Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 119 745K
2: EX-1.1 Exhibit 1.1 Form of Underwriting Agreement 37 147K
3: EX-5.1 Exhibit 5.1 Opinion of Spolin and Silverman 2 8K
4: EX-10.10 Ex-10.10.1 Fifth Amended and Restated Registration 22 94K
5: EX-10.35 Exhibit 10.35.2 Amendment #2 to Loan Agreement 8 21K
6: EX-10.37 Exhibit 10.37 Stock Purchase Sales Agreement 31 116K
7: EX-10.38 EX-10.38 Kilroy Realty Lease Agreement 22 100K
8: EX-23.1 Ex 23.1 Consent of Price Waterhouse 1 6K
9: EX-23.3 Ex 23.3 Consent of Thomas & Thomas 1 6K
10: EX-27 Exhibit 27 Financial Data Schedule 2 7K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1997
REGISTRATION NO.
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
[Download Table]
DELAWARE 3728 34-1645569
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
2361 ROSECRANS AVENUE, SUITE 180
EL SEGUNDO, CALIFORNIA 90245
(310) 725-9123
(Address, including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
R. JACK DECRANE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
DECRANE AIRCRAFT HOLDINGS, INC.
2361 ROSECRANS AVENUE, SUITE 180
EL SEGUNDO, CALIFORNIA 90245
(310) 725-9123
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service
--------------------------
COPIES TO:
STEPHEN A. SILVERMAN, ESQ. PETER P. WALLACE, ESQ.
SPOLIN & SILVERMAN MORGAN, LEWIS & BOCKIUS LLP
100 Wilshire Boulevard, Suite 940 300 South Grand Avenue, 22nd Floor
Santa Monica, California 90401 Los Angeles, California 90071
(310) 576-1221 (213) 612-2500
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
Common Stock, Par Value, $0.01....... 2,500,000 Shares $18.25 $52,468,750.00 $15,478.36
(1) Includes 375,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8, MAY DETERMINE.
--------------------------------------------------------------------------------
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SUBJECT TO COMPLETION,
DATED MARCH 6, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[LOGO]
2,500,000 SHARES
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
---------
Of the 2,500,000 shares of Common Stock of DeCrane Aircraft Holdings, Inc.
("Common Stock") offered hereby, 1,918,000 shares are being sold by the Company
and 582,000 shares are being sold by Selling Stockholders. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. The
proceeds of this offering received by the Company will be used to repay
indebtedness. Following this offering, affiliates and certain principal
stockholders of the Company will beneficially own approximately 24.6% of the
Common Stock.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DAHX." On March 4, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $18.25 per share.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Enlarge/Download Table]
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
Per Share........................... $ $ $ $
Total(3)............................ $ $ $ $
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 375,000 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and the aggregate Proceeds to
Company and Proceeds to the Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as, and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares will be made at the offices of BT Alex.
Brown Incorporated, Baltimore, Maryland, on or about 1998.
BT ALEX. BROWN
FURMAN SELZ
SBC WARBURG DILLON READ INC.
THE DATE OF THIS PROSPECTUS IS MARCH ,1998
[PHOTOGRAPH OF SILHOUETTE OF AN AIRPLANE FLYING]
[PHOTOGRAPH OF AN AIRPLANE FLIGHT DECK]
[COMPANY LOGO]
The Company manufactures avionics
interconnect components and sub-systems,
as well as a full systems integrator and
the leading provider of cabin management
systems for the corporate jet market.
Many of its products and services
interface between the aircraft and its
flight deck avionics systems, such as
those pictured here.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE COMMON
STOCK OFFERING AND PURCHASE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR
A DESCRIPTION OF THE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS
OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M OF THE SECURITIES AND
EXCHANGE COMMISSION. SEE "UNDERWRITING."
[PHOTOGRAPH OF CONTACTS]
[PHOTOGRAPH OF BINS OF CONTACTS]
The variety of contacts manufactured by the Company conduct electronic signals
or electricity within an aircraft and must be precision machined to conform to
strict design tolerances. The Company believes that it holds more qualified
parts list positions for its contact product line than any other manufacturer.
[PHOTOGRAPH OF HARNESS ASSEMBLIES]
The Company's multi-product presence in the in-flight entertainment market is
depicted above in a purser's station. This station utilizes the Company's
harnesses, contacts and connectors.
[PHOTOGRAPH OF CONNECTORS]
The Company's line of specialty connectors are targeted for select niche
markets, particularly in-flight entertainment and connectors used to interface
avionics control units to aircraft. Many of these connectors utilize the
Company's contacts.
[PHOTOGRAPH OF INSTALLATION KITS]
The Company manufactures avionics support structures which are used to connect
the avionics control units to the aircraft. These structures, as shown above
when combined with the Company's harness, contact and connector products, are
the foundation of the installation kits assembled by the Company.
[PHOTOGRAPH OF MAN AT A CAD STATION]
The Company's engineering capability is a vital component of the Company's
systems integration services. Depicted above is an engineer designing the
interface on the new smoke detection and fire suppression system for Northwest
Airlines on a state-of-the-art Pro E CAD station.
[PHOTOGRAPH OF MEN INSTALLING A
SYSTEM ONTO AN AIRCRAFT]
Pictured above is the installation of a video on demand system in a SwissAir
MD-11 widebody aircraft. As a full systems integrator and a certified FAA repair
station, the Company performs complex installations on air transport aircraft.
[PHOTOGRAPH OF AUDIO
INTERNATIONAL PRODUCTS]
The Company provides total cabin management products and services to the
corporate jet market, including integrated switch panels, audio systems and
video systems, as depicted above.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO THE "COMPANY" MEAN DECRANE AIRCRAFT HOLDINGS, INC., A
DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES, AND WITH RESPECT TO
AVIATION REGULATORY ISSUES, ONE OR MORE, BUT NOT NECESSARILY ALL, OF THESE
ENTITIES. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION.
THE COMPANY
The Company manufactures avionics components and provides avionics systems
integration services in certain niche markets of the commercial and high-end
corporate jet aircraft industries. The Company believes it is the largest and
leading provider of components within the niche markets it serves. The Company
utilizes its strong market positions to compete more effectively, as well as to
capitalize on the expected growth and consolidating trends in the aerospace
industry. Since its formation in 1989, the Company has completed nine
acquisitions of businesses or assets, the most recent of which, Audio
International Inc. ("Audio"), was completed in November 1997. The Company
targets for acquisition those aircraft component manufacturers and system
integration providers that are complementary to its existing businesses and have
a leading market share in their respective niche markets. The Company believes
that the fragmented nature of the market for aircraft components and systems
integration services will provide it with additional opportunities to exploit
industry consolidation trends. The Company's revenues have grown at a 47.4%
compounded annual rate from 1995, the year of the most recent low in commercial
aircraft production, through 1997, pro forma for the acquisition of Audio.
The Company seeks to maximize its sales by emphasizing the complementary
nature of its products and services. Components manufactured by the Company
include: (i) contacts (the Company believes it is the largest supplier of bulk
contacts to the commercial aircraft original equipment manufacturers ("OEMs"));
(ii) connectors (which often utilize the contacts manufactured by the Company);
(iii) harness assemblies (which often utilize the connectors manufactured by the
Company); and (iv) avionics support structures (which often are packaged with
the Company's connectors and harness assemblies in installation kits). The
Company also manufactures dichroic liquid crystal display ("LCD") devices, which
are used with flight deck avionics, and believes it is the largest supplier of
such devices to the commercial aircraft OEMs. In addition, the Company provides
stereo systems, video monitors and passenger switch and cabin lighting and
climate controls for the high-end corporate jet market. The systems integration
services provided by the Company include design and engineering, supplemental
type certifications on behalf of the Federal Aviation Administration ("FAA"),
manufacture of installation kits and systems installation. The Company
manufactures many of the components required to complete a systems integration
project, which it believes provides it a critical competitive advantage.
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industry, with a focus on the manufacture of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading positions while maintaining a balance of revenues among the OEM
market, the retrofit market and the aftermarket. The Company believes that such
a strategy will position it for growth over an entire aircraft industry economic
cycle. Additionally, the Company believes that its position as a primary
supplier of products and services to manufacturers of cabin avionics systems and
flight deck avionics systems provides the Company with opportunities for growth
independent of the aircraft OEM market, because such systems typically are
installed on a retrofit basis by purchasers and operators of aircraft and not by
aircraft OEMs. The Company also believes that demand for cabin avionics systems
and flight deck avionics systems is increasing, primarily as a result of: (i) a
desire by airlines for additional revenue-
3
producing services; (ii) longer flights combined with a demand by airline
passengers for more sophisticated forms of in-flight services; and (iii) the
advent of new technologies and FAA mandates related to aircraft safety and
navigation.
According to Boeing's 1997 CURRENT MARKET OUTLOOK (the "Boeing Report")
published by the Boeing Commercial Airplane Group, expenditures for new
commercial jet aircraft production are expected to total approximately $490
billion for the period from 1996 through 2006. Due to the high level of
fragmentation within certain segments of the aircraft industry and efforts by
OEMs to minimize purchasing costs, manufacturers of components and providers of
aircraft retrofit, overhaul and repair services have been undergoing
consolidation.
The Company believes that there are a number of significant trends affecting
the demand for its products and services. These trends include the continuing
increase in new aircraft production, the increase in demand for cabin and flight
deck avionics systems and the increase in airlines' purchase of products and
services provided by third parties. According to OEM aircraft delivery schedules
revised in January 1998, combined annual deliveries from Boeing (including the
former McDonnell Douglas) and Airbus Industries are projected to increase from
397 aircraft in 1996 and 557 in 1997 to an estimated 785 in 1998. Airlines have
increased purchases of certain components from third parties and have outsourced
certain repair, overhaul and retrofit functions, creating increased demand for
low cost high-quality component manufacturers and systems integrators.
In November 1997, the Company began serving the high-end corporate jet
market with its acquisition of Audio, which the Company believes is the nation's
largest and leading independent provider of premium, customized aircraft
entertainment and cabin management products and systems for corporate jets.
According to the ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new
corporate jet aircraft are expected to be delivered from 1997 through 2001, a
61% increase over the previous five year period. The Company believes that the
increase in new corporate jet production is being driven by numerous factors,
including: (i) the introduction of new, larger and more efficient aircraft; (ii)
the growing popularity of fractional aircraft ownership; (iii) the minimal
availability of used aircraft; (iv) the need for long range flights to expanding
international markets; (v) the increased demand for more expedient travel.
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial and high-end corporate jet
aircraft industry as the result of the following strengths: (i) leading
positions in niche markets; (ii) a record of successful acquisitions; (iii)
alignment with leading avionics and aircraft OEMs and suppliers; (iv) low-cost,
high quality operations; (v) engineering and related technical capacity
including industry and regulatory certifications; and (vi) management depth and
experience.
GROWTH STRATEGY
The Company intends to grow its aerospace businesses through the following
initiatives:
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage
its core competencies in existing and additional markets, and add new expertise
in the avionics and systems integration fields, by identifying and pursuing
complementary acquisitions that offer strategic value, such as economies of
scale, product line extensions, new customer relationships or increased
manufacturing capacity. While there can be no assurance that the Company will
complete additional acquisitions, the Company believes that the fragmented
nature of the market for aircraft components and systems integration services
will provide the Company with additional opportunities to exploit industry
consolidation trends. See "Risk Factors--Risks Associated with Acquisitions."
CAPITALIZE ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AVIONICS. The Company believes its strong market positions and alignment with
many of the leading commercial
4
aircraft industry participants will enable it to capitalize on the projected
increases in the production of commercial and high-end corporate aircraft. For
example, the Company believes that every aircraft currently produced by Boeing
(including McDonnell Douglas) and Airbus includes components manufactured by the
Company. The Company also believes that its products are on each model of
high-end corporate jet aircraft sold today. The Company works closely with OEMs
and modification centers to meet their delivery and scheduling requirements, and
in some cases, to provide total, turnkey solutions to new aircraft.
EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the
Company's systems integration services have been concentrated in the in-flight
passenger telecommunications market. In 1995, the Company commenced an effort to
diversify the types of systems which it retrofits onto aircraft by expanding its
expertise and sales efforts to include navigation and satellite communication,
safety, and in-flight entertainment systems. As of December 31, 1997, the
Company had contracted to provide systems integration services for global
positioning systems ("GPS"), smoke detection/fire suppression safety systems,
and in-flight entertainment systems. In the Company's area of systems
integration, it believes that it is the only company which has in-house
capabilities in each of the four elements of systems integration (design and
engineering, certification, installation kit manufacturing and system
installation).
CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the
Company's products and services are utilized to provide an interface between an
aircraft and its avionics systems. Over the past several years, the Company
increasingly has combined certain of the components which it manufactures in
order to create higher value-added products, and develop further market
opportunities through cross-selling and vertical integration of its products. By
emphasizing the complementary nature of its products and services, the Company
seeks to maximize penetration with existing customers and compete more
effectively for new customers.
* * * *
The Company's corporate office is located at 2361 Rosecrans Avenue, Suite
180, El Segundo, California 90245. The Company's telephone number is (310)
725-9123.
THE OFFERING
[Enlarge/Download Table]
Common Stock Offered by the Company....................... 1,918,000 shares(1)
Common Stock Offered by the Selling Stockholders.......... 582,000 shares(1)
Total Common Stock Offered............................ 2,500,000 shares(1)
Common Stock to be Outstanding after the Offering......... 7,236,563 shares(1),(2)
Use of Proceeds........................................... To repay certain indebtedness.
See "Use of Proceeds."
Nasdaq National Market Symbol............................. DAHX
------------------------
(1) Does not include up to 375,000 shares which may be sold by the Company and
certain Selling Stockholders pursuant to the Underwriters' over-allotment
option. See "Principal and Selling Stockholders" and "Underwriting."
(2) Does not include: 527,156 shares of Common Stock reserved for issuance
pursuant to the Company's Amended and Restated 1993 Share Incentive Plan
(the "Share Incentive Plan") (see "Management--Executive Compensation--Share
Incentive Plan").
5
SUMMARY CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996(1) 1997(2)
--------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................................................................... $ 55,839 $ 65,099 $ 108,903
Gross Profit....................................................................... 12,376 15,707 28,656
Operating income................................................................... 1,835 4,251 11,995
Income (loss) before extraordinary item............................................ (3,446) (817) 5,254
Net income (loss).................................................................. (3,446) (817) 3,176
Net income (loss) applicable to common stockholders................................ (3,307) (6,357) 531
Income (loss) per common share
Basic
Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .69
--------- ----------- ---------
Extraordinary loss(3).......................................................... -- -- (.55)
--------- ----------- ---------
Net income (loss).............................................................. $ (38.45) $ (73.92) $ .14
--------- ----------- ---------
--------- ----------- ---------
Diluted
Income (loss) before extraordinary item........................................ $ (38.45) $ (73.92) $ .62
Extraordinary loss(3).......................................................... -- -- (.42)
--------- ----------- ---------
Net income (loss).............................................................. $ (38.45) $ (73.92) $ .20
--------- ----------- ---------
--------- ----------- ---------
Pro forma income, before extraordinary item(4)
Basic.................................................................................................. $ 1.16
Diluted................................................................................................ $ 1.10
OTHER FINANCIAL DATA:
Depreciation and amortization...................................................... $ 4,542 $ 4,343 $ 5,372
Bookings (5)....................................................................... 50,785 81,914 112,082
Backlog at end of period (6)....................................................... 19,761 44,433 48,179
[Enlarge/Download Table]
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(7)
--------- ---------------
BALANCE SHEET DATA:
Working capital........................................................................ $ 24,772 $ 24,772
Total assets........................................................................... 99,137 99,137
Total debt............................................................................. 38,838 6,422
Stockholders' equity................................................................... 39,527 71,943
------------------------------
(1) Includes the effect of the acquisition of the remaining 25% minority
interest in Cory Components, Inc. beginning February 20, 1996, the date on
which the transaction occurred, and the results of ADS and Elsinore
beginning September 18, 1996 and December 5, 1996, respectively, the dates
on which they were acquired.
(2) Includes the effect of the results of the Audio acquisition beginning
November 14, 1997, the date on which it was acquired.
(3) Represents the write off of deferred financing costs, unamortized original
issue discounts, a prepayment penalty and other related expenses incurred as
a result of the repayment of debt by the Company with the net proceeds from
its IPO.
(4) Pro forma for the Recapitalization, IPO and the application of the net
proceeds therefrom.
(5) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(6) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of the Company's receipt of orders
and the speed with which those orders are filled. See "Business--Backlog."
(7) Reflects the sale by the Company of 1,918,000 shares of Common Stock in the
Offering and the application of the net proceeds therefrom as set forth
under "Use of Proceeds."
6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
COMMERCIAL AIRCRAFT INDUSTRY RISKS
Among the Company's principal customers are the world's commercial aircraft
and avionics OEMs. The principal market for such OEMs is the commercial airline
industry, which is cyclical and has been adversely affected by a number of
factors, including, but not limited to, increased fuel and labor costs and
intense price competition. The commercial airline industry may be adversely
affected by increased regulatory scrutiny in the wake of several major airline
disasters and threats of terrorism. Several domestic and foreign commercial
airlines have encountered significant financial difficulties, resulting in
certain of such airlines ceasing to conduct business or seeking protection from
creditors. These financial difficulties, as well as certain other factors,
caused new commercial aircraft deliveries to decline from a peak of
approximately 767 aircraft in 1991 to approximately 380 aircraft in 1995
according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by Standard
and Poor's Industry Surveys (the "S&P Report"). Another industry downturn could
adversely affect the Company's business. See "Business-- Industry Overview and
Trends."
HIGH-END CORPORATE JET AIRCRAFT INDUSTRY RISKS
Among the Company's customers are the world's high-end corporate jet
aircraft OEMs. The principal markets for such OEMs are large corporations and
wealthy individuals. The corporate jet market is cyclical and has been adversely
affected by a number of factors, including, but not limited to, general state of
the U.S. economy, corporate profits, interest rates and commercial airline
fares. An industry downturn could adversely affect the Company's business.
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS
In 1997, the Company reported its first net profit since its inception.
Contributing to the profit was the repayment of a significant portion of its
outstanding indebtedness with the net proceeds of the initial public offering
("IPO") of common stock completed on April 16, 1997. Prior to the IPO, the
Company operated with substantial leverage and debt service requirements since
its inception. As a result, the Company experienced net losses in each year from
1990 through 1996, despite positive operating income. In addition, until 1996
the Company at times was not in compliance with certain financial covenants
contained in its debt agreements. In each case such non-compliance was waived by
the lenders. Since March 1996, the Company has been in compliance with all
financial covenants contained in its debt agreements. There can be no assurance
as to the future profitability of the Company nor can there be assurance that
the Company will remain in compliance with the covenants contained in its debt
agreements. The Company's senior revolving line of credit (the "Credit
Facility") is guaranteed by each of the Company's subsidiaries and is secured by
substantially all the assets of the Company and its subsidiaries. In the event
that the Company is unable to remain in compliance with the covenants contained
in its debt agreements, the lenders could declare all amounts owed under such
debt agreements to be immediately due and payable, which could have a material
adverse effect on the Company. See "Use of Proceeds," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Notes to Consolidated Financial Statements."
FLUCTUATIONS IN QUARTERLY AND YEARLY RESULTS
The Company's business is subject to quarterly and yearly fluctuations.
Specifically, the magnitude of certain systems integration programs relative to
the Company's overall business has the potential to expose the Company's results
of operations to fluctuations in quarterly and yearly results. In addition,
7
irregular timing of awards or cancellations of systems integration contracts, as
well as development and technology delays by OEMs or their suppliers, could
further exacerbate such fluctuations in quarterly and yearly operations. If such
events occur, the results of operations of the Company may be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON KEY CUSTOMERS
The Company's two largest customers for the fiscal year ended December 31,
1997, were Boeing and Matsushita Avionics Systems ("Matsushita"), which
accounted for approximately 19.0% and 11.2%, respectively, of the Company's
consolidated revenues. For the year ended December 31, 1997, revenues from
Boeing would have been 20.9% had its acquisition of McDonnell Douglas been
consummated on January 1, 1997. In addition, a significant portion of the
Company's sales of components are sold to Boeing indirectly through sales to
suppliers of Boeing. Most of the Company's sales to Boeing are pursuant to
contracts which may be terminated by Boeing at any time. In addition, under
certain circumstances, Boeing may enforce alternative economic terms pursuant to
such contracts in which case the contracts could become less commercially
favorable to the Company or the Company may elect to terminate the applicable
portion of such contracts. There can be no assurance that Boeing will not
terminate any of its contracts with the Company. The five year contract under
which the Company supplies a substantial majority of the bulk contact
requirements for Boeing ends in September 1998. There can be no assurances that
the Company will be awarded the subsequent contract by Boeing for its bulk
contact requirements. During October 1997, Boeing announced that parts shortages
caused by its supplier network and production chain disrupted its production
schedules and adversely affected its production and delivery rates. Boeing shut
down its 737 and 747 production lines for approximately a month and did not
resume normal production rates until late November 1997. There can be no
assurances that Boeing will not suffer further production schedule disruptions.
The Company generally sells components and services to Matsushita pursuant to
purchase orders, but does not have any supply contracts with Matsushita.
The loss of any one or more of the Company's key customers could have a
material adverse effect on the Company. See "Business--Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REGULATION
The FAA prescribes standards and licensing requirements for aircraft
components, licenses private repair stations and issues Designated Alteration
Station ("DAS") approvals, which give the holder the right to certify certain
aircraft design modifications on behalf of the FAA. The ability of the Company
to arrange for rapid government certification of its systems integration
services is important to the Company's business and depends on its continuing
access to or use of private repair stations, DASs, and FAA-designated and
FAA-certified engineering professionals. There can be no assurance that: (i) the
Company will continue to have adequate access to such stations and
professionals; or (ii) the current public and congressional scrutiny of the
FAA's inspection philosophy and mechanisms will not result in the changes to the
standards for the use of such private repair stations or DASs, or their
elimination, either of which could have a material adverse effect on the
Company. The FAA curtailed the Company's use of a DAS for several months during
1997 until certain of its facilities were brought into compliance with the FAA's
regulations governing DAS status. See "Business Industry Regulation and
Approvals." In addition, although the Company believes that it possesses all
required domestic and foreign governmental licenses and certificates, including
without limitation Parts Manufacturer Approvals ("PMAs") and Supplemental Type
Certificates ("STCs"), any delay in obtaining or failure to obtain a required
license or certificate, or the revocation or limitation of such licenses or
certificates, could have a material adverse effect on the Company's operations.
See "Business--Industry Regulation and Approvals."
8
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's ability to grow by acquisition is dependent upon, and may be
limited by, the availability of suitable acquisition candidates and capital, and
by restrictions contained in the Company's debt agreements. In addition, growth
by acquisition involves risks that could adversely affect the Company's results
of operations, including difficulties in integrating the operations and
personnel of acquired companies, the amortization of acquired intangible assets
and the potential loss of key employees of acquired companies. In the past,
acquisitions by the Company have resulted in increased indebtedness and interest
expense which caused the Company to incur net losses in each year since its
inception, until 1997, despite positive operating income. There can be no
assurance that the Company will be able to identify suitable acquisition
candidates, obtain the capital necessary to pursue its acquisition strategy,
consummate acquisitions on satisfactory terms or, if any acquisitions are
consummated, satisfactorily integrate such acquired businesses into the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--General" and "Business--Growth Strategy."
COMPETITION
The Company operates in a highly competitive industry and competes against a
number of companies, some of which have significantly greater financial,
technological and marketing resources than the Company. The Company believes
that its ability to compete depends on high product performance, short lead-time
and timely delivery, competitive pricing, superior customer service and support
and continued certification under customer quality requirements and assurance
programs. There can be no assurance that the Company will be able to compete
successfully with respect to these or other factors. See
"Business--Competition."
ASIAN FINANCIAL MARKETS
The Asian markets are important markets for commercial aircraft and avionics
OEMs. There can be no assurance that the current crisis in the Asian financial
markets will not result in cancellation of orders for new aircraft or deferral
of deliveries, and negatively impact the OEMs, which could have a material
adverse effect on the Company.
GOLD AND COPPER
A significant portion of the cost of the materials used in the contacts
manufactured by the Company is comprised of the cost of gold, and to a lesser
extent, the cost of copper. Accordingly, a significant increase in the price of
gold or copper could have a material adverse effect on the Company's results of
operations. The Company has not purchased commodities contracts for gold or
copper and does not anticipate doing so in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FOREIGN CURRENCY
The Company has a manufacturing facility in Switzerland and incurs in Swiss
Francs a significant percentage of the cost of the contacts it manufactures in
Switzerland. Therefore the Company's financial results are subject to
fluctuations of the Swiss Franc in relation to the U.S. Dollar. From 1996
through 1998, solely in an effort to mitigate the effects of currency
fluctuations, the Company has entered into forward exchange contracts to
purchase Swiss Francs and it expects to engage in such hedging transactions in
the future. However, there can be no assurance that such transactions will
prevent currency fluctuations from adversely affecting the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements."
