-----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, JMlzZ0SXnICa4E3mXJeI14fP2wtbZB2a7qtELe9TI7kjqgdZ0RSqBg/dyI2CLwWw Qwmbz39QFcNF/7kfCVrjqg== 0001047469-98-032236.txt : 19980821 0001047469-98-032236.hdr.sgml : 19980821 ACCESSION NUMBER: 0001047469-98-032236 CONFORMED SUBMISSION TYPE: SC 14D9/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980820 SROS: NASD SUBJECT COMPANY: 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: SC 14D9/A SEC ACT: SEC FILE NUMBER: 005-52423 FILM NUMBER: 98694779 BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 FILED BY: 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: SC 14D9/A BUSINESS ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 BUSINESS PHONE: 3107259123 MAIL ADDRESS: STREET 1: 2361 ROSECRANS AVENUE STREET 2: SUITE 180 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4910 SC 14D9/A 1 SC 14D9/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 (AMENDMENT NO. 1) Solicitation/Recommendation Statement Pursuant to Section 14(d)(4) of the Securities Exchange Act of 1934 ------------------------ DECRANE AIRCRAFT HOLDINGS, INC. (NAME OF SUBJECT COMPANY) DECRANE AIRCRAFT HOLDINGS, INC. (NAME OF PERSON(S) FILING STATEMENT) ------------------------ COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS OF SECURITIES) 243662 10 3 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ R. JACK DECRANE Chairman of the Board and Chief Executive Officer DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Avenue, Suite 180 El Segundo, California 90245-4910 (310) 725-9123 (Name, address and telephone number of person authorized to receive notices and communications on behalf of the person(s) filing statement) WITH COPIES TO: MELVIN EPSTEIN, ESQ. STEPHEN A. SILVERMAN, ESQ. Stroock & Stroock & Lavan LLP Spolin & Silverman 180 Maiden Lane 100 Wilshire Boulevard, Suite 940 New York, New York 10038-4982 Santa Monica, California 90401 (212) 806-5400 (310) 576-1221
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDMENT NO. 1 TO SCHEDULE 14D-9 This Amendment supplements and amends as Amendment No. 1 the Solicitation/Recommendation Statement on Schedule 14D-9, originally filed on July 22, 1998 (the "Schedule 14D-9"), by DeCrane Aircraft Holdings, Inc., a Delaware corporation (the "Company"), relating to the tender offer by DeCrane Acquisition Co., a Delaware corporation (the "Purchaser"), a company formed by DLJ Merchant Banking Partners II, L.P. and affiliated funds ("DLJ"), disclosed in a Tender Offer Statement on Schedule 14D-1, dated July 22, 1998, to purchase all outstanding shares of common stock, par value $0.01 per share (the "Shares"), of the Company at a price per Share of $23.00, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated July 22, 1998, and the related Letter of Transmittal (which together constitute the "Offer"). Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Schedule 14D-9 ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) On or about June 10, 1998, Charles Becker, President and Chief Operating Officer of the Company, purchased 100 shares of common stock of the Company in the public markets. On or about June 10, 1998, Robert A. Rankin, Chief Financial Officer and Secretary of the Company (presently on administrative leave), purchased 100 shares of common stock of the Company in the public markets. (b) Mitchell I. Quain, a director of the Company, has indicated his intent to donate 5,220 shares of common stock of the Company to four charitable organizations prior to the expiration of the Offer to Purchase: The University of Pennsylvania, St. Luke's Foundation, Horace Mann School and the Greenwich Jewish Study Group, Inc. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. Item 8 of Schedule 14D-9 is hereby amended and supplemented by addition of the following information: BACKGROUND OF THE OFFER FAIRNESS OPINION. WDR has delivered its written opinion, dated July 21, 1998, confirming its oral opinion of July 16, 1998, to the effect that, and based upon and subject to the assumptions, limitations and qualifications set forth therein, as of the date thereof, the Offer Price to be received in the Offer is fair, from a financial point of view to the stockholders of the Company (the "Fairness Opinion"). The Fairness Opinion does not constitute a recommendation to any stockholder of the Company as to how such stockholder should vote or whether such stockholder should tender Shares in the Offer. The full text of the Fairness Opinion, which sets forth a description of the assumptions made, general procedures followed matters considered, and limitations on the review undertaken, is set out in Exhibit 5 of Schedule 14D-9. Stockholders or other interested parties are urged to read the Fairness Opinion carefully in its entirety, especially with regard to the assumptions made and matters considered by WDR. The summary of the Fairness Opinion set forth in this Amendment is qualified in its entirety by reference to the full text of such Fairness Opinion. In rendering its Fairness Opinion, WDR assumed, at the direction of the Special Committee, without independent verification, the accuracy and completeness, in all material respects, of all the financial and other information that was available to it from public sources or that was provided to it by the Company or its representatives. The Fairness Opinion was necessarily based upon economic, monetary, market, and other conditions as in effect, and the information made available to WDR as of, the date of such opinion. In addition, with the consent of the Special Committee, WDR did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of the Company. With respect to the financial estimates (including the effects of assumed savings) provided to or otherwise reviewed by or discussed with it, WDR assumed, with the consent of the Special Committee, that they were reasonably prepared on the basis of and reflecting the best currently available estimates and judgments of the Company's management as to the future financial performance of the Company and that those estimates would be materially achieved in the amounts and at the times stated therein. It should be understood that, although subsequent developments may affect the Fairness Opinion, WDR does not have any obligation to update, revise, or reaffirm the Fairness Opinion. WDR is an internationally recognized investment banking firm which, as part of its investment banking business, regularly engages in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The Special Committe selected WDR on the basis of its experience and independence. In the past, WDR and its predecessors have provided investment banking services to the Company and have received customary compensation for such services. In the ordinary course of business, WDR and its affiliates may actively trade or hold the equity securities of the Company and DLJ for their own account or the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. Pursuant to the engagement letter between the Company and WDR, the Company has paid to WDR for its services a fee of $1,300,000. The Company has also agreed to reimburse WDR for its expenses, including attorneys' fees reasonably incurred in connection with its engagement, and to indemnify WDR against certain liabilities and reasonable expenses related to, or arising out of or in connection with the engagement of WDR under the engagement letter, including liabilities under the federal securities laws in connection with its services. In arriving at the Fairness Opinion, WDR did not assign any particular weight or factor to any matter considered by it, but rather made qualitative judgments based upon its experience in providing such opinions and on then existing economic, monetary, market and other conditions as to the significance and relevance of each analysis and factor. Accordingly, WDR believes that its analysis must be considered as a whole and that selecting portions of its analyses and the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying its Fairness Opinion. In its analyses, with the consent of the Special Committee, WDR made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company or WDR. Any assumed estimates contained in WDR's analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. Such estimates relating to the value of a business or securities do not purport to be appraisals or necessarily reflect the prices at which companies or securities may actually be sold. No company, transaction or business used in the analyses described under "Analysis of Certain Other Publicly Traded Companies" and "Analysis of Selected Generally Comparable Precedent Transactions" below is identical to the Company. Accordingly, an analysis of the results thereof necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors which could affect the transaction or the public trading or other values of the company or companies to which they are being compared. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of assuring comparable acquisition or comparable company data. In connection with rendering the Fairness Opinion, WDR employed a variety of evaluation methods. The material valuation methods are summarized below. (a) ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. Using publicly available information, WDR compared selected historical share prices, and operating and financial ratios for the Company to the corresponding data and ratios for selected companies in the aviation services industry whose securities are publicly traded and that WDR believed were generally comparable in certain respects to the Company in that they were companies in the business of providing services to the aircraft industry or providing aviation products. Such data and ratios included (A) the ratio of Enterprise Value (defined as market capitalization of the common stock plus the principal amount of total debt outstanding less cash and cash equivalents) to (i) Revenue, (ii) operating earnings before depreciation, amortization, interest and taxes ("EBITDA") and 2 (iii) operating earnings before interest and taxes ("EBIT") and (B) the ratio of the price per share of the common stock to (i) the latest twelve months ("LTM") earnings per share ("EPS"), (ii) 1998 estimated Calendar Year EPS and (iii) 1999 estimated Calendar Year EPS. The companies selected for this comparison were AAR Corp., Aviall, Inc., Aviation Sales Co., AVTEAM, Inc., First Aviation Services Inc., Kellstrom Industries, Inc. and Triumph Group, Inc. Although there are no companies that directly compare to the Company, WDR believes that the business fundamentals of Aviall, Inc., First Aviation Services Inc., and Triumph Group, Inc. ("Most Comparable Companies") may be more closely aligned with the Company's business fundamentals than the others. An analysis of Enterprise Value to LTM Revenue for the Most Comparable Companies yielded a mean multiple of 1.0x compared to the Company multiple of 1.7x LTM Revenue at the Offer Price. Enterprise Value to LTM EBITDA for these companies yielded a mean multiple of 9.2x compared to the Company multiple of 9.6x LTM EBITDA at the Offer Price. Enterprise Value to LTM EBIT for these companies yielded a mean multiple of 10.9x compared to the Company multiple of 13.6x LTM EBIT at the Offer Price. An analysis of the July 15, 1998 stock price to LTM EPS for these companies yielded a mean multiple of 14.0x compared to the Company multiple of 28.0x the Offer Price. An analysis of the July 15, 1998 stock price to the estimated Calendar Year 1998 EPS for these companies yielded a mean multiple of 13.9x compared to the Company multiple of 17.0x the Offer Price. An analysis of the July 15, 1998 stock price to the estimated Calendar Year 1999 EPS for these companies yielded a mean multiple of 9.9x compared to the Company multiple of 13.2x the Offer Price. An analysis of Enterprise Value to LTM Revenue for AAR Corp., Aviation Sales Co., AVTEAM, Inc. and Kellstrom Industries, Inc. (the "Less Comparable Companies") yielded a mean multiple of 2.2x compared to the Company multiple of 1.7x LTM Revenue at the Offer Price. Enterprise Value to LTM EBITDA for these companies yielded a mean multiple of 13.7x compared to the Company multiple of 9.6x LTM EBITDA at the Offer Price. Enterprise Value to LTM EBIT for these companies yielded a mean multiple of 15.6x compared to the Company multiple of 13.6x LTM EBIT at the Offer Price. An analysis of the July 15, 1998 stock price to LTM EPS for these companies yielded a mean multiple of 25.9x compared to the Company multiple of 28.0x the Offer Price. An analysis of the July 15, 1998 stock price to the estimated Calendar Year 1998 EPS for these companies yielded a mean multiple of 18.7x compared to the Company multiple of 17.0x the Offer Price. An analysis of the July 15, 1998 stock price to the estimated Calendar Year 1999 EPS for these companies yielded a mean multiple of 14.3x compared to the Company multiple of 13.2x the Offer Price. In arriving at its opinion, WDR took into account that, in general, the multiples available to the Company at the Offer Price compared favorably to the multiples derived for the selected companies. WDR noted that no company utilized in the above comparable company analysis is identical to the Company. Accordingly, an analysis of the foregoing is not purely mathematical and involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect their public trading value. (b) ANALYSIS OF SELECTED GENERALLY COMPARABLE PRECEDENT TRANSACTIONS. WDR conducted a review of selected aviation services industry transactions in which a majority ownership position was purchased. These transactions were analyzed to provide a reference point as to the enterprise valuation multiples for the Company. From the transactions selected, there was a range of multiples, which was related to the quality and size of the companies. WDR calculated multiples for each transaction based on the ratios of the Transaction Value (defined as purchase price of equity plus the principal amount of total debt outstanding less cash and cash equivalents) to each of the target company's pre-acquisition LTM Revenue, LTM EBITDA, and LTM EBIT. An analysis of Transaction Value to LTM Revenue for these companies yielded a range of relevant multiples from a low of 0.4x to a high of 1.8x with a median of 0.7x compared to the Company multiple of 1.7x LTM Revenue at the Offer Price. Transaction Value to LTM EBITDA for these companies yielded a range of relevant multiples from a low of 4.5x to a high of 13.1x with a median of 6.9x compared to the Company multiple of 9.6x LTM EBITDA at the Offer Price. Enterprise Value to 3 LTM EBIT for these companies yielded a range of relevant multiples from a low of 6.0x to a high of 15.4x with a median of 10.9x compared to the Company multiple of 13.6x LTM EBIT at the Offer Price. In arriving at its opinion, WDR took into account that, in general, the multiples available to the Company at the Offer Price compared favorably to the multiples derived for the selected