982-84 = 100), published monthly in the Monthly Labor Review of the Bureau of Labor Statistics of the United States Department of Labor (or the successor which most closely resemble such Index) for the third month prior to the month in which the extension period commenced, and multiplying the result by the corresponding Index figure for the third month prior to the thirty-first (31st) month of such term or period; provided, however, no reduction in the amount of rent then in effect resulting from such calculation shall occur; provided, however, that the excalated rent shall not be less than four percent (4%) and not greater than eight percent (8%) more than the rent for the first thirty (30) months of the extended term, determined in accordance with paragraph 43, above. 45. HOLDING OVER. Any holding over after the expiration of the initial term, with the consent of Lessor, shall be construed to be a tenancy from month to month, at a rental of Fifty-Six Thousand Four Hundred Eight and 16/100 ($56,408.16) Dollars per month and shall otherwise be on the terms and conditions herein specified so far as applicable. Any holding over at the end of the extended term, if applicable, shall be subject to the same provisions, except that the hold over rental shall be increased by twenty-five percent (25%) over the rent immediately prior to the hold over. 46. COUNTERPARTS. This Lease may be executed in multiple counterparts, each of which shall be an original and all of which, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date set forth opposite their signatures. Dated: 20 June 1997 KILROY REALTY, L.P., ----------------------- A Delaware Limited Partnership ADDRESS FOR NOTICES: By: KILROY REALTY CORPORATION, A Maryland Corporation, 2250 E. Imperial Highway General Partner Suite 1200 El Segundo, CA 90245 Telex: By: /s/ Illegible ----------------------- -------------------------- Fax: (310) 322-5981 ----------------------- E-mail: Title: EVP-COO ----------------------- ----------------------- with a copy to: "LESSOR" - ------------------------------ - ------------------------------ - ------------------------------ Dated: HOLLINGSEAD INTERNATIONAL, ----------------------- A California Corporation Address for Notices: 2361 Rosecrans Avenue By: /s/ RJ MacDonald Suite 180 ------------------------ El Segundo, CA 90245 Title: Vice-Chairman Telex: ---------------------- ------------------------ Fax: (310) 643-0746 "LESSEE" ------------------------- E-mail: ---------------------- -22- EX-23.1 8 EX 23.1 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated February 24, 1998, relating to the consolidated financial statements of DeCrane Aircraft Holdings, Inc. ("DeCrane"), which appears in such Prospectus. We also consent to the application of the DeCrane report to the Financial Statement Schedule for the three years ended December 31, 1997 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the consolidated financial statements referred to in our report. The audit referred to in such report also included this schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Los Angeles, California March 6, 1998 EX-23.3 9 EX 23.3 CONSENT OF THOMAS & THOMAS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our (dual dated) report dated February 21, 1997 and December 17, 1997, relating to the consolidated financial statements of Audio International, Inc. and subsidiary ("Audio"), which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. Thomas & Thomas Little Rock, Arkansas March 5, 1998 EX-27 10 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 206 0 18,639 487 25,976 45,116 28,524 14,470 99,137 20,344 0 0 0 53 39,474 99,137 108,903 108,903 80,247 16,661 243 111 3,154 8,598 3,344 5,254 0 2,078 0 3,176 .14 .20
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