9
SUPPLY OF QUALIFIED ENGINEERING PERSONNEL
The Company's ability to attract and retain a high-quality engineering staff
is important to its business. Competition for qualified avionics engineers is
intense. There can be no assurance that the Company will be able to retain its
existing engineering staff or fill new positions or vacancies created by
expansion or turnover. See "Business--Products and Services" and
"Business--Employees."
CONTROL OF COMPANY BY PRINCIPAL STOCKHOLDERS
Following the completion of the Offering, Nassau Capital Partners, L.P. and
NAS Partners I L.L.C. (collectively, "Nassau") and Brantley Venture Partners II,
L.P. ("Brantley") will beneficially own 10.7% and 6.8%, respectively, of the
issued and outstanding Common Stock. See "Principal and Selling Stockholders."
Nassau, Brantley, DSV, among others, are parties to a shareholders agreement
with the Company which requires the Company to include on the Company's slate of
nominees for director a person designated by each of Nassau, Brantley and DSV,
for so long as each such stockholder owns at least 5% of the Common Stock. See
"Certain Transactions--Shareholders Agreement." The terms of the present Board
members nominated by Nassau, Brantley and DSV do not expire until 2000, 1999 and
1999, respectively, notwithstanding any decreases to such beneficial owners'
ownership of Common Stock. See "Management--Executive Officers and Directors."
EXCESS LOSS RISKS
The Company currently has in force aviation products insurance. However,
there can be no assurance that the Company's existing insurance coverage will be
adequate to cover future claims that may arise or that such coverage can be
renewed at commercially reasonable rates.
ENVIRONMENTAL RISKS; ENVIRONMENTAL REGULATION
The Company's business operations and facilities are subject to a number of
federal, state, local and foreign environmental laws and regulations. In
addition, certain environmental laws such as the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"), and similar
state laws impose strict, retroactive and joint and several liability upon
persons responsible for releases or potential releases of hazardous substances.
The Company has sent waste to treatment, storage or disposal facilities that
have been designated as National Priority List sites under CERCLA or equivalent
listings under state laws. The Company has received CERCLA requests for
information or allegations of potential responsibility from the Environmental
Protection Agency ("EPA") as to the Company's use of certain such sites. It is
possible, given the retroactive nature of CERCLA liability, that the Company
will, from time to time, receive additional notices of potential liability
relating to current or former activities. There can be no assurance that the
Company will not incur significant costs for prior waste disposal by the Company
or its predecessors. In addition, some of the Company's operations are located
on properties which are contaminated to varying degrees. There can be no
assurance that the Company will not incur significant costs in the future to
address contamination.
There can be no assurance that the Company will not incur significant costs
in the future due to current or former operations and waste disposal practices
or changing environmental compliance requirements. See "Business--Environmental
Matters" and "Business--Legal Proceedings."
DISRUPTIONS AT THE COMPANY'S FACILITIES
A significant portion of the Company's manufacturing and administrative
operations are currently located in the greater Los Angeles, California area, an
area that may be subject to earthquakes or other natural disasters. An
earthquake or other natural disaster could have a material adverse effect on the
Company's business and operating results. See "Business--Facilities."
10
YEAR 2000 COMPLIANT
Due to numerous acquisitions made over the past several years, the Company
operates several stand-alone systems using different, and in some cases
internally customized, software purchased prior to the Company's acquisition of
the relevant operating units. The Company concluded that essentially all
existing software should be upgraded to newer, off-the-shelf, integrated
manufacturing and business application software. In 1997, the Company commenced
the implementation of this strategy. One of the criteria to be used in selecting
the software is that it be Year 2000 compliant. Failure to complete the
migration to such software by the Year 2000 could have a material adverse effect
on the Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
after the Offering, or the expectation that such sales could occur, could
adversely affect the market price of the Common Stock and the Company's ability
to raise capital through a subsequent offering of securities. Of the 7,236,563
shares of Common Stock to be outstanding after the Offering, 5,297,423 shares
will be available for resale in the public market without restriction
immediately following the Offering if held by holders who are not "affiliates"
of the Company (as defined in the Securities Act of 1933, as amended (the
"Securities Act")). All of the remaining shares are "restricted securities"
within the meaning of Rule 144 adopted under the Securities Act. These
restricted securities were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. After expiration of the 90-day lock-up period following the Offering,
pursuant to agreements with the Underwriters: (i) all restricted securities will
be available for resale pursuant to the limitations of Rule 144; and (ii) the
Company, pursuant to its certificate of incorporation (the "Certificate"), may
authorize the issuance of additional shares of Common Stock and shares of one or
more series of voting preferred stock. The issuance of additional shares of
capital stock could result in the dilution of the voting power of the shares of
Common Stock purchased in the Offering. In addition, following the expiration of
the 90-day lock-up period, certain stockholders have the right, pursuant to the
terms and conditions of a registration rights agreement (the "Registration
Rights Agreement"), to require the Company to: (i) effect (in the aggregate) up
to four registrations under the Securities Act covering all or any portion of
the unregistered shares of Common Stock held by such stockholders, provided that
if the Company effects a registration at the request of a stockholder, no
further demand may be made for a period of at least nine months; and (ii)
include all or any portion of such stockholders' shares of Common Stock in any
proposed registration by the Company of shares of Common Stock (subject to
reduction to the extent that the managing underwriter, if any, is of the opinion
that such inclusion would adversely affect the marketing of the securities to be
sold therein). See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000
additional shares of Preferred Stock (the "Undesignated Preferred Stock") and to
determine the terms and number of shares constituting any wholly unissued series
of Undesignated Preferred Stock. The Board, without further approval of the
holders of Common Stock, may issue shares of Undesignated Preferred Stock with
rights that could adversely affect the rights of the holders of Common Stock.
The issuance of shares of Undesignated Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate actions. In addition, certain
provisions of the Certificate and the Company's bylaws (the "Bylaws") and of
Delaware law could have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control of
the Company. These provisions could limit the price that certain investors might
be willing to pay in the
11
future for shares of the Common Stock. See "Description of Capital Stock
Preferred Stock" and "Description of Capital Stock--Certain Certificate and
Bylaw Provisions and Delaware General Corporation Law Section 203."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,918,000 shares of Common Stock being offered hereby by the Company are
estimated to be $32.4 million after deducting underwriting discounts and
commissions and estimated expenses of the Offering. The Company plans to use
such net proceeds to repay amounts due under the Company's Credit Facility. The
Company will not receive any of the proceeds from shares sold by the Selling
Stockholders.
Pending the use of the net proceeds for the purposes described above, the
Company will invest such net proceeds in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to finance operations and the
expansion of its business. Any future determination to pay cash dividends will
be made at the discretion of the Company's board of directors (the "Board") and
will be dependent upon the Company's financial condition, operating results,
capital requirements and such other factors as the Board deems relevant.
Further, the Company's Credit Facility prohibits payment of dividends, and the
Company expects that any future debt arrangements may also include such a
prohibition.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under
the symbol "DAHX." As of March 4, 1998, the last reported sales price of the
Common Stock on Nasdaq was $18.25 per share. The following table shows, for the
periods indicated, the range of high and low sale prices per share for the
Common Stock as reported on Nasdaq:
[Enlarge/Download Table]
HIGH LOW
----- ---------
FISCAL 1997
Second Quarter (from 4/16/97).................................................................. $ 147/8 $ 93/4
Third Quarter.................................................................................. 191/4 145/8
Fourth Quarter................................................................................. 21 151/4
FISCAL 1998
First Quarter (through 3/4/98)................................................................. $ 19 $ 163/4
As of December 31, 1997, there were 5,318,563 shares of Common Stock
outstanding, which were held by 31 shareholders of record.
12
CAPITALIZATION
The following table sets forth as of December 31, 1997: (i) the consolidated
capitalization of the Company; and (ii) the consolidated capitalization of the
Company as adjusted for the sale by the Company of 1,918,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom as
described in "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Capital Stock--The Recapitalization" and the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus.
[Enlarge/Download Table]
ACTUAL AS ADJUSTED
---------- ------------
Long-term debt (including current portion)............................................. $ 38,270 $ 5,854
---------- ------------
---------- ------------
Stockholders' equity:
Common Stock, $.01 par value, 5,318,563 shares issued and outstanding, 7,236,563
shares as Adjusted................................................................. $ 53 $ 72
Additional paid-in capital........................................................... 51,057 83,454
Accumulated deficit.................................................................. (11,444) (11,444)
Foreign currency translation adjustment.............................................. (139) (139)
---------- ------------
Total stockholders' equity......................................................... 39,527 71,943
---------- ------------
Total capitalization(1)................................................................ $ 77,797 $ 77,797
---------- ------------
---------- ------------
------------------------
(1) Total capitalization consists of long-term debt and stockholders' equity.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations and balance
sheet data for the Company as of and for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 have been derived from the Company's audited
consolidated financial statements. All of the information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996(1) 1997(2)
--------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 48,197 $ 47,092 $ 55,839 $ 65,099 $ 108,903
Cost of sales.................................................. 36,258 36,407 43,463 49,392 80,247
--------- --------- --------- ----------- ---------
Gross profit................................................... 11,939 10,685 12,376 15,707 28,656
Selling, general and administrative expenses................... 7,953 7,716 9,426 10,747 15,756
Amortization of intangible assets.............................. 1,210 1,209 1,115 709 905
--------- --------- --------- ----------- ---------
Operating income............................................... 2,776 1,760 1,835 4,251 11,995
Interest expense............................................... 2,940 3,244 3,821 4,248 3,154
Other (income) expense, net.................................... (148) 332 382 108 243
--------- --------- --------- ----------- ---------
Income (loss) before provision for income taxes, cumulative
effect of accounting change and extraordinary item........... (16) (1,816) (2,368) (105) 8,598
Provision for income taxes (3)................................. (620) (613) (1,078) (712) (3,344)
--------- --------- --------- ----------- ---------
Income (loss) before cumulative effect of accounting change and
extraordinary item........................................... (636) (2,429) (3,446) (817) 5,254
Cumulative effect of accounting change (4)..................... (121) -- -- -- --
Extraordinary loss from debt refinancing (5)................... -- (264) -- -- (2,078)
--------- --------- --------- ----------- ---------
Net income (loss).............................................. $ (757) $ (2,693) $ (3,446) $ (817) $ 3,176
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income (loss) applicable to common stockholders............ $ (972) $ (2,891) $ (3,307) $ (6,357) $ 531
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Income (loss) per common share
Basic
Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .69
Cumulative effect of accounting change..................... (1.46) -- -- -- --
Extraordinary loss......................................... -- (3.15) -- -- (.55)
--------- --------- --------- ----------- ---------
Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .14
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Diluted
Income (loss) before extraordinary item.................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .62
Cumulative effect of accounting change..................... (1.46) -- -- -- --
Extraordinary loss......................................... -- (3.15) -- -- (.42)
--------- --------- --------- ----------- ---------
Net income (loss).......................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .20
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Pro forma before extraordinary item (6)
Basic.................................................................................................... $ 1.16
Diluted.................................................................................................. $ 1.10
OTHER FINANCIAL DATA:
Depreciation and amortization.................................. $ 3,553 $ 3,868 $ 4,542 $ 4,343 $ 5,372
Bookings (7)................................................... 46,830 47,896 50,785 81,914 112,082
Backlog at end of period (8)................................... 23,933 24,493 19,761 44,433 48,179
DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ----------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................................................ $ (637) $ 11,459 $ 12,583 $ 10,486 $ 24,772
Total assets................................................... 34,653 37,685 36,329 69,266 99,137
Total debt..................................................... 19,653 23,874 24,672 42,250 38,838
Mandatorily redeemable preferred stock and common stock
warrants..................................................... 5,818 2,329 1,633 6,879 --
Stockholders' equity (deficit)................................. (2,618) 766 (1,697) 1,236 39,527
See accompanying notes to the Selected Consolidated Financial Data.