transactions. WDR noted that no transaction utilized in the above selected acquisition transaction analysis is identical to the Merger. Accordingly, an analysis of the foregoing is not purely mathematical and involves complex considerations and judgments concerning differences in financial and operating characteristics of the acquired companies in such transactions and other factors that could affect their acquisition and public trading values. (c) DISCOUNTED CASH FLOW ANALYSIS. WDR performed a discounted cash flow analysis for the Company on a stand-alone basis based on projections provided by management of the Company through 1999 and with the consent of the Board of Directors extended for an additional three years based on certain assumptions including, among others, assumptions as to internal growth rate and operating profit (the "Company Projections"). The discounted cash flow analysis estimated the theoretical present value of the Company based on the sum of: (i) the discounted cash flows that the Company could generate over the five years ending 2002 and (ii) a terminal value assuming that the Company performs in accordance with the Company Projections. The terminal value of the Company was based upon a multiple applied to EBIT. This terminal value and the cash flows generated by the Company were discounted to derive the Enterprise Value of the Company. The value of the Shares was calculated by taking the Enterprise Value and subtracting the principal amount of the total debt outstanding and adding and cash equivalents. Using discount rates ranging from 10% to 13%, and exit EBIT multiples from 8x to 12x to calculate the terminal values, WDR estimated that, based on discounted cash flow analysis of the Company Projections, the Enterprise Value of the Company ranged from $184.5 million to $297.6 million and the per Share value of the Company ranged from $11.83 to $26.29. (d) PREMIUM ANALYSIS. WDR analyzed the premium offered per share of Company common stock over selected periods and compared it to the average historical premium of selected transactions over the same time periods. Based upon the Offer Price on July 16, 1998, the premium to the closing price one day prior was 30.5%, to one week prior was 27.8%, and to one month prior was 29.6%, compared to 30.6%, 35.0%, and 38.0% respectively for the average of the selected historical transactions. The Offer Price represented a 9.5% premium to the Company's 52 week high stock price and a 55.9% premium to Company's 52 week low stock price. The presentation of WDR at the July 15, 1998 meeting of the Special Committee and the July 16, 1998 meeting of the full Board of Directors included a description of its analyses as set forth above. SUBSEQUENT DEVELOPMENTS (a) OTHER INDICATIONS OF INTEREST. On July 17, 1998, following the announcement of the Merger Agreement, an independent third party ("Potential Bidder 1") advised the Company of its interest in pursuing an alternative transaction with the Company. Potential Bidder 1 indicated its interest was in pursuing a possible merger that would qualify as a pooling of interests transaction, but its interest was subject, among other things, to a satisfactory due diligence review. Accordingly, on July 23, 1998, the Company, after receiving the advice of counsel, obtained a confidentiality agreement from Potential Bidder 1 on terms substantially identical to the confidentiality agreement between the Company and DLJ. Potential Bidder 1 then began its due diligence investigation. Recently, however, Potential Bidder 1 informed WDR that it had concluded, as a result of recent stock market conditions affecting the market value of its own shares, that it was not in a position to pursue an acquisition of the Company. 4 On or about August 4, 1998, another independent third party ("Potential Bidder 2") advised the Company that it might be interested in making an offer to purchase the Shares for cash. On the advice of counsel, the Board of Directors decided to authorize the Company to furnish information to Potential Bidder 2, subject to an appropriate confidentiality agreement. Such an agreement was executed and information was furnished, but Potential Bidder 2 subsequently indicated to WDR that it believed that it was not in a position to pursue the transaction. (b) COMPENSATION LITIGATION. On August 5, 1998, the Company and R. Jack DeCrane, its Chief Executive Officer, were served in an action filed in state court in California by Robert A. Rankin, the Company's Chief Financial Officer and Secretary, claiming that he is due additional compensation in the form of stock options, and claiming fraud, negligence and breach of contract in connection therewith. Mr. Rankin has advised the Company that his claim for additional compensation is justified based on his opinion that the Company's common stock is worth $29.00 per Share. The action seeks not less than $1.5 million plus punitive damages and costs. The action is in the early stages of development and discovery has not yet been conducted; the Company intends to vigorously defend against the claim. Mr. Rankin, has been placed on administrative leave with pay. John R. Hinson, the Company's Vice President for Planning and Business Development, has been appointed as the interim Chief Financial Officer and acting Secretary of the Company. (c) SHAREHOLDERS' LITIGATION. On July 21, 1998, an action entitled TAAM ASSOCIATES, INC. V. DECRANE, ET AL. (the "Action"), was commenced in Delaware Court of Chancery on behalf of a purported class of stockholders of the Company against the Company, its directors and various officers, DLJ and the Purchaser, alleging, among other things, that the directors had breached their fiduciary duties by entering into the Merger Agreement without engaging in an auction or "active market check" and, therefore, did not adequately inform themselves in agreeing to terms that are unfair and inadequate from the standpoint of the Company's stockholders. On July 24, 1998, the plaintiffs thereafter amended the complaint. The amended class action complaint (the "Amended Complaint") alleges, among other things, that the Company's initial Schedule 14D-9 failed to disclose adequately (i) material information regarding the equity participation of management following the Merger, (ii) the claimed failure to adequately shop the Company, (iii) complete financial information, (iv) the claimed unreasonableness of the termination fees, (v) details regarding the Company's financial projections and (vi) details regarding WDR's analysis. The Amended Complaint seeks a p reliminary and permanent injunction barring defendants from proceeding with the Merger, or if the Merger is consummated, an order rescinding it or awarding damages, together with interest; and an award of attorneys' and litigation expenses. Plaintiff stipulated to the dismissal without prejudice of the claims against those defendants who were officers, but not directors, of the Company. Although defendants have not been required to answer the Amended Complaint, if required to answer the Amended Complaint, the Company would deny and understands that other defendants would deny the allegations of wrongdoing and would assert various defenses. Without admitting any wrongdoing in the Action, in order to avoid the burden and expense of further litigation, the Company, DLJ, the Purchaser and the individual defendants reached an agreement in principle with the plaintiffs which contemplates settlement of the Action. The Company, DLJ, the Purchaser and the individual defendants and the plaintiffs entered into a memorandum of understanding (the "Memorandum of Understanding"), pursuant to which the parties would, subject to certain facts being confirmed through discovery which has not been completed, enter into a settlement agreement which would be subject to approval by the Court of Chancery. The Memorandum of Understanding contemplates that the settlement would provide: (a) that the Company promptly amend the Schedule 14D-9 dated July 22, 1998 to include information regarding the financial results of the Company for the quarter ended June 30, 1998, and to provide further disclosure (1) concerning further contacts and negotiations with other potential acquirors of the Company, (2) regarding the analysis 5 presented to and considered by the Special Committee in evaluating the Merger Agreement, (3) the Special Committee's conclusions regarding the later assertions by Mr. Rankin relating to the Fairness Opinion (as described below), and (4) regarding financial projections disclosed to DLJ or other potential acquirors of the Company; (b) that the Company will use its reasonable best efforts to mail such amendment to the Company's stockholders as soon as practicable; and (c) reasonably promptly following the execution of the Memorandum of Understanding by the parties, the Company shall publicly disclose the terms of the proposed settlement set forth therein in a manner deemed reasonable by the Company, and (d) for a complete release and settlement of all claims, whether asserted directly, derivatively or otherwise, against defendants, or any of their affiliates, directors, officers, employees or agents arising out of the facts set forth in the complaint. The released claims will include any claims that could be raised as a result of the matters described in this Amendment. The Company, DLJ, the Purchaser and the individual defendants and the plaintiffs agreed that the settlement outlined above is fair, in the best interest of the Company's stockholders, and confers a substantial benefit on the Company and its stockholders. Pursuant to the Memorandum of Understanding, a draft of this amended Schedule 14D-9 was provided to plaintiffs' lead counsel to review and comment upon prior to the initial filing with the Commission. The Memorandum of Understanding contemplates that, in connection with the benefit conferred, plaintiffs' counsel will apply to the Court of Chancery for an award of attorney's fees and litigation expenses in an amount not exceeding $375,000, which application, the defendants have agreed not to oppose. (d) FAIRNESS OPINION. Following the execution and delivery of the Merger Agreement and the delivery of the Fairness Opinion, Robert A. Rankin, the Company's Chief Financial Officer (who has brought suit against the Company in a compensation dispute, as described above) advised the Company, its counsel, and WDR that he had "serious concerns about the accuracy and reliability of" the Fairness Opinion. He questioned the accuracy of the presentation of certain financial data to the Board of Directors related to the Fairness Opinion, whether the appropriate comparable transactions had been used by WDR and certain other aspects of WDR's presentation. WDR informed the members of the Board of Directors, that, in its judgment, the purported concerns raised by Mr. Rankin had no material impact on its analysis and WDR again reviewed its selection of the comparable transactions and the other aspects of its methodology. The Board of Directors and the Company's senior management agreed with WDR's assessment of Mr. Rankin's concerns. Also subsequent to the delivery of the Fairness Opinion, WDR and the Special Committee became aware that certain members of senior management, at the end of June 1998, had prepared a set of projected consolidated income and cash flow statements and balance sheets of the Company for the five year period ended December 31, 2002 (the "Five-Year Projections") and that the Five-Year Projections had been included in materials made available to DLJ and the Purchaser, subsequent to the execution of the Merger Agreement, and to Potential Bidder 1 and Potential Bidder 2. The Five-Year Projections (which are different from the projections described in the Offer) assumed an internal growth rate in the Company's operating income of more than 20%, significantly higher than the Company Projections. As a result, the Five-Year Projections showed a significantly higher EBIT than that relied on by WDR in preparing the discounted cash flow calculations used in its analysis. The members of the Special Committee reviewed the Five-Year Projections and conducted extensive interviews of Mr. DeCrane, the Chief Executive Officer and Messrs. R.G. MacDonald and John R. Hinson, respectively, the Vice Chairman of the Board and the interim Chief Financial Officer of the Company. Messrs. DeCrane, MacDonald and Hinson confirmed that the Five-Year Projections do not represent the views of senior management because (i) they employed assumptions as to the future development of certain of the Company's operations and certain of the Company's markets that are overly optimistic and an internal growth rate significantly greater than historical experience, with the result that EBIT amounts were also significantly greater, and (ii) the management of the Company's business units had not participated in their preparation. Attorneys representing Mr. Rankin in litigation wrote to counsel 6 for the Special Committee and, through Company counsel, were invited to submit any additional information for the Committee's consideration. The Special Committee discussed with WDR the results of its investigation at a meeting with WDR. The Special Committee concluded that the Five-Year Projections (which had been delivered to WDR after it rendered the Fairness Opinion) were not reliable or representative of the Company management's views of the Company and that they did not provide a basis for questioning the Fairness Opinion. The Special Committee advised the other members of the Board of Directors to that effect, and they agreed. The Special Committee also discussed with WDR, at the same meeting, the condition of the equity markets since July 16, 1998. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. Exhibit 1. Merger Agreement dated as of July 16, 1998, by and between DeCrane Acquisition Co. and DeCrane Aircraft Holdings, Inc.* Exhibit 2. Pages 7 through 17 of the Proxy Statement dated June 2, 1998, relating to its 1998 Annual Meeting of Stockholders held on June 17, 1998 at DeCrane Aircraft Holdings, Inc.* Exhibit 3. Employment Agreement between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane, dated as of July 17, 1998.* Exhibit 4. Confidentiality Agreement, dated as of June 15, 1998, between DeCrane Aircraft Holdings, Inc. and DLJ Merchant Banking II, L.P.* Exhibit 5. Opinion of Warburg Dillon Read LLC to the Board of Directors of DeCrane Aircraft Holdings, Inc. dated July 21, 1998.* Exhibit 6. Letter of the Board of Directors of DeCrane Aircraft Holdings, Inc. addressed to the stockholders of DeCrane Aircraft Holdings, Inc., dated July 22, 1998.* Exhibit 7. Joint Press Release dated July 17, 1998 of DeCrane Aircraft Holdings, Inc. and DLJ Merchant Banking Partners II, L.P.* Exhibit 8. The Quarterly Report of the Company on Form 10-Q for the quarterly period ended June 30, 1998. Exhibit 9. Amended Class Action Complaint. Exhibit 10 Memorandum of Understanding.
- ------------------------ * Previously filed with the Schedule 14D-9. 7 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: August 19, 1998 DECRANE AIRCRAFT HOLDINGS, INC. By: /s/ R. JACK DECRANE ----------------------------------------- R. Jack DeCrane CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
8 EX-8 2 EX-8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission File Number 0-22371 ------------------------ DECRANE AIRCRAFT HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1645569 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2361 ROSECRANS AVENUE, SUITE 180, EL SEGUNDO, CA 90245 (Address, including zip code, of principal executive offices) (310) 725-9123 (Registrant's telephone number, including area code) ------------------------ (NOT APPLICABLE) (Former address and telephone number of principal executive offices, if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No The number of shares of Registrant's Common Stock, $.01 par value, outstanding as of July 31, 1998 was 7,524,740 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, INC. INDEX
PAGE ----- PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............................ 1 Consolidated Statements of Operations for the three months and six months ended June 30, 1998 and 1997........................................................................................... 2 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1998........... 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997............ 4 Condensed Notes to Consolidated Financial Statements............................................. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 11 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................................................................ 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 15 ITEM 5. OTHER INFORMATION................................................................................ 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits......................................................................................... 16 Reports on Form 8-K.............................................................................. 16
i ITEM 1. FINANCIAL STATEMENTS DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents............. $ 2,337 $ 206 Accounts receivable, net.............. 25,857 18,152 Inventories........................... 35,109 25,976 Income taxes refundable............... 4,368 -- Prepaid expenses and other current assets.............................. 2,875 782 ----------- ------------ Total current assets................ 70,546 45,116 Property and equipment, net............. 23,815 14,054 Other assets, principally intangibles, net................................... 101,248 39,967 ----------- ------------ Total assets...................... $195,609 $ 99,137 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings................. $ 90 $ 568 Current portion of long-term obligations......................... 857 858 Accounts payable...................... 8,157 8,032 Accrued expenses...................... 11,597 6,911 Income taxes payable.................. 3,175 3,975 ----------- ------------ Total current liabilities........... 23,876 20,344 ----------- ------------ Long-term liabilities Long-term obligations................. 93,027 37,412 Other long-term liabilities........... 523 96 Deferred income taxes................. 521 1,758 ----------- ------------ Total long-term liabilities......... 94,071 39,266 ----------- ------------ Commitments and contingencies........... -- -- Stockholders' equity Undesignated preferred stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding......... -- -- Common stock, $.01 par value, 9,924,950 shares authorized; 7,524,740 and 5,318,563 shares issued and outstanding as of June 30, 1998 and December 31, 1997, respectively........................ 75 53 Additional paid-in capital............ 85,928 51,057 Accumulated deficit................... (8,084) (11,444) Accumulated other comprehensive income (deficit)........................... (257) (139) ----------- ------------ Total stockholders' equity.......... 77,662 39,527 ----------- ------------ Total liabilities and stockholders' equity............ $195,609 $ 99,137 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of the consolidated financial statements. 1 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ----------------------- 1998 1997 1998 1997 ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) Revenues................................ $ 29,854 $ 28,130 $ 58,982 $ 54,248 Cost of sales........................... 20,134 20,916 40,275 41,023 ----------- ----------- ---------- ---------- Gross profit........................ 9,720 7,214 18,707 13,225 ----------- ----------- ---------- ---------- Operating expenses Selling, general and administrative expenses............................ 5,302 3,838 10,181 7,222 Amortization of intangible assets..... 382 203 761 410 ----------- ----------- ---------- ---------- Total operating expenses............ 5,684 4,041 10,942 7,632 ----------- ----------- ---------- ---------- Income from operations.................. 4,036 3,173 7,765 5,593 Other expenses (income) Interest expense...................... 383 692 1,169 2,284 Terminated debt offering expenses..... 600 -- 600 -- Other expenses (income)............... (41) 132 (70) 14 Minority interest..................... 28 24 40 55 ----------- ----------- ---------- ---------- Income before provision for income taxes and extraordinary item................ 3,066 2,325 6,026 3,240 Provision for income taxes.............. 1,394 871 2,666 1,157 ----------- ----------- ---------- ---------- Income before extraordinary item........ 1,672 1,454 3,360 2,083 Extraordinary loss from debt refinancing, net of income tax benefit............................... -- 2,078 -- 2,078 ----------- ----------- ---------- ---------- Net income (loss)....................... 1,672 (624) 3,360 5 Adjustment to redemption value of mandatorily redeemable common stock warrants.............................. -- (2,203) -- (2,203) Cumulative convertible preferred stock dividends............................. -- (62) -- (442) ----------- ----------- ---------- ---------- Net income (loss) applicable to common stockholders.......................... $ 1,672 $ (2,889) $ 3,360 $ (2,640) ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Income per common share Basic Income (loss) before extraordinary item.............................. $ .23 $ (.18) $ .53 $ (.25) Extraordinary loss from debt refinancing....................... -- (.47) -- (.91) ----------- ----------- ---------- ---------- Net income (loss)................... $ .23 $ (.65) $ .53 $ (1.16) ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Diluted Income (loss) before extraordinary item.............................. $ .22 $ (.18) $ .50 $ (.25) Extraordinary loss from debt refinancing....................... -- (.47) -- (.91) ----------- ----------- ---------- ---------- Net income (loss)................... $ .22 $ (.65) $ .50 $ (1.16) ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Weighted average number of common and dilutive common equivalent shares outstanding Basic............................... 7,421 4,442 6,376 2,276 Diluted............................. 7,734 4,442 6,687 2,276 Pro forma for the Recapitalization, as adjusted for the Initial Public Offering Income applicable to common stockholders........................ $ 1,672 $ 1,568 $ 3,360 $ 2,983 Income per common share Basic............................... $ .23 $ .30 $ .53 $ .56 Diluted............................. $ .22 $ .28 $ .50 $ .53 Weighted average number of common and dilutive common equivalent shares outstanding Basic................................. 7,421 5,302 6,376 5,302 Diluted............................... 7,734 5,576 6,687 5,576
The accompanying notes are an integral part of the consolidated financial statements. 2 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK -------------------------- ---------------------- ADDITIONAL ACCUMULATED OTHER NUMBER OF NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIT) ------------- ----------- --------- ----------- ----------- ------------ ----------------- Balance, December 31, 1997.... -- $ -- 5,318,563 $ 53 $ 51,057 $ (11,444) $ (139) Comprehensive income Net income (Unaudited)...... -- -- -- -- -- 3,360 -- Translation adjustment (Unaudited)............... -- -- -- -- -- -- (118) Stock option compensation expense (Unaudited)......... -- -- -- -- 78 -- -- Sale of common stock (Unaudited)................. -- -- 2,206,177 22 34,793 -- -- --- ----- --------- --- ----------- ------------ ----- Balance, June 30, 1998 (Unaudited)................. -- $ -- 7,524,740 $ 75 $ 85,928 $ (8,084) $ (257) --- ----- --------- --- ----------- ------------ ----- --- ----- --------- --- ----------- ------------ ----- TOTAL --------- Balance, December 31, 1997.... $ 39,527 --------- Comprehensive income Net income (Unaudited)...... 3,360 Translation adjustment (Unaudited)............... (118) --------- 3,242 Stock option compensation expense (Unaudited)......... 78 Sale of common stock (Unaudited)................. 34,815 --------- Balance, June 30, 1998 (Unaudited)................. $ 77,662 --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 3 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ---------------------- 1998 1997 ---------- ---------- (UNAUDITED) Cash flows from operating activities Net income.............................................................................. $ 3,360 $ 5 Adjustments to reconcile net income to net cash (used for) provided by operating activities Depreciation and amortization......................................................... 2,966 2,656 Extraordinary loss from debt refinancing.............................................. -- 2,078 Deferred income taxes................................................................. (1,219) 439 Unrealized (gain) loss on forward foreign exchange contracts.......................... (71) 302 Other, net............................................................................ (88) 55 Changes in assets and liabilities Accounts receivable................................................................. (2,154) (946) Inventories......................................................................... (3,058) (2,265) Prepaid expenses and other assets................................................... (643) 368 Accounts payable.................................................................... (1,451) 1,278 Accrued expenses.................................................................... 2,316 (940) Income taxes payable................................................................ (778) (62) ---------- ---------- Net cash (used for) provided by operating activities.............................. (820) 2,968 ---------- ---------- Cash flows from investing activities Purchase of stock of Avtech Corporation, net of cash acquired........................... (83,599) -- Purchase of net assets of Dettmers Industries Inc., net of cash acquired................ (2,145) -- Capital expenditures.................................................................... (1,102) (2,253) Other, net.............................................................................. 175 -- ---------- ---------- Net cash used for investing activities............................................ (86,671) (2,253) ---------- ---------- Cash flows from financing activities Sale of common stock and application of the net proceeds Net proceeds from the sale of common stock............................................ 34,815 29,220 Net borrowings (repayments) under senior credit facility.............................. (34,815) 12,334 Repayment of debt..................................................................... -- (42,160) Revolving line of credit borrowings to finance acquisitions............................. 85,744 -- Net borrowings under revolving line of credit agreements................................ 5,358 1,879 Principal payments on capitalized lease and other long-term obligations................. (1,156) (1,048) Promissory note principal payments...................................................... -- (956) Payment of deferred financing costs..................................................... (311) -- Other, net.............................................................................. (18) 31 ---------- ---------- Net cash provided by (used for) financing activities.............................. 89,617 (700) ---------- ---------- Effect of foreign currency translation on cash............................................ 5 (34) ---------- ---------- Net increase (decrease) in cash and cash equivalents...................................... 2,131 (19) Cash and cash equivalents at beginning of period.......................................... 206 320 ---------- ---------- Cash and cash equivalents at end of period................................................ $ 2,337 $ 301 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 4 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--CONSOLIDATED FINANCIAL STATEMENTS The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1997. The consolidated financial information as of June 30, 1998 and for the three months and six months ended June 30, 1998 and 1997 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. Certain reclassifications have been made to prior periods' financial information to conform to the 1998 presentation. NOTE 2--SALE OF COMMON STOCK In April 1998, the Company sold 2,206,177 shares of common stock for $17.00 per share ("Follow-On Equity Offering"). Net proceeds from the Follow-On Equity Offering of $34,815,000 were used to partially repay borrowings outstanding under the Company's senior credit facility. NOTE 3--INCOME PER COMMON SHARE As described in the Company's Form 10-K for the year ended December 31, 1997, the holders of certain securities agreed to a plan for the recapitalization of the Company (the "Recapitalization") during 1997. 