14
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes the effect of the acquisition of the remaining 25% minority
interest in Cory Components, Inc. beginning February 20, 1996, the date on
which the transaction occurred, and the results of ADS and Elsinore
beginning September 18, 1996 and December 5, 1996, respectively, the dates
on which they were acquired.
(2) Includes the effect of the acquisition of Audio beginning November 14, 1997,
the date on which it was acquired.
(3) Prior to the acquisition of the remaining 25% minority interest in Cory
Components, Inc. in 1996, the Company did not consolidate the earnings of
its Cory Components subsidiary for tax purposes. As such, despite a
consolidated pre-tax loss in each of the years, the Company recorded a
provision for income taxes from 1993 up to the date of the Minority Interest
Acquisition in 1996 which primarily relates to Cory Components.
(4) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting for
Income Taxes."
(5) Represents the write-off of unamortized deferred financing costs,
unamortized original issue discounts and a prepayment penalty incurred as
result of the refinancing by the Company of a substantial portion of its
debt in November 1994 and the write off of deferred financing costs,
unamortized original issue discounts, a prepayment penalty and other related
expenses incurred as a result of the repayment of debt by the Company
concurrent with its IPO in 1997. These charges are net of an income tax
benefit.
(6) Pro forma for the Recapitalization, IPO and the application of the net
proceeds therefrom.
(7) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(8) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of the Company's receipt of orders
and the speed with which those orders are filled. See "Business--Backlog."
15
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Financial Data presents the
results of operations of the Company as if the following transactions had
occurred on January 1, 1997: (i) the Recapitalization (see "Description of
Capital Stock--the Recapitalization"), the IPO, and the application of the net
proceeds therefrom; (ii) the acquisition of Audio; and (iii) the sale by the
Company of 1,918,000 shares of Common Stock in the Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds." The
Unaudited Pro Forma Consolidated Financial Data for the year ended December 31,
1997 reflects the unaudited financial statements of Audio for the period from
January 1 through November 14, 1997, the date on which it was acquired.
The Unaudited Pro Forma Consolidated Financial Data is not necessarily
indicative of the results of operations that actually would have occurred had
the transactions referenced above been consummated on the dates indicated, or
that may be obtained in the future. The Unaudited Pro Forma Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
16
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
[Enlarge/Download Table]
DECRANE RECAPITALIZATION PRO FORMA FOR AUDIO
AIRCRAFT AND IPO RECAPITALIZATION INTERNATIONAL, ACQUISITION
HOLDINGS, INC. ADJUSTMENTS AND IPO INC. ADJUSTMENTS
-------------- ----------------- ---------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................. $ 108,903 $ -- $ 108,903 $ 12,431 $ --
Cost of sales............................. 80,247 -- 80,247 7,345 63(6)
-------------- ------- ---------------- -------------- -------------
Gross profit (loss)....................... 28,656 -- 28,656 5,086 (63)
Selling, general and administrative
expenses................................ 15,756 100(2) 15,856 3,983 (89)(7)
Amortization of intangible assets......... 905 -- 905 -- 587(8)
-------------- ------- ---------------- -------------- -------------
Operating income (loss)................... 11,995 (100) 11,895 1,103 (561)
Interest expense.......................... 3,154 (1,528)(3) 1,626 8 1,583(9)
Other expenses............................ 243 -- 243 5 --
-------------- ------- ---------------- -------------- -------------
Income (loss) before provision (benefit)
for income taxes(1)..................... 8,598 1,428 10,026 1,090 (2,144)
Provision (benefit) for income taxes...... 3,344 528(4) 3,872 365 (517)(10)
-------------- ------- ---------------- -------------- -------------
Income (loss)(1).......................... $ 5,254 $ 900 $ 6,154 $ 725 $ (1,627)
-------------- ------- ---------------- -------------- -------------
-------------- ------- ---------------- -------------- -------------
Income (loss) applicable to common
stockholders(1)......................... $ 2,609 $ 3,545(5) $ 6,154 $ 725 $ (1,627)
-------------- ------- ---------------- -------------- -------------
-------------- ------- ---------------- -------------- -------------
Income (loss) per common share(1)
As reported
Basic................................. $ 0.69
Diluted............................... 0.62
Pro forma
Basic................................. $ 1.16
Diluted............................... 1.10
Weighted average number of common shares
outstanding
As reported
Basic................................. 3,803
Diluted............................... 4,892
Pro forma
Basic................................. 5,304
Diluted............................... 5,606
PRO FORMA FOR OFFERING PRO FORMA
ACQUISITION ADJUSTMENTS AS ADJUSTED
-------------- ------------- -----------
Revenues.................................. $ 121,334 $ -- $ 121,334
Cost of sales............................. 87,655 -- 87,655
-------------- ------------- -----------
Gross profit (loss)....................... 33,679 -- 33,679
Selling, general and administrative
expenses................................ 19,750 -- 19,750
Amortization of intangible assets......... 1,492 -- 1,492
-------------- ------------- -----------
Operating income (loss)................... 12,437 -- 12,437
Interest expense.......................... 3,217 (2,192)( 1) 1,025
Other expenses............................ 248 -- 248
-------------- ------------- -----------
Income (loss) before provision (benefit)
for income taxes(1)..................... 8,972 2,192 11,164
Provision (benefit) for income taxes...... 3,720 880 (12 4,600
-------------- ------------- -----------
Income (loss)(1).......................... $ 5,252 $ 1,312 $ 6,564
-------------- ------------- -----------
-------------- ------------- -----------
Income (loss) applicable to common
stockholders(1)......................... $ 5,252 $ 1,312 $ 6,564
-------------- ------------- -----------
-------------- ------------- -----------
Income (loss) per common share(1)
As reported
Basic.................................
Diluted...............................
Pro forma
Basic................................. $ .99 $ .91
Diluted............................... .94 .87
Weighted average number of common shares
outstanding
As reported
Basic.................................
Diluted...............................
Pro forma
Basic................................. 5,304 7,222
Diluted............................... 5,606 7,524
The accompanying notes are an integral part of the Unaudited Pro Forma
Consolidated Financial Data.
17
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects income (loss) before the effect of a $2,078,000 extraordinary loss
incurred as a result of the Company's debt refinancing. See the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus.
(2) Represents incremental selling, general and administrative expenses
associated with regulatory compliance requirements including listing,
registrar and transfer agent fees, quarterly and annual report and proxy
statement preparation and distribution expenses, legal and accounting fees
and director and officers' liability insurance premiums.
(3) Represents a reduction in interest expense to reflect the IPO and
application of the net proceeds therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) Represents an increase in the provision for income taxes resulting from an
increase in pro forma taxable income.
(5) Reflects the elimination of preferred stock dividends and adjustment to the
redemption value of mandatorily redeemable common stock warrants as a result
of the Recapitalization and IPO.
(6) Represents an increase in depreciation expense to reflect a $486,000
increase in the fair value of assets acquired.
(7) Represents: (i) a $21,000 increase in depreciation expense to reflect a
$486,000 increase in the fair value of assets acquired; and (ii) a $110,000
net decrease in compensation expense attributable to the resignation of one
former stockholder of Audio as of the acquisition date, offset by an
increase in compensation for the two remaining former stockholders of Audio
pursuant to employment agreements entered into with the Company.
(8) Represents an increase in amortization expense resulting from the
amortization of $20,110,000 of goodwill related to the acquisition on a
straight-line basis over 30 years.
(9) Represents an increase in interest expense resulting from Credit Facility
borrowings to finance the acquisition.
(10) Represents a decrease in the provision for income taxes as a result of a
decrease in pro forma taxable income.
(11) Reflects a decrease in interest expense to reflect the sale by the Company
of 1,918,000 shares of Common Stock in the offering and the application of
the net proceeds therefrom as set forth under "Use of Proceeds."
(12) Represents an increase in the provision for income taxes resulting from an
increase in pro forma taxable income.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations have been affected by its history of
acquisitions. Since its formation in 1989, the Company has completed nine
acquisitions of businesses or assets, the most recent of which, Audio, was
closed in November 1997. The Company's revenues have grown at a 47.3% compounded
annual rate from 1995, the year of the most recent low in commercial aircraft
production, through 1997, pro forma for the acquisition of Audio. During this
same period, operating income as a percentage of revenues increased to 11.0%
from 3.3%, primarily as a result of increased sales volume without a
corresponding increase in fixed costs, a shift in the sales mix toward more
profitable products, variable cost reductions and price increases.
The Company's principal strategy is to establish and expand leading market
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industries, with a focus on the manufacturing of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading market positions while maintaining a balance of revenues among the
OEM market, the retrofit market and the aftermarket. The Company believes that
such a strategy will position it for growth over an entire aircraft industry
economic cycle. For example, the Company's revenues grew 31% without
acquisitions from 1992 through 1995, a period in which new aircraft deliveries
by Boeing and Airbus declined from 603 to 330.
All of the Company's acquisitions have been accounted for under the purchase
method of accounting which resulted in approximately $40.3 million of goodwill
reflected on the balance sheet as of December 31, 1997. The annual amortization
of goodwill will result in non-cash charges to future operations of
approximately $1.6 million per year (of which approximately 40% of such
amortization is deductible for tax purposes).
Historically, the Company's systems integration operations have been
affected by the timing and magnitude of program awards, at times resulting in
quarterly and yearly fluctuations in revenue and earnings, such as the one-time
growth created by the 1996 contract to provide systems integration services for
in-flight entertainment system developed by Interactive Flight Technologies Inc.
("IFT") on 19 wide-body aircraft for Swiss Air Transport Co. Ltd. ("Swissair").
That program has been substantially completed (in 16 of the 19 aircraft) as of
December 31, 1997, and no follow-on contracts have been booked with IFT.
However, the Company believes that it has lessened its exposure to such
fluctuations by developing capabilities in multiple major systems integration
areas: in-flight entertainment systems, safety systems, and GPS and other
navigation systems.
In April 1997, the Company used the net proceeds from the IPO, together with
borrowings under the Credit Facility, to repay outstanding (i) senior revolving
line of credit borrowings; (ii) senior term notes; (iii) senior subordinated
notes; and (iv) convertible subordinated notes payable. In conjunction with the
debt repayment, the Company incurred a $2.1 million extraordinary charge, net of
an estimated $1.4 million income tax benefit, which is comprised of: (i) a $1.9
million write-off of deferred financing costs; (ii) a $1.2 million write-off of
unamortized original issued discounts; (iii) a $0.3 million charge for a
prepayment penalty and expenses; and (iv) a $0.1 million write-off of the
unamortized portion of an interest rate cap agreement.
Certain of the contact blanks used by the Company in the production of its
contacts are manufactured at the Company's Swiss facility and shipped to its El
Segundo, California facility for plating and assembly. In 1996, 1997 and 1998,
solely in an effort to mitigate the effects of currency fluctuations between the
U.S. Dollar and the Swiss Franc, the Company entered into forward exchange
contracts at fixed rates and plans to continue this forward exchange program in
the future. The Company does not engage in any currency exchange transactions
for trading or speculative purposes. Gains and losses on
19
foreign exchange contracts are recognized currently in the consolidated
statements of operations. In the fourth quarter of 1997, the Company recorded a
$0.5 million unrealized market value loss on the open 1998 contracts. In 1996,
the Company did not experience any material changes in the cost of contact
blanks resulting from currency fluctuations.
RESULTS OF OPERATIONS
The following table sets forth the items in the Company's consolidated
statements of operations as percentages of its revenues for the periods
indicated:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ----------
Revenues.................................................................. 100.0% 100.0% 100.0%
Cost of sales............................................................. 77.8 75.9 73.7
---------- ---------- ----------
Gross profit.............................................................. 22.2 24.1 26.3
Selling, general and administrative expenses.............................. 16.9 16.5 14.5
Amortization of intangible assets......................................... 2.0 1.1 0.8
---------- ---------- ----------
Operating income.......................................................... 3.3 6.5 11.0
Interest expense.......................................................... 6.8 6.5 2.9
Other expense, net........................................................ 0.7 0.2 0.2
---------- ---------- ----------
Income (loss) before provision for income taxes, and extraordinary item... (4.2) (0.2) 7.9
Provision for income taxes................................................ (2.0) (1.1) (3.1)
---------- ---------- ----------
Income (loss) before extraordinary item................................... (6.2) (1.3) 4.8
Extraordinary loss from debt refinancing.................................. -- -- (1.9)
---------- ---------- ----------
Net income (loss)......................................................... (6.2)% (1.3)% 2.9%
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) applicable to common stockholders....................... (5.9)% (9.8)% 0.5%
---------- ---------- ----------
---------- ---------- ----------
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for
1997 from $65.1 million for 1996. Revenues increased primarily due to the
following: (i) the inclusion of $10.7 million of revenues from ADS which was
acquired on September 18, 1996; (ii) growth in the Company's private labeling
programs of $6.4 million; (iii) growth in contact sales of $6.3 million driven
by new aircraft production rate increases; (iv) an increase in sales of harness
assemblies for in-flight entertainment systems of $5.1 million; (v) an increase
in sales of specialty connectors for cabin management and in-flight
entertainment systems principally on Boeing's 777 aircraft of $4.9 million; (vi)
an increase of sales to IFT of $3.3 million relating to a major systems
integration program for Swissair; (vii) the inclusion of $3.0 million of revenue
from Elsinore which was acquired on December 5, 1996; (viii) new systems
integration programs for navigational systems of $1.5 million; (ix) the
inclusion of $1.3 million of revenue from Audio which was acquired on November
14, 1997; (x) a new systems integration program for United Parcel Service of
$0.9 million; and (xi) the overall growth in the commercial aircraft market.