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. Since the Company's historical capital structure is not indicative of its structure after the Recapitalization and IPO, pro forma income per share is presented for 1997 and reflects the Recapitalization, the IPO and the application of the proceeds therefrom, as if both had occurred January 1, 1997. Income per common share ("EPS") has 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. The following table provides a reconciliation of both income and the number of common shares used in the computations of "basic" EPS, which utilizes the weighted average number of common shares 5 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3--INCOME PER COMMON SHARE (CONTINUED) outstanding without regard to dilutive potential common shares, and "diluted" EPS, which includes all such shares. All amounts are in thousands, except per share data, and are unaudited.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- 1997 1997 ---------------------- ---------------------- 1998 AS REPORTED PRO FORMA 1998 AS REPORTED PRO FORMA --------- ----------- --------- --------- ----------- --------- Income (loss) applicable to common shares-- Numerator Before extraordinary item.......................... $ 1,672 $ 1,454 $ 1,568 $ 3,360 $ 2,083 $ 2,983 Adjustment to redeemable warrant redemption value............................................ -- (2,203) -- -- (2,203) -- Preferred stock dividends.......................... -- (62) -- -- (442) -- --------- ----------- --------- --------- ----------- --------- Income (loss) applicable to common shares (basic)........................................ 1,672 (811) 1,568 3,360 (562) 2,983 Cumulative convertible preferred stock dividends... -- -- -- -- -- -- --------- ----------- --------- --------- ----------- --------- Income (loss) applicable to common shares (diluted)...................................... $ 1,672 $ (811) $ 1,568 $ 3,360 $ (562) $ 2,983 --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- Shares--Denominator Weighted average common shares outstanding (basic).......................................... 7,421 4,442 5,302 6,376 2,276 5,302 Add dilutive effect of Preferred stock outstanding prior to conversion..................................... -- 320 -- -- 1,126 -- Common stock options............................. 313 274 274 311 274 274 Warrants outstanding prior to cancellation, conversion or exercise......................... -- 198 71 -- 445 71 Less antidilutive effect of potential common shares........................................... -- (792) (71) -- (1,845) (71) --------- ----------- --------- --------- ----------- --------- Weighted average common shares outstanding (diluted)...................................... 7,734 4,442 5,576 6,687 2,276 5,576 --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- EPS--Income (loss) before extraordinary item Basic.............................................. $ .23 $ (.18) $ .30 $ .53 $ (.25) $ .56 Diluted............................................ $ .22 $ (.18) $ .28 $ .50 $ (.25) $ .53
Pro forma for the Recapitalization and IPO assumes each occurred on January 1, 1997. Therefore, pro forma income per common share is computed using pro forma income before adjustment to redemption value of redeemable warrants and preferred stock dividends. Pro forma income 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. 6 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--ACQUISITIONS AVTECH On June 26, 1998, the Company purchased substantially all of the common stock of Avtech Corporation ("Avtech"). Avtech is a manufacturer of avionics components and an avionics systems integrator for the commercial and high-end corporate jet aircraft industries. The total purchase price was $84,693,000 in cash at closing, including an estimated $1,250,000 of acquisition related costs. The acquisition was financed with borrowings under the Company's senior credit facility. The acquisition was accounted for as a purchase and the $57,911,000 difference between the purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The consolidated balance sheet as of June 30, 1998 reflects the Avtech assets and liabilities acquired and the consolidated results of operations include the operating results of Avtech subsequent to June 25, 1998. DETTMERS On June 30, 1998, the Company purchased certain assets, subject to certain liabilities assumed, of Dettmers Industries Inc. ("Dettmers"). Dettmers is a manufacturer of seats for high-end corporate jet aircraft. The total purchase price was $2,314,000 in cash at closing, including an estimated $141,000 of acquisition related costs, plus contingent consideration aggregating a maximum $2,000,000 payable over four years based on future attainment of defined performance criteria during each of the years in the four- year period ending December 31, 2002. The acquisition was financed with borrowings under the Company's senior credit facility. The acquisition was accounted for as a purchase and the $2,068,000 difference between the purchase price, excluding contingent consideration, and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial 30-year term. The consolidated balance sheet as of June 30, 1998 reflects the Dettmers assets and liabilities acquired and the consolidated results of operations include the operating results of Dettmers subsequent to June 29, 1998. PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION, IPO AND FOLLOW-ON EQUITY OFFERING Unaudited pro forma consolidated results of operations are presented in the table below for the year ended December 31, 1997 and the six months ended June 30, 1997 and 1998. For all periods presented, the results of operations are pro forma for the Recapitalization, the IPO, the Follow-On Equity Offering (Note 2), and the application of the net proceeds therefrom. For the year ended December 31, 1997 and six months ended June 30, 1997, the results are also pro forma as if the Avtech and Dettmers acquisitions, and the Audio International acquisition (which occured on November 14, 1997), were consummated on January 1, 1997. For the six months ended June 30, 1998, the results are pro forma as if the Avtech and 7 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--ACQUISITIONS (CONTINUED) Dettmers acquisitions were consummated on January 1, 1997. Amounts are in thousands, except per share data.
PRO FORMA ---------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------- 1997 1998 1997 ------------ --------- --------- Revenues..................................................................... $ 160,054 $ 81,846 $ 79,590 Income before extraordinary item............................................. 5,279 4,356 2,877 Income applicable to common stockholders, before extraordinary item.......... 5,279 4,356 2,877 Pro forma income per common share, before extraordinary item Basic...................................................................... $ .70 $ .58 $ .38 Diluted.................................................................... .68 .56 .37 Pro forma weighted average number of common shares outstanding Basic...................................................................... 7,510 7,525 7,509 Diluted.................................................................... 7,812 7,836 7,782
The above information reflects adjustments for depreciation, amortization, general and administrative expenses 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 5--INVENTORIES Inventories are comprised of the following (amounts in thousands):
DECEMBER 31, 1997 JUNE 30, ------------ 1998 ------------ (UNAUDITED) Raw material............................ $21,440 $14,224 Work-in process......................... 5,072 4,655 Finished goods.......................... 8,597 7,097 ------------ ------------ Total inventories................... $35,109 $25,976 ------------ ------------ ------------ ------------
NOTE 6--LONG-TERM OBLIGATIONS; SENIOR CREDIT FACILITY In April 1998, the Company used the net proceeds from the Follow-On Equity Offering to partially repay borrowings outstanding under the Senior Credit Facility. In May 1998, the Senior Credit Facility was amended to provide for a $105 million revolving line of credit. The revolving line of credit is subject to automatic reductions of up to $45 million upon the incurrence of additional indebtedness permitted under the loan plus $500,000 per month from October 31, 1998 through May 31, 1999 and $1 million per month thereafter. The maximum interest rate margins were increased 0.25% to 1.00% above the prime rate or 2.25% above the IBOR rate and the maximum commitment fee was increased to 0.425% on the unused portion of the Senior Credit Facility. In June 1998, the Company borrowed funds under the Senior Credit Facility to finance the Avtech and Dettmers acquisitions. 8 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7--INCOME TAXES During the three months and six months ended June 30, 1998, the Company reduced its deferred tax asset valuation allowance by $68,000 and $115,000, respectively, to reflect the book benefit of federal net operating loss carryforwards not previously recognized. Approximately $2,205,000 of the Company's loss carryforwards remained at June 30, 1998 for federal income tax purposes. No benefit for the remaining loss carryforwards has been recognized in the consolidated financial statements. NOTE 8--COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss and the change in the foreign currency translation adjustment during a period. The Company adopted SFAS 130 for the year ending December 31, 1998 and has reclassified earlier periods to reflect application of the statement. NOTE 9--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company is required to adopt SFAS 133 for its fiscal year beginning January 1, 2000. Management believes the adoption of SFAS 133 will not have a material impact on the Company's consolidated financial position or results of operations. NOTE 10--DEFINITIVE MERGER AGREEMENT; TENDER OFFER On July 17, 1998, the Company announced that it had signed a definitive merger agreement (the "Merger Agreement") with an affiliate of DLJ Merchant Banking Partners II, which contemplates a cash tender offer by the affiliate for all of the shares of common stock of the Company at $23.00 per share. As a result of the pending tender offer, the Company terminated a debt offering and recorded a $600,000 pre-tax charge as of June 30, 1998 for the estimated costs incurred. On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware Chancery Court on behalf of a purported class of stockholders of the Company against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and certain of its affiliates, alleging, among other things, that the directors had breached their fiduciary duties by entering into the Merger Agreement without engaging in an auction or "active market check" and, therefore, did not adequately inform themselves in agreeing to terms that are unfair and inadequate from the standpoint of the Company's stockholders. On July 24, 1998, the plaintiffs amended the complaint by repeating the allegations in the initial complaint and adding allegations that: (i) the Company's Solicitation/Recommendation Statement of Schedule 14D-9 (the "14D-9") contained material misstatements or omissions including: (a) inadequate disclosure of any future equity participation by management after the transaction is consummated; (b) no disclosure of any efforts to shop the Company; (c) incomplete financial information and projections; and (d) incomplete disclosure of the basis 9 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10--DEFINITIVE MERGER AGREEMENT; TENDER OFFER (CONTINUED) for the fairness opinion delivered by the Company's financial advisor; (ii) the termination fees are unreasonable; and (iii) the directors who approved the Merger Agreement had conflicts of interest. The complaint seeks a preliminary and permanent injunction barring defendants from proceeding with the transaction or, if the transaction is consummated, an order rescinding it or awarding damages, together with interest, and an award of attorneys' fees and litigation expenses. The Company believes the action is without merit. The Company expects to incur various expenses estimated to range between $1.5 million and $2.0 million (pre-tax) if the tender offer and acquisition are consummated. Under certain circumstances, the Company may incur an additional $6.9 million (pre-tax) of fees if the Company terminates the tender offer and proposed acquisition. While the exact timing, nature and amount of these expenses are subject to change, the Company anticipates a one-time pre-tax charge will be recorded in the quarter in which the tender offer is either consummated or terminated, possibly resulting in a net loss for such quarter. NOTE 11--LITIGATION On August 5, 1998, the Company and its chief executive officer were served in an action filed in state court in California by the Company's chief financial officer and secretary claiming that he is due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith. The action seeks not less than $1.5 million plus punitive damages and costs. The action is in the early stages of development and discovery has not yet been conducted; the Company intends to vigorously defend against the claim. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 REVENUES. Revenues increased $1.7 million, or 6.1%, to $29.8 million for the three months ended June 30, 1998 from $28.1 million for the three months ended June 30, 1997. Revenues increased primarily due to the inclusion of $4.3 million of revenues from Audio International, Inc. which was acquired on November 14, 1997. This sales increase was somewhat offset by the sales decrease to Boeing of $0.7 million, which management believes is related primarily to Boeing's production problems, and the sales decrease of $0.8 million to Matsushita. GROSS PROFIT. Gross profit increased $2.5 million, or 34.7%, to $9.7 million for the three months ended June 30, 1998 from $7.2 million for the three months ended June 30, 1997. Gross profit as a percentage of revenues increased to 32.6% for the three months ended June 30, 1998 from 25.6% for the three months ended June 30, 1997. This increase was attributable to an improvement in gross profit as a percentage of revenues from increased sales of higher margin product and lower material costs, as well as $0.8 million realized on the bulk sale of certain inventory items. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses increased $1.5 million, or 38.1%, to $5.3 million for the three months ended June 30, 1998 from $3.8 million for the three months ended June 30, 1997. SG&A expenses as a percentage of revenues increased to 17.8% for the three months ended June 30, 1998 from 13.6% for the three months ended June 30, 1997. SG&A expenses increased primarily due to the inclusion of SG&A expenses from Audio International, Inc. which was acquired on November 14, 1997. INTEREST EXPENSE. Interest expense decreased $0.3 million, or 44.7%, to $0.4 million for the three months ended June 30, 1998 from $0.7 million for the three months ended June 30, 1997. The decrease resulted from the repayment of a substantial portion of the Company's debt with the net proceeds from the Follow-On Equity Offering in April 1998. OTHER EXPENSE, NET. Other expenses, not including interest, increased $0.4 million to $0.6 million for the three months ended June 30, 1998. The primary reason for the increase was the inclusion of costs associated with the terminated debt offering. PROVISION FOR INCOME TAXES. During the three months ended June 30, 1998, the Company increased its provision for income taxes by $0.5 million primarily due to higher income before taxes, net of a reduction in its deferred tax valuation allowance of $0.1 million to reflect the book benefit of federal net operating loss carryforwards not previously recognized. Approximately $2.2 million of the net operating loss carryforwards are available at June 30, 1998 for federal income tax purposes. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the three months ended June 30, 1998, the Company did not have any extraordinary charges. During the three months ended June 30, 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 net proceeds from its initial public offering. The extraordinary charge 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. NET INCOME (LOSS). Net income increased $2.3 million to $1.7 million for the three months ended June 30, 1998 from a net loss of $0.6 million for the three months ended June 30, 1997. The increase is a result of the factors described above. 11 NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable to common stockholders increased $4.6 million to $1.7 million for the three months ended June 30, 1998 from a net loss applicable to common stockholders of $2.9 million for the three months ended June 30, 1997. The increase resulted from the factors described above, as well as the absence of the $2.2 million increase in the redemption value of mandatorily redeemable common stock warrants during the three months ended June 30, 1997. PRO FORMA INCOME, AS ADJUSTED. Pro forma income, as adjusted before extraordinary item, increased $0.1 million to $1.7 million for the three months ended June 30, 1998 from $1.6 million for the three months ended June 30, 1997 as a result of the factors described above. Pro forma income, as adjusted, reflects the Recapitalization and the IPO and the application of the net proceeds therefrom, as if each had occurred as of January 1, 1997 (Note 3). The pro forma results exclude an extraordinary charge incurred in April 1997 as a result of the repayment of debt with the net offering proceeds. BOOKINGS AND BACKLOG. Bookings increased $4.8 million, or 14.9%, to $33.1 million for the three months ended June 30, 1998 compared to $28.3 million for the same period in 1997. The increase in bookings for 1998 includes $4.4 million attributable to Audio International, Inc., which was acquired in November 1997. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 REVENUES. Revenues increased $4.7 million, or 8.7%, to $59.0 million for the six months ended June 30, 1998 from $54.3 million for the six months ended June 30, 1997. Revenues increased primarily due to the inclusion of $9.0 million of revenues from Audio International, Inc. which was acquired on November 14, 1997. This revenue increase was partially offset by a decrease in sales to Boeing of $2.6 million, which management believes was primarily related to Boeing's production difficulties, and a decrease in sales to Matsushita of $2.2 million. GROSS PROFIT. Gross profit increased $5.5 million, or 41.5%, to $18.7 million for the six months ended June 30, 1998 from $13.2 million for the six months ended June 30, 1997. Gross profit as a percentage of revenues increased to 31.7% for the six months ended June 30, 1998 from 24.4% for the six months ended June 30, 1997. The increase in gross profit was attributable to increased sales of higher margin products and lower material costs, as well as $0.8 million realized on the bulk sale of certain inventory items. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses increased $3.0 million, or 41.0%, to $10.2 million for the six months ended June 30, 1998 from $7.2 million for the six months ended June 30, 1997. SG&A expenses as a percentage of revenues increased to 17.3% for the six months ended June 30, 1998 from 13.3% for the six months ended June 30, 1997. SG&A expenses increased primarily due to the inclusion of SG&A expenses from Audio International, Inc. which was acquired on November 14, 1997. OPERATING INCOME. Operating income increased $2.2 million to $7.8 million for the six months ended June 30, 1998 from $5.6 million for the six months ended June 30, 1997. Operating income as a percentage of revenues increased to 13.2% for the six months ended June 30, 1998 from 10.3% for the six months ended June 30, 1997. The increase in operating income resulted from the factors described above. INTEREST EXPENSE. Interest expense decreased $1.1 million, or 48.8%, to $1.2 million for the six months ended June 30, 1998 from $2.3 million for the six months ended June 30, 1997. The decrease resulted from the repayment of a substantial portion of the Company's debt with the net proceeds from the Follow-On Equity Offering in April 1998. OTHER EXPENSE, NET. Other expense, not including interest expense, increased $0.5 million to $0.6 million during the six months ended June 30, 1998. The primary reason for the increase was the inclusion of costs associated with the terminated debt offering. 12 PROVISION FOR INCOME TAXES. During the six months ended June 30, 1998, the Company increased its provision for income taxes by $1.5 million primarily due to higher income before taxes, net of a reduction in its deferred tax valuation allowance of $0.1 million to reflect the book benefit of federal net operating loss carryforwards not previously recognized. Approximately $2.2 million of the net operating loss carryforwards are available at June 30, 1998 for federal income tax purposes. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the six months ended June 30, 1998, the Company did not have any extraordinary charges. During the six months ended June 30, 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 its initial public offering. NET INCOME. Net income increased $3.4 million to $3.4 million for the six months ended June 30, 1998 from a nominal net income for the six months ended June 30, 1997. The increase is a result of the factors described above. NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable to common stockholders increased $6.0 million to $3.4 million for the six months ended June 30, 1998 from a net loss applicable to common stockholders of $2.6 million for the six months ended June 30, 1997. The increase resulted from the factors described above, as well as the absence of the $2.2 million increase in the redemption value of mandatorily redeemable common stock warrants during the six months ended June 30, 1997. PRO FORMA INCOME, AS ADJUSTED. Pro forma income, as adjusted before extraordinary item, increased $0.4 million to $3.4 million for the six months ended June 30, 1998 from $3.0 million for the six months ended June 30, 1997 as a result of the factors described above. Pro forma income, as adjusted, reflects the Recapitalization and the IPO and the application of the net proceeds therefrom, as if each had occurred as of January 1, 1997 (Note 3). The pro forma results exclude an extraordinary charge incurred in April 1997 as a result of the repayment of debt with the net offering proceeds. BOOKINGS AND BACKLOG. Bookings increased $6.1 million, or 11.0%, to $61.8 million for the six months ended June 30, 1998 compared to $55.7 million for the same period in 1997. The increase in bookings for 1998 includes $9.4 million attributable to Audio International Inc., which was acquired in November 1997. As of June 30, 1998, the Company had a sales order backlog of $84.5 million which includes $31.4 million from Avtech Corporation, compared to $49.0 million as of December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 1998, the Company used cash for operating activities of $0.8 million. The Company used $5.8 million 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 for long-term contracts. Accounts receivable increased $2.2 million for the six months ended June 30, 1998 due to higher sales. Inventories increased by $3.1 million for the six months ended June 30, 1998, primarily in anticipation of higher sales during the remainder of 1998. Accounts payable decreased by $1.5 million for the six months ended June 30, 1998, primarily as a result of a change to a new gold supplier that offered substantial discounts for prompter payment. Net cash used in investing activities was $86.7 million during the six months ended June 30, 1998. Of this amount, $83.6 was used for the Avtech acquisition and $2.1 million for the Dettmers acquisition (both net of cash acquired). The total purchase price for the Dettmers acquisition included additional contingent consideration with a maximum of $2.0 million payable between 1999 and 2002. Capital expenditures of $1.1 million were made during the six months ended June 30, 1998. The Company anticipates total capital expenditures of approximately $4.5 million in 1998. Net cash provided by financing activities was $89.6 million for the six months ended June 30, 1998. On April 1, 1998, the Company completed the Follow-On Equity Offering and sold 2,206,117 shares of 13 common stock for $17.00 per share. Net proceeds from the Follow-On Equity Offering totaled $34.8 million. The Company also increased its borrowings under its revolving line of credit by $85.7 million for the six months ended June 30, 1998 to finance the acquisitions of Avtech Corporation and Dettmers Industries Inc. on June 26, 1998 and June 30, 1998, respectively. Cash increased $2.1 million for the six months ended June 30, 1998 due to the factors described above. In May 1998, the Company amended its existing Credit Facility, which expires in 2002, to further increase the revolving line to $105.0 million. The amendment was subject to the fulfillment of certain conditions, including the consummation of the Avtech acquisition, with mandatory reductions of up to $45.0 million from the proceeds of certain indebtedness, and automatic reductions on the last day of each month in the monthly amount of $0.5 million from October 31, 1998 through May 31, 1999 and $1.0 million thereafter (See Note 6 to the consolidated financial statements). Availability under the Credit Facility was $12.2 million and working capital aggregated $46.7 million as of June 30, 1998. The Company believes that the current levels of working capital and amounts available under the Credit Facility will enable it to meet its foreseeable short-term and long-term liquidity requirements. ANTICIPATED CHARGE FOR DEFINITIVE MERGER AGREEMENT AND TENDER OFFER FEES AND EXPENSES The Company expects to incur various expenses estimated to range between $1.5 million and $2.0 million (pre-tax) if the tender offer and acquisition are consummated (See Note 10 to the consolidated financial statements). Under certain circumstances, the Company may incur an additional $6.9 million (pre-tax) of fees if the Company terminates the tender offer and proposed acquisition. While the exact timing, nature and amount of these expenses are subject to change, the Company anticipates a one-time pre-tax charge will be recorded in the quarter in which the tender offer is either consummated or terminated, possibly resulting in a net loss for such quarter. The Company believes the fees and expenses will not have a significant adverse effect on its liquidity or working capital. FORWARD-LOOKING STATEMENTS Management's discussion and analysis of financial condition and results of operations that are not historical facts are forward-looking statements. Such forward-looking statements in this document are made pursuant to the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements involve a number of risks and uncertainties. For a discussion of certain risks and uncertainties that may affect the actual results of any forward-looking information contained herein, refer to the section entitled "Risk Factors" included in Item 1, "Description of Business," in the Company's Form 10-K for the year ended December 31, 1997. 14 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 5, 1998, the Company and R. Jack DeCrane, its Chief Executive Officer, were served in an action filed in state court in California by Robert A. Rankin claiming that he is due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith. The action seeks not less than $1.5 million plus punitive damages and costs. The action is in the early stages of development and discovery has not yet been conducted; the Company intends to vigorously defend against the claim. Mr. Rankin has been placed on administrative leave with pay. The Company's board of directors has appointed John R. Hinson, the Company's Vice President of Planning & Business Development, as the interim Chief Financial Officer and acting Secretary of the Company. On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware Chancery Court on behalf of a purported class of stock holders of the Company against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc., and certain of its affiliates, alleging, among other things, that the directors had breached their fiduciary duties in connection with entering into the Merger Agreement described in Item 5, "Other Information," below. See Item 5 for a description of the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 17, 1998 the Company held its annual meeting of stockholders. R. G. MacDonald and Mitchell I. Quain, incumbent members of the board of directors, were re-elected as Class I directors for a term of three years (or until their respective successors are duly elected and qualified). The terms of office of each of the remaining directors, James R. Bergman, Paul H. Cascio, R. Jack DeCrane and Jonathan A. Sweemer, continued after the meeting. A total of 5,422,672 shares were voted at the meeting, in person or by proxy, as follows:
ELECTION OF MR. MACDONALD ELECTION OF MR. QUAIN - ----------------------------------- ----------------------------------- For 5,412,572 For 5,422,472 Withhold 10,100 Withhold 200 ---------- ---------- Total 5,422,672 Total 5,422,672 ---------- ---------- ---------- ----------
No other business was submitted to the stockholders for a vote at the annual meeting. ITEM 5. OTHER INFORMATION DEFINITIVE MERGER AGREEMENT; TENDER OFFER On July 17, 1998, the Company announced that it had signed a definitive merger agreement (the "Merger Agreement") with an affiliate of DLJ Merchant Banking Partners II, which contemplates a cash tender offer by the affiliate for all of the shares of common stock of the Company at $23.00 per share. As a result of the pending tender offer, the Company terminated a debt offering and recorded a $600,000 pre-tax charge as of June 30, 1998 for the estimated costs incurred. On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware Chancery Court on behalf of a purported class of stockholders of the Company against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and certain of its affiliates, alleging, among other things, that the directors had breached their fiduciary duties by entering into the Merger Agreement without engaging in an auction or "active market check" and, therefore, did not adequately inform themselves in agreeing to terms that are unfair and inadequate from the standpoint of the Company's stockholders. On July 24, 1998, the plaintiffs amended the complaint by repeating the allegations in the initial complaint and adding allegations that: 15 (i) the Company's Solicitation/Recommendation Statement of Schedule 14D-9 (the "14D-9") contained material misstatements or omissions including: (a) inadequate disclosure of any future equity participation by management after the transaction is consummated; (b) no disclosure of any efforts to shop the Company; (c) incomplete financial information and projections; and (d) incomplete disclosure of the basis for the fairness opinion delivered by the Company's financial advisor; (ii) the termination fees are unreasonable; and (iii) the directors who approved the Merger Agreement had conflicts of interest. The complaint seeks a preliminary and permanent injunction barring defendants from proceeding with the transaction or, if the transaction is consummated, an order rescinding it or awarding damages, together with interest, and an award of attorneys' fees and litigation expenses. The Company believes the action is without merit. The Company expects to incur various expenses estimated to range between $1.5 million and $2.0 million (pre-tax) in connection with the tender offer. Under certain circumstances, the Company may incur an additional $6.9 million (pre-tax) of fees if the Company terminates the tender offer and proposed acquisition. While the exact timing, nature and amount of these expenses are subject to change, the Company anticipates a one-time pre-tax charge will be recorded in the quarter in which the tender offer is either consummated or terminated, possibly resulting in a net loss for such quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 20.1 Final Prospectus of the Company dated April 2, 1998 (incorporated by reference to the Company's Form 10-Q filed May 14 1998, Registration No. 333-47457) * 27 Financial Data Schedule ** 99.7 Solicitation/Recommendation Statement dated July 22, 1998 (incorporated by reference to the Company's Schedule 14D-9 filed July 22, 1998) *
- ------------------------ * Previously filed ** Filed herewith b. Reports on Form 8-K On June 5, 1998, the Company filed a Form 8-K Current Report with respect to the signing of a definitive agreement to acquire Avtech Corporation. On July 10, 1998, the Company filed a Form 8-K Current Report with respect to its consummation of the acquisitions of Avtech Corporation and Dettmers Industries, Inc. On July 21, 1998, the Company filed a Form 8-K Current Report with respect to the Company signing a definitive merger agreement with an affiliate of DLJ Merchant Banking Partners II, which contemplates a cash tender offer by the affiliate for all of the shares of common stock of the Company at $23.00 per share. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DECRANE AIRCRAFT HOLDINGS, INC. (Registrant) August 11, 1998 By: /s/ JOHN R. HINSON ----------------------------------------- Name: John R. Hinson Title: INTERIM CHIEF FINANCIAL OFFICER AND ACTING SECRETARY
17 EX-9 3 EXHIBIT 9 Exhibit 9 IN THE COURT OF CHANCERY IN THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY - -----------------------------------------x TAAM Associates, Inc. : Plaintiff, : v. : R. JACK DeCRANE, R.G. MACDONALD, : CHARLES H. BECKER, ROBERT A. RANKIN, : C.A. NO. 16551-NC ROGER L. KELLER, JAMES R. BERMAN, : PAUL H. CASCIO, MITCHELL I. QUAIN, : JONATHAN A. SWEEMER, DeCRANE : AIRCRAFT HOLDINGS, INC., DONALDSON : LUFKIN JENRETTE INC. AND DeCRANE : ACQUISITION CO. : Defendants. : - -----------------------------------------x AMENDED CLASS ACTION COMPLAINT Plaintiff alleges upon information and belief, except for paragraph 1 hereof, which is alleged upon knowledge, as follows: 1. Plaintiff has been the owner of the common stock of DeCrane Aircraft Holdings, Inc. ("DeCrane Aircraft" or the "Company") since prior to the transaction herein complained of and continuously to date. 2. Defendant DeCrane Aircraft is a corporation duly organized and existing under the laws of the State of Delaware. The Company is a leader in the manufacturing and integration of avionics components primarily for the commercial aircraft market, with the balance for the corporate, military and regional airplane sectors. 3. Defendant Donaldson, Lufkin & Jenrette ("DLJ") is a Delaware corporation based in New York, New York and is a leading integrated investment and merchant bank servicing institutional corporate, governmental individual clients. 4. Defendant DeCrane Acquisition Co. ("DeCrane Acquisition") is a Delaware corporation and is owned or controlled by defendant DLJ and/or its affiliates. 5. Defendant R. Jack DeCrane, the founder of the Company, is Chairman of the Company's Board of Directors. 6. Defendant R.G. MacDonald is Vice Chairman of t he Company's Board of Directors and was President of the Company from April 1993 to December 1996. 7. Defendant Charles H. Becker is President, Chief Operating Officer and Director of the Company. 8. Defendant Robert A. Rankin is Chief Financial Officer and a Director of the Company. 9. Defendant Roger L. Keller is Group Vice President of Systems and a Director of the Company. 10. Defendant James R. Bergman, is one of the founders and a Director of the Company and is the nominee of DSV Partners IV, which owns 6.5% of the Company's outstanding stock. 11. Defendant Paul H. Cascio is a Director of the Company and is general partner of Brantley Venture Partners II, L.P., which owns or controls 6.5% of the Company's outstanding common stock. 12. Defendant Jonathan A. Sweemer is the nominee of Nassau Capital Partners, L.P., which owns or controls 11.6% of the Company's outstanding common stock. 2 13. Defendant Mitchell I. Quain is a Director of the Company. 14. The Individual Defendants, who collectively own approximately 22.5% of the Company's outstanding common stock, are in a fiduciary relationship with Plaintiff and the other public stockholders of DeCrane Aircraft and owe them the highest obligations of good faith and fair dealing. CLASS ACTION ALLEGATIONS 15. Plaintiff brings this action on its own behalf and as a class action, pursuant to Rule 23 of the Rules of the Court of Chancery, on behalf of all common stockholders of the Company (except the defendants herein and any person, firm, trust, corporation, or other entity related to or affiliated with any of the defendants) and their successors in interest, who are or will be threatened with injury arising from defendants' actions as more fully described herein. 16. This action is properly maintainable as a class action because: (a) The class is so numerous that joinder of all members is impracticable. As of May 11, 1998, there were approximately 1,524,740 shares of DeCrane Aircraft common stock outstanding owned by hundreds, if not thousands, or record and beneficial, holders, (b) There are questions of law and fact which are common to the class including, inter alia, the following: (i) whether defendants have breached their fiduciary and other common law duties owed by them to plaintiff and the members of the class; and (ii) whether the class is entitled to injunctive relief or damages as a result of the wrongful conduct committed by defendants. (c) Plaintiff is committed to prosecuting this action and has retained competent counsel experienced in litigation of this nature. The claims of the plaintiff are 3 typical of the claims of other members of the class and plaintiff has the same interest as the other members of the class. Plaintiff will fairly and adequately represent the class. (d) Defendants have acted in a manner which affects plaintiff and all members of the class alike, thereby making appropriate injunctive relief and/or corresponding declaratory relief with respect to the class of a whole. (e) The prosecution of separate actions by individual members of the Class would create a risk of inconsistent or varying adjudications with respect to individual members of the Class, which would establish incompatible standards of conduct for defendants, or adjudications with respect to individual members of the Class which would, as a practical matter, be dispositive of the interests of other members or substantially impair or impede their ability to protect their interests. SUBSTANTIVE ALLEGATIONS BACKGROUND 17. DeCrane Aircraft's recent operating results have been exceptional. In a press release dated March 3,1998 announcing its results for the fourth quarter and year ended December 31, 1997, the Company reported that fourth quarter revenue increased 27.1% and pro forma earnings per share had increased 57.9% over the same period in the prior year. For the year, the Company reported that revenues advanced 67.3% and pro forma earnings per share rose 120%. The Company has continued to produce strong revenue and earnings growth this year. For the first quarter ending March 31, 1998, the Company reported that revenues advanced 11.5% to $29.1 million from $26.1 million for the first quarter of 1997. Gross profit improved 49.5% to $9 million from $6 million over the first quarter in the prior year, while the Company's gross margins continued to improve to 30.9% percent from 23% in the prior period. Significantly, the Company's 4 net income for the first quarter of 1998 increased 168.4% to $1.7 million from $0.6 million in the same period in the prior year. Defendant DeCrane commented that "our acquisition strategy together with our overall business approach of carefully focusing on product and service niches we can dominate is working. We remain on course to deliver strong results for the balance of the year." 18. Despite these spectacular results, DeCrane Aircraft's stock price has languished. Given the Company's strong financial performance, its prospects for future growth and expansion are substantial, and the intrinsic value of DeCrane Aircraft is far greater then that reflected in the market price of DeCrane Aircraft's stock. DLJ Acts to Acquire DeCrane Aircraft 19. On July 17, 1998, defendants DeCrane Aircraft and DLJ announced that DeCrane Aircraft and an affiliate of DLJ Merchant Banking Partners II, DeCrane Acquisition Co., a Delaware corporation ("DeCrane Acquisition"), had entered into a definitive merger agreement pursuant to which DeCrane Acquisition will acquire DeCrane Aircraft in a transaction valued at approximately $173 million. DLJ Merchant Banking Partners II, is controlled by defendant DLJ. 20. On or about July 22, 1998, DeCrane Acquisition commenced a cash tender offer for all of the Company's outstanding common shares at $23 per share by filing an Offer to Purchase on Schedule 14D-1 (the "14D-1) with the United States Securities and Exchange Commission ("SEC"). On the same day, the Individual Defendants caused DeCrane Aircraft to file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (the "14D-9"). The two filings purported to describe, inter alia, the merger transaction, the history of the negotiations between the companies, the opinion of DeCrane Aircraft's financial advisor and 5 certain other purportedly relevant information. The 14D-9 was apparently mailed to DeCrane Aircraft shareholders shortly after dissemination of the 14D-1. The 14D-9 Fails to Disclose Material Information A. The Equity Participation Of Management Following The Tender Offer is Not Disclosed 21. The 14D-9 fails to disclose material information necessary for DeCrane Aircraft shareholders to make an informed decision. For example, buried within the 14D-1 is the statement "It is DLJMB's [DLJ Merchant Banking Partners II, L.P.] intention to afford certain key members of the Company's management the opportunity to purchase an equity participation in Parent [DeCrane Holdings Co]," which is owned and controlled by DLJ and its affiliates. The 14D-1 also states "No agreement has been entered into between DLJMB, Parent or Purchaser, on the one hand, and management of the Company, on the other, regarding such equity participation, and no discussions or negotiations regarding such equity participation are currently anticipated to occur during the pendency of the Offer." The 14D-9, however, is completely silent with respect to the proposed "equity participation" of senior management in the successor company once DeCrane Aircraft's public shareholders have been eliminated. The 14D-9 fails to disclose the identities of the "certain key members of the Company's management" who will be granted the right to equity participation in the successor company, and whether any of these "key members" are also directors upon whose recommendation to accept the tender offer stockholders are being asked to rely. Presumably, there were discussions between defendant DLJ and senior management prior to the execution of the merger agreement regarding the equity participation of senior management in the successor company. However, the 14D-9 fails to disclose what the substance of these discussions was and when and on what terms senior management will be 6 permitted to reassert their ownership interests in the Company. Absent this information, DeCrane Aircraft's public shareholders are unable to make an informed decision about the fairness and adequacy of the proposed buy-out at $23 per share. B. The Failure To Shop The Company 22. The 14D-9 fails to disclose the efforts, if any, of the DeCrane Aircraft Board to comply with their fiduciary duties to solicit indications of interest or competing bids from third parties in this change-of-control transaction. On July 15, 1998, a mere two days before the merger agreement was executed, the Board of Directors "broadened the scope of the authority of the Special Committee to consider acquisition proposals and strategic alternatives in addition to a business combination with DLJ. However, it is not disclosed whether this expanded mandate authorized the Special Committee or its financial advisor to actively solicit, and not merely "consider", competing bids for the Company and if it did, what the results of these efforts were. Additionally, if the Special Committee and/or its financial advisor were not authorized to solicit competing bids, the 14D-9 fails to provide any explanation or rationale for this apparent failure to explore other strategic alternatives. 