Partially offsetting this increase was a decline in sales to AT&T Wireless
Services, Inc. ("AT&T Wireless") of $3.8 million, reflecting the completion in
late 1995 and early 1996 of a major systems integration program.
GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7
million for 1997 from $15.7 million for 1996. Gross profit as a percentage of
revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in
profit margin was attributable to an increased sales volume, favorable mix,
20
savings from the rationalization of the newly purchased AMP Facility with the
Company's existing facilities in El Segundo, California and Lugano, Switzerland,
sustained price increases and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $5.0 million, or 46.6%, to $15.8
million for 1997 from $10.7 million for 1996. SG&A expenses as a percentage of
revenues decreased to 14.5% for 1997 from 16.5% for 1996. SG&A expenses
increased primarily due to the following: (i) the Company added staff to pursue
higher sales to OEMs and to develop capabilities for in-flight entertainment,
navigation and satellite communication and safety systems integration services;
(ii) the inclusion of SG&A expenses from (a) Aerospace Display Systems ("ADS"),
a manufacturer of dichroic LCD devices acquired from Allard Industries, Inc.,
(b) certain manufacturing assets (collectively, the "AMP Facility") from AMP,
Inc. ("AMP") and (c) Elsinore Aerospace Services, Inc. and the Elsinore
Engineering Services division (collectively, "Elsinore") of Elsinore. L.P. which
were acquired in late 1996; and (iii) the inclusion of SG&A expenses from Audio
which was acquired in 1997.
OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to
$12.0 million for 1997 from $4.3 million for 1996. Operating income as a
percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The
increase in operating income resulted from the factors described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to
$3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the
completion of the IPO on April 16, 1997 and the repayment of a substantial
portion of the Company's debt with the proceeds.
PROVISION FOR INCOME TAXES. During 1997, the Company reduced its deferred
tax asset valuation allowance by $0.5 million to reflect the book benefit of
federal and state net operating loss carry forwards not previously recognized.
The Company has approximately $2.5 million of net operating loss carry forwards
available at December 31, 1997 for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, the Company incurred
a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax
benefit, as a result of refinancing the Company's debt with the proceeds from
the IPO.
NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for
1997 from a net loss of $0.8 million for 1996. The increase is a result of the
factors described above.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable
to common stockholders increased $6.9 million to a net income of $0.5 million
for 1997 from a net loss applicable to common stockholders of $6.4 million for
1996. The increase resulted from the factors described above, plus a $2.1
million decrease in the redemption value adjustment of mandatorily redeemable
common stock warrants between the two periods. Current warrants were
subsequently redeemed. In addition, the increase was also influenced by a $0.8
million decrease in cumulative preferred stock dividends attributable to the
preferred stock that was converted into common stock as part of the
Recapitalization. See "Description of Capital Stock-the Recapitalization".
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for
1996 from $55.8 million for 1995. Revenues increased primarily due to the
following: (i) growth in contact sales driven by new aircraft production rate
increases and growth in the Company's private labeling programs of $6.4 million;
(ii) an increase of sales to IFT of $3.0 million in 1996 relating to a major
systems integration program for Swissair; (iii) the inclusion of $2.8 million of
revenues from ADS which was acquired on September 18, 1996; (iv) an increase in
sales of specialty connectors for cabin management and in-flight
21
entertainment systems on Boeing's 777 aircraft of $2.4 million; and (v) an
increase in sales of harness assemblies for in-flight entertainment systems of
$2.4 million. Partially offsetting this increase was a decline in sales to AT&T
of $9.2 million, reflecting the completion in 1995 of a major systems
integration program primarily for American Airlines.
GROSS PROFIT. Gross profit increased $3.3 million, or 26.9%, to $15.7
million for 1996 from $12.4 million for 1995. Gross profit as a percentage of
revenues increased to 24.1% for 1996 from 22.2% for 1995. This increase was
attributable to an improvement in gross profit as a percentage of revenues from
the sale of contacts for 1996, partially offset by a decline in higher margin
sales to AT&T. This improvement resulted from sustained price increases,
increased sales volume, lower wage-related expenses and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.5
million, or 15.7%, to $10.9 million for 1996 from $9.4 million for 1995. SG&A
expenses as a percentage of revenues decreased to 16.7% for 1996 from 16.9% for
1995. SG&A expenses increased primarily due to the following: (i) the Company
added staff to pursue higher sales to OEMs and to develop capabilities for in-
flight entertainment, navigation and satellite communication and safety systems
integration services; and (ii) the inclusion of SG&A expenses from ADS and
Elsinore, which were acquired in 1996. This increase in SG&A expenses was offset
partially by the elimination of $0.7 million of expenses of the Minority
Interest Acquisition.
OPERATING INCOME. Operating income increased $2.4 million, or 131.7%, to
$4.3 million for 1996 from $1.8 million for 1995. The increase in operating
income resulted from the factors described above and a decline of $0.4 million
in amortization of intangible assets as a result of the termination of certain
non-compete agreements.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 11.2%, to
$4.2 million for 1996 from $3.8 million for 1995. This increase resulted from
higher outstanding indebtedness attributed to the funding of the acquisitions of
ADS and Elsinore and the purchase of the AMP Facility.
NET LOSS. Net loss decreased $2.6 million, or 76.3%, to $0.8 million for
1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted
from the factors described above and a lower tax provision resulting from the
Minority Interest Acquisition in February 1996.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $3.1 million, or 92.2%, to $6.4 million for 1996 from a
net loss applicable to common stockholders of $3.3 million for 1995. The
increase resulted from the change in redemption value of mandatorily redeemable
common stock warrants of $5.0 million (resulting from an increase in the value
of the warrants due to the Company's improved results from operations and the
anticipated price of the Common Stock as a result of the Offering) and the
increase in cumulative convertible preferred stock dividends of $0.7 million
(resulting from new issuances of preferred stock), which were offset in part by
the decrease in net loss of $2.6 million. As a result of the Recapitalization,
substantially all warrants were exchanged for Common Stock and all preferred
stock was converted into Common Stock. See "Description of Common Stock--The
Recapitalization."
LIQUIDITY AND CAPITAL RESOURCES
The Company has required cash primarily to fund acquisitions and, to a
lesser extent, to fund capital expenditures and for working capital.
In 1997 and 1996, the Company generated cash from operating activities of
$4.6 million and $3.0 million, respectively. Cash from operating activities is
net of interest payments of $2.8 million and $3.0 million for 1997 and 1996,
respectively. With the net proceeds of the Offering to be received by the
22
Company, the Company estimates that it will repay a significant portion of its
debt. As a result, the related interest payments will decrease substantially.
See "Use of Proceeds."
In 1997 and 1996, the Company used $5.2 million and $0.9 million,
respectively, in cash for working capital. The Company's accounts receivable
consist of trade receivables and unbilled receivables which are recognized
pursuant to the percentage of completion method of accounting. Trade receivables
increased $3.0 million and $2.7 million in 1997 and 1996, respectively, due to
higher sales. Unbilled receivables increased $0.2 million in 1997 as a result of
the systems integration program for Swissair (through IFT) that began in
mid-1996. Inventories increased by $5.0 million and $2.7 million in 1997 and
1996, respectively, in support of sales growth. Accounts payable decreased by
$0.4 million in 1997 and increased by $1.9 million in 1996. The foregoing
amounts for accounts receivable, inventories and accounts payable are consistent
with the amounts set forth in the Consolidated Statements of Cash Flow contained
herein.
Net cash used in investing activities was $27.8 million for 1997 and $24.0
million for 1996. Of the $27.8 million used in 1997, $23.6 million related to
the acquisition of Audio in November 1997. (The total purchase price for the
Audio acquisition also included contingent consideration with a maximum of $6.0
million payable in 1999 and 2000.) Of the $24.0 million used in 1996, $22.6
million related to the Minority Interest Acquisition in February 1996, the
acquisition of ADS in September 1996 and the acquisition of Elsinore and the
purchase of the AMP Facility in December 1996. Capital expenditures of $3.8
million and $1.5 million were made in 1997 and 1996, respectively. Capital
expenditures were incurred in 1997 to: (i) increase manufacturing capacity in
support of revenue growth; (ii) improve plating controls and capacity; and (iii)
construct three additional selective plating machines. The Company anticipates
capital expenditures of approximately $4.5 million in 1998.
Net cash provided by financing activities in 1997 was $23.0 million. The
Company raised $28.9 million in net proceeds from the sale of approximately 2.7
million shares of Common Stock in the IPO in April, 1997. The net proceeds from
the Offering were applied to repay amounts due under the Company's prior senior
revolving line of credit (the "Prior Credit Facility"). Subsequently, in April
1997, concurrent with the IPO, the Company replaced the Prior Credit Facility
with the present Credit Facility, and in November 1997 financed the Audio
Acquisition (including the related fees and expenses) through a drawdown under
the Credit Facility.
Net cash provided by financing activities in 1996, was $21.1 million.
Specifically, the Company financed the Minority Interest Acquisition (including
the related fees and expenses) in February 1996 for $6.5 million, the
acquisition of ADS (including the related fees and expenses) in September 1996
for $11.4 million, and the acquisition of Elsinore and the initial cash portion
of the AMP Facility acquisition in December 1996 for an aggregate of $8.0
million. The foregoing acquisitions were financed by various combinations of
convertible preferred stock (all of which was subsequently converted to Common
Stock during the Recapitalization), warrants for Common Stock, convertible
notes, debt notes, and a total of $2.1 million in drawdowns under the Prior
Credit Facility.
Cash decreased $0.1 million in 1997 and remained unchanged in 1996 due to
the factors described above. The Company entered into the Credit Facility in
April, 1997 which initially provided for a $40.0 million senior revolving credit
facility which expires in 2002. The Credit Facility was amended to increase the
permitted maximum borrowings by $20.0 million to $60.0 million in November 1997,
concurrent with the closing of the acquisition of Audio. Availability under the
Credit Facility was $24.0 million and working capital aggregated $24.8 million
as of December 31, 1997. The interest rate under the Credit Facility was
initially, at the option of the Company, either the prime rate or 1% above a
certain floating interbank offered rate ("IBOR"). The interest rate is to be
reset quarterly based upon a ratio of debt to the Company's earnings before
interest, taxes, depreciation and amortization, pro forma (for acquisitions) for
the 12 month period ending on such date; the maximum rate is either 0.75% above
the prime rate or 2.0% above IBOR. The Credit Facility contains restrictive and
financial covenants,
23
including a restriction on acquisitions having a purchase price in excess of $10
million. The Credit Facility was amended to increase the permitted maximum
borrowings by $15 million to $75.0 million in February 1998 and is subject to an
automatic reduction by $0.5 million on the last day of each month commencing
January 31, 1999.
The Company believes that the current levels of working capital and amounts
available under the Credit Facility will enable it to meet its liquidity
requirements through the end of 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first quarter
of 1998, and does not anticipate a significant impact on the financial
statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required beginning with the statement made
as of December 31, 1998.
FORWARD-LOOKING STATEMENTS
This Prospectus, particularly the sections entitled "Prospectus Summary,"
"Use of Proceeds," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," contains certain
forward-looking statements and other statements that are not historical facts
concerning, among other things, market conditions of the aircraft industry, the
demand for avionics components and systems and future strategic acquisitions.