23. Additionally, the 14D-9 discloses that, after defendants announced the proposed acquisition, the Company received an indication of interest from another potential acquiror. However, no information is provided concerning the terms of this alternative acquisition, who made the proposal, or the extent to which it was pursued. Considering the apparent failure of the Board to actively pursue strategic alternatives, such an omission as inexcusable. 7 24. Attached to the 14D-9 is a letter dated July 21, 1998, from Warburg Dillon Reed ("Warburg"), the Special Committee's financial advisor, to the Company's Board of Directors (the "fairness opinion") opining that the proposed transaction is fair to DeCrane Aircraft's public shareholders from a financial point of view. The fairness opinion states "You have not asked us to solicit or otherwise evaluate any other offers that may be available to the Company." 25. Given the lack of information provided concerning the potential value to be received in competing bids, investors are unable to consider the proposed acquisition on an informed basis because they have no way of knowing if the proposed acquisition price is low in relation to what DeCrane Aircraft could receive in an open market auction or, at the very least, by soliciting other bids. Defendants fail to disclose the Company's purported rationale in directing its financial advisor not to conduct a formal auction and not to solicit competing bids for DeCrane Aircraft. C. The Absence of Current Financial Information or Detailed Projections 26. The 14D-1 contains historical information concerning the Company only through the three months ended March 31, 1997. The failure to provide more recent financial information on which the Company's shareholders can base a decision whether to tender or not is inexcusable. DeCrane Aircraft shareholders are being asked to make an irrevocable decision regarding their investment in DeCrane Aircraft on the basis of incomplete information and the 14D-9, by omitting any financial information concerning the Company, fails to cure this omission. 8 27. The 14D-1 discloses that DeCrane Aircraft provided defendant DLJ and its representatives with financial projections. The 14D- 1, however, merely provides a bare-bones summary of these projections. Moreover, this omission is not cured by the 14D-9 which contains no information at all regarding the Company's projections and prospects, despite the fact that these projections were provided to DLJ and its affiliates. This information is vital to the ability of DeCrane Aircraft's public shareholders to evaluate the $23 per share buyout price properly. D. The Incomplete Description Of the Banker's Financial Analyses 28. The fairness opinion recites a litany of various documents relied on by Warburg in rendering the fairness opinion, including "certain internal financial information and other data relating to the business and prospects of the Company, including financial estimates, that were provided to us by the Company and are not publicly available, [and] certain internal financial information and other data relating to the business, including financial estimates that were provided to us by the management of the Company and are not publicly available." Yet none of this information is provided to shareholders or accounted for in the fairness opinion. 29. Neither the 14D-9 nor the fairness opinion contains a discussion of the various financial analysis presumably performed by Warburg. The 14D-9 and the fairness opinion are silent with respect to what valuation methodologies were employed by Warburg in rendering its fairness opinion so that shareholders cannot determine whether there was any deviation from standard investment banking practices. Accordingly, DeCrane Aircraft shareholders cannot determine from these materials what the intrinsic value of the shares is and why the proposed acquisition by DLJ is preferable to other alternatives or is fair. 9 The Termination Fee Provisions Are Coercive 30. In order to assure success for the DLJ acquisition and thereby trigger the acceleration of options described below which confers windfall profits on certain of the Individual Defendants, the Individual Defendants have agreed to termination provisions that would render it prohibitively expensive for anyone else to acquire the Company. 31. According to the 14D-1, the merger agreement provides that i: DeCrane Aircraft terminates the merger agreement, and/or accepts a superior acquisition proposal from a third party within one year, then the Company shall pay to DLJ a termination fee of $6.9 million. The Company must also reimburse DLJ for the expenses it incurs, up to $4.25 million. Accordingly, the Company is obligated to pay u to $11.15 million in termination fees and expenses, representing approximately 6.5% of the total acquisition price, if a superior proposal is accepted. 32. As structured, the termination fee provisions, representing 6.5%o f the acquisition price, impose unreasonably severe financial costs on a competing bidder for control of DeCrane Aircraft thus discouraging and penalizing any buy-out proposal which would enhance or maximize shareholder value, including the competing proposal the Company received since announcing the proposed acquisition by DLJ. The Individual Defendants Have Substantial Conflicts With The Class 33. The merger agreement creates disabling conflicts of interest by conferring extraordinary benefits on certain of the Individual Defendants. Pursuant to the merger agreement, all stock options, whether or not then vested or exercisable, will be cancelled and the holder thereof will be entitled to a lump sum cash payment equal to the excess of $23.00 per 10 share over the exercise price of the option multiplied by the number of shares available to be purchased under the options. Accordingly, defendants DeCrane, MacDonald, Becker, Rankin and Keller will receive $3,958,967, $1,364,244, $1,100,064, $1,101,683 and $989,332, respectively, if the proposed merger is completed. 34. The Special Committee was comprised of defendants Bergman, Cascio and Quain. Defendants Bergman and Cascio are the nominees of the venture capital funds DSV Partners IV ("DSV") and Brantley Venture Partners II, L.P. ("Brantley"). Defendants Berman and Cascio are also the general partners of these venture capital limited partnership interests, which obtained their shares of DeCrane Aircraft prior to and at prices substantially below the $12 per share price in the Company's initial public offering in April 1997. Accordingly, defendants Bergman and Cascio have substantial conflicts of interest with the public shareholders of DeCrane Aircraft. As general partners of DSV and Brantley, defendants Bergman and Cascio are obligated to achieve an acceptable rate of return for those limited partnerships and to liquidate that investment once the rate of return is realized, an objective which can be realized through the acquisition by DLJ. The obligations of defendants Bergman and Cascio to DSV and Brantley and their investors may conflict with their fiduciary obligations as directors of DeCrane Aircraft to enhance and protect the interest of the Company's public shareholders. Defendants Have Failed To Maximize Shareholder Value 35. By entering into the agreement with DLJ, the DeCrane Aircraft Board has initiated a process to sell the Company which imposes heightened fiduciary responsibilities and requires enhanced scrutiny by the Court. However, the terms of the proposed transaction were not the result of an auction process or active market check; they were arrived at without a full 11 and thorough investigation by the Individual Defendants; and they are intrinsically unfair and inadequate from the standpoint of the DeCrane Aircraft shareholders. 36. The Individual Defendants failed to make an informed decision, as no market check of the Company's value was obtained. In agreeing to the merger, the Individual Defendants failed to properly inform themselves of DeCrane Aircraft's highest transactional value. 37. The Individual Defendants have violated the fiduciary duties owed to the public shareholders of DeCrane Aircraft. The Individual Defendants' agreement to the terms of the transaction, its timing, and the failure to auction the Company and invite other bidders, and defendants' failure to provide a market check demonstrate a clear absence of the exercise of due care and of loyalty to DeCrane Aircraft's public shareholders. 38. The Individual Defendants have violated their fiduciary duties to the public shareholders of DeCrane Aircraft and agreed to the proposed transaction in order to maintain and enhance their own substantial positions and perquisites. Indeed, the joint press release announcing the proposed transaction stated: Thomspon Dean, Managing Partner of DLJ Merchant Banking Partners II, said, "We are excited to invest in a company with such rapid growth prospects and industry leading products. We look forward to providing management with the capital to aggressively grow these businesses through both internal investment and acquisitions." (emphasis added). 39. The proposed bid is a attempt by defendants to benefit themselves from the transaction at the expense of DeCrane Aircraft's public stockholders. The proposed plan will, for inadequate consideration, deny plaintiff and the other members of the class their right to share proportionately in the future success of DeCrane Aircraft and its valuable assets, while 12 permitting DLJ and certain members of the Company's management to reap huge benefits from the transaction. 40. The Individual Defendants' fiduciary obligations under these circumstances require them to: (a) Undertake an appropriate evaluation of DeCrane Aircraft's net worth as merger/acquisition candidate; and (b) Engage in a meaningful auction with third parties in an attempt to obtain the best value for DeCrane Aircraft's public shareholders. 41. The Individual Defendants have breached their fiduciary duties by reason of the acts and transactions complained of herein, including their decision to be acquired by DLJ without making the requisite effort to obtain the best offer possible. 42. Plaintiff and other members of the Class have been and will be damaged in that they have not and will not receive their fair proportion of the value of DeCrane Aircraft's assets and business, and will be prevented from obtaining fair and adequate consideration for their shares of DeCrane Aircraft common stock. 43. The consideration to be paid to class members in the proposed merger is unfair and inadequate because, among other things: (a) The intrinsic value of DeCrane Aircraft's common stock is materially in excess of the amount offered for those securities in the merger giving due consideration to the anticipated operating results, net asset value, cash flow, and profitability of the Company; (b) The merger price is not the result of an appropriate consideration of the value of DeCrane Aircraft because the DeCrane Aircraft Board approved the proposed 13 merger without undertaking steps to accurately ascertain DeCrane Aircraft's value through open bidding or at least a "market check mechanism;" and (c) By entering into the agreement with DLJ, the Individual Defendants have allowed the price of DeCrane Aircraft stock to be capped, thereby depriving plaintiff and the Class of the opportunity to realize any increase in the value of DeCrane Aircraft stock. 44. By reason of the foregoing, each member of the Class will suffer irreparable injury and damages absent injunctive relief by this Court. DLJ I An Aider And Abettor 45. Defendant DLJ has knowingly aided and abetted the breaches of fiduciary duty committed by the other defendants to the detriment of DeCrane Aircraft's public shareholders. Indeed, the proposed merger could not take place without the active participation of DLJ. DLJ has agreed to the structure of the transaction and to maintain and enhance the positions and compensation of the Individual Defendants in the successor company to assure their agreement and cooperation in and to a transaction which will not maximize value for the Company's public shareholders. DLJ has so agreed to enable it and its affiliates to acquire the Company at the lowest possible price. Furthermore, DLJ and its affiliates are the intended beneficiaries of the wrongs complained of and would be unjustly enriched absent relief in this action.; 46. Plaintiff and other members of the Class have no adequate remedy at law. WHEREFORE, plaintiff and members of the Class demand judgment against defendants as follows: 14 A. Declaring that this action is properly maintainable as a class action and certifying plaintiff as the representative of the Class; B. Preliminarily and permanently enjoining defendants and their counsel, agents, emp0loyees and all persons acting under, in concert with, or for them, from proceeding with, consummating, or closing the proposed transaction; C. In the event that the proposed transaction is consummated, rescinding it and setting it aside, or awarding rescissory damages to the Class; D. Awarding compensatory damages against defendants, individually and severally, in an amount to be determined at trial, together with pre-judgment and post-judgment interest at the maximum rate allowable by law, arising from the proposed transaction; E. Awarding plaintiff its costs and disbursements and reasonable allowances for fees of plaintiff's counsel and experts and reimbursement of expenses; and F. Granting plaintiff and the Class such other and further relief as the Court may deem just and proper. ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A. By: /s/ ------------------------------------- Suite 1401, Mellon Bank Center P.O. Box 1070 Wilmington, Delaware 19899-1070 (302) 656-4433 Attorneys for Plaintiff OF COUNSEL: BERNSTEIN LIEBHARD & LIFSHITZ 274 Madison Avenue New York NY 1016 (212) 779-1414 July 24, 1998 15 EX-10 4 EXHIBIT 10 Exhibit 10 MEMORANDUM OF UNDERSTANDING This MEMORANDUM OF UNDERSTANDING is entered into as of August 18, 1998 among the plaintiff ("Plaintiff") in the Action (as defined herein), and DeCrane Aircraft Holdings, Inc. ("DeCrane"), members of DeCrane's Board of Directors (including directors constituting the special committee ("Special Committee")), Donaldson Lufkin Jenrette, Inc. ("DLJ") and DeCrane Acquisition Co. ("DeCrane Acquisition") (collectively, "Defendants") by the undersigned attorneys. Except as otherwise stated in this Memorandum of Understanding, capitalized terms herein have the meaning given them in the Agreement and Plan of Merger dated as of July 16, 1998 among DeCrane and DeCrane Acquisition (the "Merger Agreement"). WHEREAS, there is now pending an action in the Court of Chancery of the State of Delaware, styled Taam Associates, Inc. v. DeCrane, et al., C.A. No. 16551-NC ("the Action "); and WHEREAS, the Action was filed as a putative class action on behalf of the public holders of DeCrane common stock, relating to the proposed merger (the "Transaction") of DeCrane into DeCrane Acquisition, as set forth in the Merger Agreement; and WHEREAS, the Action names as defendants DeCrane, DLJ, DeCrane Acquisition, and individual members of the DeCrane Board of Directors; and WHEREAS, the Action seeks declaratory and injunctive relief, monetary damages and/or rescission with respect to the Transaction based upon the allegation, inter alia, that the conduct of the members of the DeCrane Board of Directors in connection with the Transaction constitutes a breach of their fiduciary duties, aided and abetted by DLJ; and WHEREAS, the defendants deny that they have committed or have attempted to commit any violation of law or breach of duty, including breach of any duty to DeCrane shareholders, or have otherwise acted in any improper manner; and WHEREAS, following document production and arms-length negotiations between the parties, counsel for the parties have reached an agreement in principle providing for the proposed settlement of the Action on the terms and conditions set forth below (the "Settlement"); and WHEREAS, counsel for the parties believe that the proposed Settlement is in the best interests of the public shareholders of DeCrane; NOW THEREFORE, IT IS HEREBY AGREED IN PRINCIPLE AS FOLLOWS: 1. Principal terms of Settlement. Subject to the additional conditions, terms and limitations described herein, as a result of the bringing of the Action, the parties agree in principle as follows: a. Regardless of whether DeCrane is legally required to do so, DeCrane agrees that it will promptly amend the Schedule 14D-9 dated July 22, 1998 to provide additional disclosure concerning further contacts and negotiations with other potential acquirers of DeCrane. b. DeCrane also agrees that it will promptly amend the Schedule 14D-9 to provide additional disclosure regarding the financial analyses presented to and considered by the Special Committee in evaluating the Transaction, and the Special Committee's conclusions regarding later assertions by DeCrane's then-chief financial officer relating to the fairness opinion received by DeCrane from its financial advisor. c. DeCrane also agrees that it will promptly amend the Schedule 14D-9 to provide additional disclosure regarding financial projections disclosed to DLJ or other potential acquirers of DeCrane. d. DeCrane also agrees that it will promptly amend the Schedule 14D-9 to include information regarding the financial results of DeCrane for the quarter ended June 30, 1998. e. DeCrane agrees that it will mail the amended Schedule 14D-9 to DeCrane shareholders as soon as practicable. f. Reasonably promptly following the execution of this Memorandum of Understanding by the parties, DeCrane shall publicly disclose the terms of the proposed Settlement set forth herein in a manner deemed reasonable by DeCrane. 2. Stipulation of Settlement. The parties to the Action will attempt in good faith to agree upon and execute an appropriate Stipulation of Settlement (the "Stipulation") and such other documentation as may be required in order to obtain Final Court Approval (as defined below) of the Settlement and the dismissal of the Action upon the terms set forth in this Memorandum of Understanding (collectively, the "Settlement Documents"). The Stipulation will expressly provide, inter alia, that Plaintiff will petition the Court for certification of a non-opt out settlement class pursuant to Delaware Court of Chancery Rules 23(b)(1) and (b)(2) of DeCrane shareholders and their successors in interest and transferees, immediate and remote, from July 16, 1998 through and including the Effective Time (as defined in the Merger Agreement) (the "Class"); for entry of a judgment dismissing the Action "with prejudice"; for a complete release and settlement of all claims, whether asserted directly, derivatively or otherwise, against defendants or any of their families, parent entities, affiliates, subsidiaries, predecessors, successors or assigns, and each and all of their respective past, present or future officers, directors, associates, stockholders, controlling persons, representatives, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, heirs, executors, trustees, general or limited partners or partnerships, personal representatives, estates or administrators, which have been, or could have been, asserted relating to the Transaction or Merger Agreement, the actions of DeCrane, the DeCrane Board (including each member of the DeCrane Board), DLJ or DeCrane Acquisition relating to the Transaction, the related disclosure materials, disclosures, facts and allegations that are or could (insofar as such transactions, disclosures, facts and allegations relate to, or occurred in connection with, the subject matter of the Action) be the subject of the Action; that defendants have denied and continue to deny that they have committed or attempted to commit any violations of law or breaches of duty of any kind; that defendants are entering into the Stipulation solely because the proposed Settlement as described above would eliminate the burden, risk and expense of further litigation, and is in the best interests of DeCrane and all its shareholders; and that any of the defendants shall have the right to withdraw from the proposed Settlement in the event that (x) any claims related to the Transaction or the subject matter of the Action (whether direct, derivative or otherwise) are commenced against any person in any court prior to Final Court Approval of the Settlement, and such claims are not dismissed or stayed in contemplation of dismissal or (y) any of the additional conditions set forth in paragraph 4 below shall not have been satisfied. The parties agree to use their good faith efforts to obtain the dismissal or stay in contemplation of dismissal of any action covered by clause (x) in the foregoing sentence and further agree that the defendants shall have the right to withdraw from this Memorandum of Understanding if such efforts do not result in the dismissal or stay in contemplation of dismissal of such an action. 3. Notice and Court Approval. Subject to prior Court approval of the Stipulation and the form of the Settlement Documents, the parties to the respective Action will present the Settlement Documents to the Delaware Court of Chancery for approval as soon as practicable following appropriate notice of the proposed Settlement to the DeCrane shareholders as to all claims asserted in the Action by the named Plaintiff and the shareholders of DeCrane on whose behalf the Action was brought, without costs to any party except as provided herein. DeCrane shall pay the costs and expenses related to providing notice of the Settlement to the DeCrane shareholders. As used herein, "Final Court Approval" of the Settlement means that the Delaware Court of Chancery has entered an order approving the Settlement and that such order is finally affirmed on appeal or is no longer subject to appeal and the time for any petition for reargument, appeal or review, by certiorari or otherwise, has expired. Plaintiff's counsel intend to apply to the Delaware Court of Chancery for an award of attorneys' fees and reasonable out-of-pocket disbursements. Subject to the terms and conditions of this Memorandum of Understanding and the contemplated Stipulation of Settlement, Plaintiff's counsel will apply for an award of fees and expenses in an amount not exceeding $375,000, which the defendants and other releasees will not oppose, to be paid by DeCrane to Bernstein Liebhard & Lifshitz, as receiving agent for Plaintiff's counsel within five (5) business days of Final Court Approval of the Settlement. 4. Other Conditions. The consummation of the Settlement is subject to: (a) consummation of the Transaction, as contemplated in the Merger Agreement as such may be amended from time to time; (b) the drafting and execution of the Settlement Documents and the other agreements necessary to effectuate the terms of the proposed Settlement; (c) the completion by Plaintiff of appropriate discovery in the Action reasonably satisfactory to Plaintiff's counsel; and (d) Final Court Approval (as defined above) of the Settlement and dismissal of the Action with prejudice and without awarding costs to any party, except as provided herein. This Memorandum of Understanding shall be null and void and of no force and effect if (i) any of these conditions are not met or (ii) Plaintiff's counsel in the Action determine that the Settlement is not fair and reasonable. In such event, this Memorandum of Understanding shall not be deemed to prejudice in any way the positions of the parties with respect to the Action, shall be subject to Rule 408 of the Delaware Rules of Evidence, and shall not entitle any party to recover any costs or expenses incurred in connection with the implementation of this Memorandum of Understanding. 5. Interim Stay of the Action. The parties to the Action agree that except as expressly provided herein, the Action shall be stayed pending submission of the proposed Settlement to the Court for its consideration. Plaintiff's counsel agree that the defendants' time to answer or otherwise respond to the amended complaint in the Action is extended without date. Counsel shall enter into such documentation as shall be required to effectuate the foregoing agreements. 6. Miscellaneous. (a) This Memorandum of Understanding may be executed in counterparts by any of the signatories hereto and as so executed shall constitute one agreement; (b) this Memorandum of Understanding and the Settlement contemplated by it shall be governed by and construed in accordance with the laws of the State of Delaware without regard to that State's rules concerning conflict of laws; (c) this Memorandum of Understanding shall be binding upon and inure to the benefit of the parties and their respective agents, executors, heirs, successors and assigns, subject to the conditions set forth herein; (d) Plaintiff and its counsel represent and warrant that none of the claims or causes of action asserted in the Action have been assigned, encumbered or in any manner transferred, in whole or in part; (e) except as provided herein, the defendants in the Action shall bear no expenses, costs, damages or fees alleged or incurred by the Plaintiff, any member of the Class or their respective attorneys, experts, advisors, agents or representatives; and (f) the provisions contained in this Memorandum of Understanding shall not be deemed a presumption, concession or admission by any defendant in the Action of any breach of duty, liability, default or wrongdoing as to any facts or claims alleged or asserted in the Action, or in any other actions or proceedings, and shall not be interpreted, construed, deemed, invoked, offered or received in evidence or otherwise used by any person in the Action or in any other action or proceeding of any nature whatsoever. ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A. Norman Monhait Suite 1401, Mellon Bank Center P.O. Box 1070 Wilmington, DE 19899-1070 (302) 656-4433 Attorneys for Plaintiff Of Counsel: BERNSTEIN LIEBHARD & LIFSHITZ 274 Madison Avenue New York, New York 10016 (212) 779-1414 MORRIS NICHOLS ARSHT & TUNNELL Alan J. Stone William J. Lafferty 1201 North Market Street P.O. Box 1347 Wilmington, Delaware 19899 (302) 658-9200 Attorneys for Defendant DeCrane, R. Jack DeCrane, and R.G. MacDonald Of Counsel: SPOLIN & SILVERMAN 100 Wilshire Boulevard Suite 940 Santa Monica, CA 90401 (310) 576-1221 POTTER ANDERSON & CORROON LLP Michael D. Goldman John E. James Hercules Plaza P.O. Box 951 Wilmington, Delaware 19899 (302) 984-6000 Attorneys for Defendants Paul H. Cascio, Mitchell I. Quain, James R. Bergman, and Jonathan A. Sweemer Of Counsel: STROOCK & STROOCK & LAVAN LLP 180 Maiden Lane New York, New York 10038-4982 (212) 806-5400 RICHARDS, LAYTON & FINGER, P.A. Allen M. Terrell, Jr. Srinivas M. Raju One Rodney Square P.O. Box 551 Wilmington, Delaware 19899 (302) 658-6541 Attorneys for Defendants Donaldson Lufkin Jenrette, Inc. and DeCrane Acquisition Co. Of Counsel: DAVIS POLK & WARDWELL 450 Lexington Avenue New York, New York 10017 (212) 450-4000 -----END PRIVACY-ENHANCED MESSAGE-----