There can be no assurance that the Company has accurately identified and
properly weighed all of the factors which affect market conditions and demand
for the Company's products and services, that the public information upon which
the Company has relied is accurate or complete or that the Company's analysis of
the market and demand for its products and services is correct and, as a result,
the strategy based on such analysis will be successful. See "Risk Factors" for a
more detailed summary of factors which could affect future results.
24
BUSINESS
GENERAL
The Company manufactures avionics components and provides avionics systems
integration services in certain niche markets of the commercial and high-end
corporate jet aircraft industries. The products and services offered by the
Company are utilized primarily in commercial and corporate aircraft to connect,
support and/or integrate various avionics systems, including cabin avionics
systems and flight deck avionics systems. The Company's targeted markets consist
of commercial aircraft and avionics OEMs, the commercial aircraft retrofit
market, the commercial aircraft aftermarket and high-end corporate jet market.
The Company also sells products and services to the military aircraft market.
The Company seeks to maximize its sales by emphasizing the complementary
nature of its products and services. Components manufactured by the Company
include: (i) contacts (of which the Company believes it is the largest supplier
of bulk contacts to the commercial aircraft OEMs); (ii) connectors (which often
utilize the contacts manufactured by the Company); (iii) harness assemblies
(which often utilize the connectors manufactured by the Company); and (iv)
avionics support structures (which often are packaged with the Company's
connectors and harness assemblies in installation kits). The Company also
manufactures dichroic LCD devices, which are used with flight deck avionics, and
believes it is the largest supplier of such devices to the commercial aircraft
OEMs. In addition, the Company provides stereo systems, video monitors,
amplifiers, chimes and paging devices, headphone systems and passenger switch
and cabin lighting and climate controls for the high-end corporate jet market.
The systems integration services provided by the Company include design and
engineering, FAA certification, manufacture of installation kits and systems
installation. The Company manufactures many of the components required to
complete a systems integration project, which it believes provides it a critical
competitive advantage.
The Company was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, the Company has
completed nine acquisitions of businesses or assets. A summary of these
transactions follows:
[Enlarge/Download Table]
YEAR OF
TRANSACTION TARGET PRINCIPAL PRODUCTS AND SERVICES(1)
------------ ------------------------------- ---------------------------------- APPROXIMATE
PURCHASE PRICE(2)
-----------------
(IN MILLIONS)
1990 Hollingsead International, Inc. Avionics support structures $ 9.1
1991 Tri-Star Electronics
International, Inc. Contacts and connectors *(3)
1991 Tri-Star Europe, S.A. Contact blanks *(3)
1991 Tri-Star Technologies, Inc. Wire marking equipment *(3)
1991 Cory Components Connectors & harness assemblies 7.7(4)
1996 ADS Dichroic LCD devices 13.4
1996 Elsinore Engineering services 2.6
1996 AMP Facility Contact blanks 6.8
1997 Audio Cabin management &
entertainment products 24.7(5)
--------------------------
(1) At the time of the transaction.
(2) Includes, where applicable, related fees and expenses and post closing
adjustments.
(3) Although each of Tri-Star Electronics International, Inc., ("Tri-Star"),
Tri-Star Europe S.A. ("Tri-Star Europe") and Tri-Star Technologies, Inc.
("TST") was acquired pursuant to a separate agreement, the purchase price,
which was $10.4 million for all three entities, was determined in the
aggregate.
(4) The Company acquired 75% of Cory Components in 1991 for approximately $2.0
million. In February 1996, the Company acquired the 25% which it did not
already own for approximately $5.7 million.
(5) Subject to contingent consideration of up to $6,000,000 depending on certain
performance criteria for Audio.
25
The Company commenced its operations in October 1990 with the acquisition of
Hollingsead, which, at the time of the acquisition, was solely a manufacturer of
avionics support structures. The Company expanded its manufacturing operations
with the 1991 acquisition of Tri-Star, Tri-Star Europe and TST and Cory
Components, Inc. (the "Tri-Star Companies"). The Company's management has
refocused and expanded the businesses which were acquired in the Hollingsead and
Tri-Star transactions. By capitalizing on Hollingsead's manufacturing strength
in avionics support structures, which are used extensively in the systems
integration process, the Company has expanded Hollingsead into a full-service
systems integrator concentrated in the retrofit market. Concurrently, the
Company has enhanced the market positions of the Tri-Star Companies as a leading
supplier of certain low-cost, high-quality avionics components. Management has
focused on reducing costs, improving quality and increasing the market
penetration of the components manufactured by these companies.
During the last two years, the Company completed: (i) the acquisitions of
ADS and Elsinore; (ii) the purchase of the AMP Facility; (iii) the acquisition
of the remaining 25% interest in Cory Components which it did not already own;
and (iv) the acquisition of Audio. The acquisition of ADS, a manufacturer of
dichroic LCD devices, which the Company believes is the largest supplier of such
products to commercial aircraft OEMs, expanded the Company's offering of
components used in flight deck avionics systems. The acquisition of ADS has
allowed the Company to capitalize on the upturn in aircraft OEM production by
increasing its revenue content per aircraft. The acquisition of Elsinore, with
its DAS approval, permits the Company to issue, through Elsinore, on behalf of
the FAA, certification that the designs of aircraft modifications performed in
connection with systems integration services conform to all pertinent FAA
requirements. Such certifications are issued as FAA-approved STCs, which
constitute, in effect, specific FAA design approval for each modification. In
addition, the acquisition of Elsinore enhanced the Company's systems integration
capabilities and increased the number of engineering professionals dedicated to
the Company's systems integration effort by approximately 50%. The acquisition
of Elsinore also provided the Company with an important new customer in the
aircraft industry, Daimler-Benz Aerospace Airbus GmbH, and the opportunity to
obtain additional customers. The Company's purchase of the AMP Facility added
contact capability and capacity which enables the Company to optimize and expand
its contact manufacturing operations. The AMP Facility enables the Company to
produce contact blanks using a cold-heading manufacturing process which, when
used for high volume production, is more cost effective than screw machine
operations. As a result of the purchase of the AMP Facility, the Company has
significantly increased its sales of contacts and the number of distributors to
which it sells. The Company believes Audio, which it acquired in November 1997,
is the nation's largest and leading independent provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. The acquisition of Audio expanded the Company's
offering of products and systems for the corporate jet market.
INDUSTRY OVERVIEW AND TRENDS
The Company participates in the commercial, high-end corporate jet and
military segments of the aircraft industry. Within those segments, the Company
sells to commercial and high-end corporate jet OEMs, major avionics equipment
OEMs and military aircraft OEMs as well as to the aircraft retrofit market,
aircraft component aftermarket and corporate jet modification centers. According
to the Boeing Report, expenditures for new commercial jet aircraft production
are expected to total approximately $490 billion for the period from 1996
through 2006; and worldwide air travel will average 4.9% annual growth over the
next two decades. The aircraft component retrofit market (the integration of new
systems into existing aircraft) and the aircraft component aftermarket (the
manufacture and sale of replacement products for existing aircraft) are served
by a highly fragmented group of companies, including many of the OEMs. The
aviation industry has been consolidating at an increasing pace in recent years,
and it is expected that such consolidation will continue for the foreseeable
future.
26
The market for commercial aircraft designed to carry 100 or more passengers
is served principally by Boeing and Airbus. The market for commercial aircraft
designed to carry fewer than 100 passengers is served by more than a half dozen
other manufacturers. The major systems installed on new commercial and military
aircraft, such as flight deck avionics systems, are produced by a limited number
of OEMs, including Allied Signal, Rockwell Collins, General Electric, Honeywell,
Raytheon and Sextant Avionique. Components and sub-systems for new aircraft are
provided by a much more fragmented group of smaller, specialized companies such
as the Company. The Company markets its commercial aircraft products directly to
the aircraft OEMs as well as to the major systems OEMs. In some cases, the
Company sells its products under private label agreements with certain component
manufacturers.
The Company believes that there are numerous barriers to entry which limit
access to the aircraft industry. These barriers include: (i) general FAA
certification requirements, including those necessary to perform aircraft
modifications or maintenance; (ii) required compliance with military
specifications for certain products sold to commercial and military markets;
(iii) required compliance with qualification and approval standards imposed by
aircraft and avionics systems OEMs in addition to FAA aircraft manufacturing and
aircraft modification design and installation standards; (iv) reluctance of OEMs
to list new companies as approved vendors on the engineering drawings of the
OEMs (referred to as "print position"); and (v) significant initial capital
investment and tooling requirements necessary for the manufacture of certain
aircraft components and systems.
The Company believes the following trends are affecting the commercial and
corporate aircraft industry:
INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The Boeing Report cites that
over the next decade, the world jetliner fleet is projected to grow from 11,500
aircraft at the end of 1996 to nearly 17,000 aircraft in 2006 and to 23,600 by
2016; and the report estimates that, over the next 20 years, the industry will
require 16,160 new aircraft both to support the projected world fleet expansion
and to replace capacity lost as aircraft are removed from commercial airline
service. According to aircraft delivery schedules revised in January 1998,
combined annual deliveries from Boeing (including the former McDonnell Douglas)
and Airbus Industries are projected to increase from 397 aircraft in 1996 and
557 in 1997 to an estimated 785 in 1998. The Company believes that every
commercial aircraft currently produced by Boeing and Airbus contains components
manufactured by it. The Boeing report notes that the pent-up demand for
replacement aircraft, and upcoming deadlines for noise abatement, which may take
some older aircraft out of service, will require carriers to add capacity in
order to keep pace with traffic growth.
INCREASED DEMAND FOR NEW CORPORATE JET AIRCRAFT. According to the
ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new corporate jet aircraft
are expected to be delivered from 1997 through 2001, a 61% increase over the
previous five year period. The Company believes that the increase in new
corporate jet aircraft production is being driven by a number of factors,
including: (i) the introduction of new, larger and more efficient aircraft; (ii)
the growing popularity of fractional aircraft ownership; (iii) the minimal
availability of used aircraft; (iv) the need for long range flights to expanding
international markets; and (v) the increased demand for more expedient travel.
INDUSTRY CONSOLIDATION - REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND
VENDORS. In order to reduce purchasing costs and have greater control over
quality, OEMs and aircraft operators have been reducing the number of vendors
and suppliers from whom they purchase. Suppliers and vendors must now possess
the critical mass and production and distribution capabilities required to
provide a broader range of products and services to airlines and OEMs on a
just-in-time basis. These requirements, coupled with the high level of
fragmentation within the aerospace industry, have led many companies to realize
significant internal synergies and external marketing benefits from merging.
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INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has
been an increase in demand for cabin avionics systems, including in-flight
passenger telecommunications systems and in-flight entertainment systems, such
as video, video-on-demand and other interactive systems. The Company believes
that the increase in new corporate jet production is being driven by numerous
factors, including: (i) the introduction of new, larger and more efficient
aircraft; (ii) the growing popularity of fractional aircraft ownership; (iii)
the minimal availability of used aircraft; (iv) the need for long range flights
to expanding international markets; (v) the increased demand for more expedient
travel.
PROLIFERATION OF NEW SAFETY REQUIREMENTS. The advent of new technologies
and FAA mandates are driving a proliferation of new safety systems for
airplanes. The world's airlines, aircraft and avionics OEMs and regulatory
agencies have coordinated to develop industry standards, regulations and system
requirements for future air navigation systems ("FANS"). Through the
implementation of FANS, a complete modernization of both airborne and
ground-based air traffic management systems is expected to be introduced. As
overall navigation system accuracy is improved, new navigation systems, such as
GPS, will be required. Other new technologies which have already been mandated
include the traffic collision avoidance system ("TCAS"), cargo hold fire
detection and suppression systems and windshear detection systems. In
anticipation of new FAA recommendations and mandates, many airlines have already
begun to install enhanced ground proximity warning systems, a predictive
windshear detection system and enhanced digital flight data recorders. Each of
these systems presents aircraft avionics retrofit opportunities to the Company.
DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to
reduce operating and capital costs associated with providing services. In
response, airlines have increased purchases of certain components from third
parties and have outsourced certain repair, overhaul and retrofit functions.
Similarly, aircraft and avionics OEMs increasingly are reducing their level of
vertical integration by outsourcing more manufacturing, repair and retrofit
functions to third parties. The Company believes that these trends are creating
increased demand for low-cost, high-quality component manufacturers and systems
integrators, such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial and high-end corporate jet
aircraft industry as a result of the following competitive strengths:
LEADING POSITIONS IN NICHE MARKETS. The Company successfully has
established strong positions in several specialized niches within the commercial
aircraft industry. The Company believes that it is the largest supplier of bulk
contacts to the commercial aircraft OEMs. The Company also believes it is the
largest supplier of dichroic LCD devices for use by commercial aircraft OEMs and
a major supplier of harness assemblies for use in in-flight entertainment
systems. The Company believes it is the largest provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. The Company seeks to utilize its strong market
positions to compete more effectively as well as to capitalize on industry
consolidation trends.
RECORD OF SUCCESSFUL ACQUISITIONS. Since its formation in 1989, the Company
has completed nine acquisitions of businesses or assets, including, in 1997, the
acquisition of Audio and, in 1996, the acquisitions of ADS and Elsinore and the
purchase of the AMP Facility. The Company has demonstrated its ability to: (i)
identify strategic acquisition targets; (ii) complete the acquisitions of
identified targets; (iii) retain key management; and (iv) increase revenues of
an acquired company, often while refocusing that company's business strategy.
The Company believes that its acquisition success has resulted from its ability
to identify and screen acquisition candidates, implement an effective cost
reduction program and expand and diversify the products and services provided by
an acquired company. In the past, acquisitions by the Company have resulted in
increased indebtedness and interest expense which has caused
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the Company to incur net losses in each year since its inception despite
positive operating income. See "Risk Factors--Risks Associated with
Acquisitions."
ALIGNMENT WITH LEADING AVIONICS AND AIRCRAFT OEMS AND SUPPLIERS. The
Company seeks to maximize its growth by establishing long-term relationships
with leaders in the Company's primary markets. For example, the Company has
entered into supply agreements with Boeing. The Company believes that through
these agreements it is the supplier of a substantial majority of the bulk
contacts for all aircraft currently manufactured by Boeing and the sole source
supplier of certain connectors for in-flight entertainment systems installed by
Boeing on its 777 aircraft. The Company is also: (i) a preferred supplier of
harness assemblies to Matsushita for its in-flight entertainment systems; (ii) a
preferred systems integrator for the fire suppression and smoke detection
systems of Securaplane and Kidde Safety; (iii) a preferred systems integrator
for Canadian Marconi Co. and Smiths Industries plc in navigation systems; and
(iv) a preferred systems integrator for Honeywell's GPS systems.
LOW-COST, HIGH-QUALITY OPERATIONS. The Company believes that it has
established low-cost operations through well-defined cost reduction programs,
technological development and the use of vertical integration, where
appropriate. The Company's low-cost operations are demonstrated, for example, by
the growth of the Company's contact private labeling programs under which the
Company supplies contacts to many of its competitors.
The Company uses sophisticated procedures and processes to ensure its
products meet or exceed industry and customer quality requirements. Many
customers formally have recognized the effectiveness of the Company's quality
programs by issuing quality approval letters, awarding quality compliance
certificates and authorizing the Company's inspection personnel to act as the
authorized quality representative of the customer. For example, in February
1996, the Company became the 13th Boeing supplier to receive its D1-9000
Advanced Quality System award, and two of the Company's facilities are currently
ISO-9001 or ISO-9002 certified.
ENGINEERING AND RELATED TECHNICAL CAPACITY INCLUDING INDUSTRY AND REGULATORY
CERTIFICATIONS. The Company believes that it is one of a few companies with the
capability to perform full-service systems integration functions (design and
engineering, FAA certification, installation kit manufacturing and installation
of cabin avionics and flight deck avionics systems on aircraft). The Company
employs FAA-certified airframe and power-plant mechanics who are authorized to
perform certain aircraft modification functions, and approximately 12% of the
Company's employees are engineering professionals. This level of expertise
enables the Company to respond rapidly and effectively to the technical
requirements of its customers as well as to capitalize on the outsourcing trends
in its industry. The Company's subsidiaries hold numerous PMA authorizations
from the FAA, permitting them to manufacture and sell various parts in many
different aircraft; three FAA domestic repair station certificates, authorizing
them to perform certain aircraft modifications; and one of only 26 DASs
worldwide which are authorized by the FAA to provide approval of certain
aircraft modifications as the FAA's designee certificates (all as of December
31, 1997). The FAA approvals obtained by the Company's subsidiaries are owned,
and may only be used by, the subsidiary obtaining such approval.
MANAGEMENT DEPTH AND EXPERIENCE. The Company has assembled a team of
executives, program managers and engineers from many of the major manufacturers
and suppliers to the aircraft industry. Key management and professional
employees of the Company bring experience with them from such companies as The
B.F. Goodrich Co. ("B.F. Goodrich"), BE Aerospace, Inc., COMSAT Corp.,
Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc.,
Matsushita and McDonnell Douglas, providing the Company with broad commercial
aircraft industry expertise. On average, the Company's executive management has
approximately 18 years of related industry experience.
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GROWTH STRATEGY
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industry, with a focus on the manufacture of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading positions while maintaining a balance of revenues among the OEM
market, the retrofit market and the aftermarket. The Company believes that such
a strategy will position it for growth over an entire aircraft industry economic
cycle. Specifically, the Company seeks to:
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage
its core competencies in existing and additional markets, and add new expertise
in the avionics and systems integration fields, by identifying and pursuing
complementary acquisitions that offer strategic value, such as economies of
scale, product line extensions, new customer relationships or increased
manufacturing capacity. While there can be no assurance that the Company will
complete additional acquisitions, the Company believes that the fragmented
nature of the market for aircraft components and systems integration services
will provide the Company with additional opportunities to exploit industry
consolidation trends. See "Risk Factors--Risks Associated with Acquisitions."
CAPITALIZE ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AVIONICS. The Company believes its strong market positions and alignment with
many of the leading commercial aircraft industry participants will enable it to
capitalize on the projected increases in the production of commercial and
high-end corporate aircraft. For example, the Company believes that every
aircraft currently produced by Boeing (including McDonnell Douglas) and Airbus
includes components manufactured by the Company. The Company also believes that
its products are on each model of high-end corporate jet aircraft sold today.
The Company works closely with OEMs and modification centers to meet their
delivery and scheduling requirements, and, in some cases, to provide total,
turnkey solutions to new aircraft. Additionally, the Company believes that the
demand for cabin avionics systems is increasing, primarily as a result of: (i) a
desire by airlines for additional revenue-producing services; (ii) longer
flights; and (iii) increased passenger demand for more sophisticated forms of
in-flight services. The Company believes that this increased demand represents a
significant retrofit and aftermarket opportunity for cabin avionics systems, as
well as the components (such as contacts, connectors and harness assemblies) and
systems integration and installation services necessary to such systems.
EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the
Company's systems integration services have been concentrated in the in-flight
passenger telecommunications market. In 1995, the Company commenced an effort to
diversify the types of systems which it retrofits onto aircraft by expanding its
expertise and sales efforts to include navigation and satellite communication,
safety, and in-flight entertainment systems. As of December 31, 1997, the
Company had contracted to provide systems integration services for GPS
(Continental Airlines through Honeywell and KLM Royal Dutch Airlines through
Canadian Marconi and Smiths Industries plc), smoke detection/fire suppression
safety systems (Southwest Airlines through Securaplane and Northwest Airlines
through Kidde Safety) and in-flight entertainment systems (Swissair through
IFT). In the Company's area of systems integration, it believes that it is the
only company which has in-house capabilities in each of the four elements of
systems integration (design and engineering, certification, installation kit
manufacturing and system installation).
CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the
Company's products and services are utilized to provide an interface between an
aircraft and its avionics systems. Over the past several years, the Company
increasingly has combined certain of the components which it manufactures in
order to create higher value-added products, and develop further market
opportunities through cross-selling and vertical integration of its products.
For example, the contacts manufactured by the Company often are utilized as an
integral component of the Company's connectors. In turn, the connectors
manufactured by the Company often are utilized as primary components of the
Company's harness assemblies. Additionally, in support of the systems
integration services provided by the Company, the
30
Company's harness assemblies often are packaged with its avionics support
structures to form the foundation for the installation kits which are then sold
to the Company's systems integration customers. By emphasizing the complementary
nature of its products and services, the Company seeks to maximize penetration
with existing customers and compete more effectively for new customers.
PRODUCTS AND SERVICES
The Company's principal products and services are: contacts; connectors;
harness assemblies; avionics support structures; dichroic LCD devices;
entertainment and cabin management products; and the integration of certain
cabin and flight deck avionics systems into different aircraft models. The
Company believes that its products are used in each of the commercial aircraft
models currently produced by Boeing (including McDonnell Douglas models) and
Airbus, the two largest commercial aircraft OEMs. In 1997, sales of five classes
of product or service accounted for the bulk of the Company's revenues (pro
forma for the acquisition of Audio): contacts (approximately 30%), connectors
(approximately 22%), systems integration (approximately 15%), dichroic LCD
devices (approximately 11%), and entertainment and cabin management products
(approximately 11%). No other product or service accounted for more than 10% of
the Company's pro forma revenues in 1997.
CONTACTS.
The Company produces precision-machined contacts for use in commercial
aircraft. Contacts conduct electronic signals or electricity and are installed
at the terminus of a wire or an electronic or electrical device. The Company
supplies contacts for use in connectors found in virtually every electronic and
electrical system on the aircraft. Over the last three years the Company has
successfully initiated private labeling programs whereby the Company
manufactures contacts for several of the major connector manufacturers. The
Company sells contacts directly to aircraft and avionics OEMs and, through its
private labeling programs, to connector manufacturers who sell connectors to the
aircraft and avionics OEMs under their brand name. The Company believes that it
is able to sell contacts on a private label basis because of its reputation for
high quality, its levels of service and its low-cost manufacturing operations.
The Company believes that it is the supplier of a substantial majority of the
bulk contact requirements for all aircraft currently manufactured by Boeing.
CONNECTORS.
The Company manufactures and sells to the commercial aircraft industry
electronic and electrical connectors, which provide the electronic or electrical
link between discrete wires and devices. Connectors also serve as a separable
interface that facilitates assembly, installation, repair and removal of wires
or equipment. The Company manufactures a narrow range of electrical and
electronic connectors that are designed and manufactured specifically to operate
in the harsh airborne environment of an aircraft and to meet the critical
performance requirements demanded by the commercial aircraft market. The Company
produces connectors that are used in aircraft galleys, flight decks and control
panels in the passenger cabin. The Company is the sole-source supplier of
certain connectors for in-flight entertainment systems installed by Boeing on
its 777 aircraft.
The Company characterizes its connectors as follows: (i) application
specific-- designed and developed by the Company for a specific application,
usually for a single customer; (ii) proprietary-- Company-designed connectors
which are sold to the broad market for a variety of applications, often evolving
over time from an application specific product; and (iii) industry
standard--produced in accordance with an industry or military controlled design
or specification and sold to the broad market to which the design or
specification relates. Examples of the Company's application specific,
proprietary and industry standard connectors are as follows:
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APPLICATION SPECIFIC. The Company manufactures a connector used as an
electrical distribution block for Boeing's 777 aircraft. Currently, this
product is used solely for this application; however, in the future, it
could be used in similar applications on other aircraft.
PROPRIETARY. The CQ connector family is an application specific product
designed by the Company for use with in-flight entertainment and cabin
management systems on Boeing's 777 aircraft.
INDUSTRY STANDARD. The Company sells standard connectors, built to U. S.
military specification ("mil-spec") standards, which can be used in many
applications without further testing or certification.
HARNESS ASSEMBLIES.
The Company produces harness assemblies for use in cabin avionics systems,
primarily in-flight entertainment systems. A harness assembly is made from wire,
which the Company buys from its vendors, and connectors, contacts and hardware,
which the Company manufactures. The Company sells its harness assemblies to
avionics OEMs. In addition, the Company uses harness assemblies in its systems
integration activities. The Company is currently a primary supplier of harness
assemblies to Matsushita, one of the largest manufacturers of in-flight
entertainment systems.
AVIONICS SUPPORT STRUCTURES.
The Company has designed, patented and produced a wide range of avionics
support structures for use on commercial aircraft. Avionics support structures
are typically comprised of trays, shelving, racks, mounts, and insertion and
extraction devices which are combined with other components to form the
installation kit that securely holds and connects avionics equipment to the
aircraft and other systems or devices such as antennae, flight instruments and
power supplies. Avionics support structures are used to support and
environmentally cool (using fans and air chambers) the avionics equipment,
including navigation, communication and flight control equipment. Avionics
support structures are generally located in the avionics bay of an aircraft and
are secured to the frame of the aircraft. The Company's avionics support
structures are recognized by its customers under the Box-Mount-TM- name which
the Company believes is highly respected in the marketplace. The Company sells
its avionics support structures to aircraft and avionics OEMs, airlines and
major modification centers. In addition, these products are essential components
included in the installation kits which are used in the Company's systems
integration operations.
DICHROIC LCD DEVICES.
Through the acquisition of ADS, the Company became a leading manufacturer of
dichroic LCDs and modules (which are LCDs packaged with a backlight source and
direct drive electronics) used in commercial and military aircraft. The Company
believes it is the primary supplier of dichroic LCD devices to aircraft and
avionics OEMs and the U.S. military.
The Company's dichroic LCD products, which provide output information to the
flight crew, are used in a variety of flight deck applications, including flight
control systems, fuel quantity indicators, airborne communications and safety
systems. Dichroic LCD products are widely used in the aerospace industry because
of their high performance characteristics and custom design. Key performance
characteristics of dichroic LCD devices include high readability in sunlight and
darkness, ability to withstand wide temperature fluctuations and readability
from extreme viewing angles. During the development phase of flight deck
avionics, the Company works closely with its customers to develop products that
meet the customers' requirements which are subsequently incorporated into new or
modified flight decks.
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The Company also manufactures electronic clocks which utilize its dichroic
LCD devices. The Company's clocks utilize its dichroic LCD technology and are
suitable for use in general aviation, business, commercial and military
aircraft. The Company believes that it is the only clock manufacturer which has
designed a line of clocks capable of serving all types of aircraft.
ENTERTAINMENT AND CABIN MANAGEMENT.
Through its recent acquisition of Audio, the Company became a leading
supplier of aircraft entertainment and cabin management product and systems to
the high-end corporate jet market. Audio brings to the Company additional
expertise in: (i) cabin management systems including switching and control
modules; (ii) audio and video components; and (iii) systems engineering and the
integration of cabin management electronics. The Company provides stereo
systems, video monitors, amplifiers chimes and paging devices, headphone systems
and passenger switch and cabin lighting and climate controls. The Company sells
its entertainment and cabin management products and systems to corporate jet
OEMs and major modification centers.
SYSTEMS INTEGRATION.
The Company performs all of the functions necessary to retrofit an existing
aircraft with an avionics system that previously did not exist on the aircraft,
or replace an existing system with an updated one. As a full-service systems
integrator, the Company provides design and engineering, FAA certification,
installation kit manufacturing and systems installation services required to
retrofit an aircraft with a new system. A summary of these functions follows:
DESIGN AND ENGINEERING. The Company provides a full range of systems,
electrical and mechanical engineering services to its customers through its
staff of qualified and experienced engineers and program management
personnel. The Company's engineers work proactively with its customers in
all phases of the systems integration effort to achieve an engineering
design data package. This engineering design data package provides
information to: (i) certify product compliance with applicable industry and
FAA standards and regulations; (ii) define the manufacturing requirements
for kit implementation; and (iii) provide installation definition for actual
installation of the system onto aircraft.
FAA CERTIFICATION. The Company employs on a full-time basis or contracts for
FAA-certified Designated Engineering Representatives ("DERs") to evaluate
the engineering design data package, coordinate compliance testing to
applicable FAA regulations and obtain formal FAA approval of the engineering
design data package. These DERs facilitate FAA approval of the Company's
products and services. In general, DERs evaluate the design of an aircraft
modification, part or system, ensure compliance with the applicable Federal
Aviation Regulations and oversee product testing to ensure the airworthiness
of the aircraft as modified. DERs also either issue, on behalf of the FAA,
certain approvals, or work with the FAA to obtain certain approvals directly
from the FAA. Significant aircraft modifications by anyone other than the
aircraft manufacturer require the issuance of an STC, which constitutes an
FAA determination that the design of the modification meets all pertinent
FAA requirements. STCs may be issued directly by the FAA or on behalf of the
FAA by an approved DAS. The acquisition of Elsinore and its DAS approval
enables the Company to issue STCs for certain modifications without applying
directly to the FAA for such certifications.
INSTALLATION KIT MANUFACTURING. The Company ordinarily applies for and
receives multi-aircraft STCs which constitute design approval for a
modification which may be applied to any aircraft of a particular type. The
approved modifications commonly are referred to as "installation kits." Such
installation kits generally include: (i) parts, components, and
sub-assemblies; and (ii) detailed instructions on approved installation. The
installation kit and all of its elements are defined in the STC in a Master
Data List. Once the Company has an STC, issued directly by the FAA or by the
33
Company's DAS through Elsinore, the Company applies to the FAA for a PMA or
a supplement to an existing PMA, which allows the Company to manufacture the
installation kit in accordance with the approved design and data package.
SYSTEMS INSTALLATION. The Company employs a dedicated team of FAA-certified
mechanics and repairmen to ensure proper installation of the installation
kits and associated avionics systems. These mechanics and repairmen, who
have extensive installation experience over a broad range of commercial
aircraft models, operate within the provisions and limitations of the FAA
repair station certificates which cover the Company's three repair stations.
The Company believes that its staff of kit installation personnel is
sufficiently large and diverse in talent to complete multiple installation
projects simultaneously at different locations.
During 1997 and currently, the Company has focused its systems integration
efforts on the following three general categories of systems: (i) in-flight
entertainment systems; (ii) safety systems; and (iii) GPS and navigation
systems. The Company has targeted these three areas because it believes
significant retrofit opportunities exist due to the advent of new technologies
and the need for the airlines to: (i) capture incremental revenues without
increased capital investment (in-flight entertainment); (ii) satisfy increased
safety and regulatory requirements; and (iii) reduce operating expenses
(navigation). A summary of recent Company activity in each of these categories
follows:
IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is a preferred components
supplier to Cathay Pacific Airlines (through Matsushita), as well as a
supplier of kits to United Airlines (through BE Aerospace, Inc.). Each of
these companies have designed digital interactive passenger entertainment
systems which provide video-on-demand, video games and other electronic
gaming.
SAFETY SYSTEMS. The Company is an integrator of safety systems which are
required by the FAA, or voluntarily adopted by airlines. The Company was
recently selected to integrate smoke detection and suppression systems for
Kidde Safety and Securaplane on aircraft for Northwest Airlines and
Southwest Airlines, respectively. The Company believes significant
opportunity exists for the integration of these types of safety systems onto
aircraft worldwide, and will continue to grow as additional safety
requirements and industry practices are mandated, such as enhanced digital
flight data recorders and ground proximity warning systems.
GPS AND NAVIGATION SYSTEMS. The Company has entered into agreements to
provide systems integration services for GPS on thirteen 747-200/300
aircraft and one MD-82 aircraft. The Company believes that GPS and similar
systems (consistent with the FANS initiative) will be retrofitted into
numerous aircraft over the next few years. In many cases, the airlines are
electing to replace older navigation systems with newer GPS technology due
to avionics obsolescence and significantly increased maintenance costs. In
December 1997, the Company signed a memorandum of understanding with
Honeywell whereby it will become Honeywell's preferred systems integrator
for GPS.
INDUSTRY REGULATION AND APPROVALS
The aviation industry is highly regulated in the U.S. by the FAA and is
regulated in other countries by similar agencies to ensure that aviation
products and services meet stringent safety and performance standards. The
Company and its customers are subject to these regulations. In addition, many of
these customers impose their own compliance and quality requirements on the
Company.
The FAA prescribes standards and licensing requirements for aircraft
components, licenses private repair stations and issues DAS approval, which
gives the holder the right to certify the design of aircraft modifications on
behalf of the FAA. As a result of the FAA's oversight of the Company, the FAA
can authorize or deny authorization of many of the services and products
provided by the Company. Any FAA denial of such required authorizations would
preclude the ability of the Company to provide the pertinent service or product.
Should the Company fail to comply with the applicable FAA standards or
34
regulations, the FAA would have available to it a wide-range of enforcement
options. Such enforcement options include: (i) issuance of a warning letter or a
letter of correction to the Company; (ii) initiation of a civil penalty action
against the Company; (iii) suspension or emergency suspension of a Company
certificate or approval; or (iv) the revocation or emergency revocation of a
Company certificate or approval.
In July of 1997, the FAA notified the Company that its facilities did not
fully comply with certain regulations governing its DAS status, granted the
Company until September 10, 1997 to bring the facilities into full compliance,
and curtailed the operations of the relevant facilities as a DAS until they
achieved full compliance. On August 28, 1997 the FAA inspected the Company's
facilities and determined they were in full compliance. The Company's DAS
approval status was fully restored on September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief in support of its
enforcement powers. In the event the FAA were to suspend or revoke a Company
certificate or approval on an emergency basis, the Company would be obliged to
cease immediately the manufacture of products and the delivery of services which
require such certificate or approval. In the event the FAA were to suspend or
revoke a Company certificate or approval on other than an emergency basis, the
Company would be permitted to continue the manufacture of products and the
delivery of services which require such certificate or approval pending any
available appeals. However, if the FAA were to prevail in any such appeal, upon
the completion of the appeal process the Company would be obliged to cease the
manufacture of such products and the delivery of such services. In addition, in
the event the FAA were to determine that the Company's noncompliance with the
applicable FAA standards or regulations created a safety hazard, the FAA could
order that the pertinent component or aircraft immediately cease to be operated
until appropriate corrective action is taken. This could require the grounding
of aircraft and/or the removal of affected components from aircraft already
returned to service. The Company's FAA approvals are owned, and may only be used
by, the subsidiary obtaining such approval.
All aircraft operated by airlines in the United States must be of a type
which has received an FAA type certificate ("TC"). A TC is issued by the FAA
after the FAA determines that the aircraft type design meets the applicable FAA
airworthiness standards. After a type design has been approved through the
issuance of a TC by the FAA, a manufacturer with rights to the TC can apply for
FAA approval to produce the aircraft. This approval is a "production
certificate." Any major change in design of a type certificated aircraft which
is not significant enough to require a new application for a TC under the FAA's
rules must still be approved by the FAA. FAA approval of such a design change
developed by an entity other than the TC holder is issued under an STC. There
are two types of STCs: a "single-aircraft" STC, which may be applied to a single
aircraft, and a "multi-aircraft" STC, which may be applied to all aircraft of a
particular type design, for example, all Boeing 747-400s.
As of December 31, 1997, the Company had obtained 94 STCs, most of which
were obtained on behalf of its customers in connection with the Company's
systems integration services, and substantially all of which are multi-aircraft
STCs. The Company foresees the need to obtain additional STCs so that it can
expand the services it provides and the customers it serves.
Proposed aircraft modifications can be tested and approved and STCs issued
directly by the FAA or on behalf of the FAA by holders of DAS approvals. DAS
approvals are granted to domestic repair stations, air carriers, commercial
operators of large aircraft, and manufacturers which demonstrate their ability
to provide the personnel and follow specific procedures to ensure the issuance
of STCs only for appropriate design modifications. Each DAS approval holder is
specifically limited by the FAA as to the type of STCs which it can issue. The
Company, which holds a DAS approval through Elsinore, can now issue many of the
STCs (both single and multi-aircraft) it requires in connection with its systems
integration operations.
35
This has eliminated the need for the Company, in most instances, to apply to the
FAA for STC approvals, enabling the Company to obtain STCs more quickly than in
the past.
After obtaining an STC, the Company must apply for a PMA or a PMA supplement
to produce the modification installation kit covered by the STC. The Company has
four PMAs and 69 supplements to its PMAs (as of December 31, 1997). Each initial
PMA is, in general, an approval of the manufacturing or modification facility's
production quality control system. Each supplement authorizes the manufacture of
a particular part in accordance with the requirements of the corresponding STC.
The Company routinely applies for and receives PMA supplements. The Company also
is required to have FAA authority to perform the installation of a modification
kit. This authority is provided either by the Company's PMAs and supplements or
its repair station certificates. In order for a company to perform certain
repair, engineering, installation or other services on aircraft, its facility
must be designated as an FAA-authorized repair station. The Company has three
such repair stations.
In addition to FAA approval of the design, production, and installation of
modifications, the FAA certifies personnel. Selected Company personnel have been
certified by the FAA to perform certain tasks related to the design, production,
and performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. In addition, the FAA delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified designees. The Company employs FAA designees on a full-time basis
to facilitate FAA approval and oversight of the Company's activities. In
addition, the Company contracts with additional FAA designees as they are
needed.
Mil-specs are frequently used by both military and commercial customers in
the aerospace industry to define and control characteristics of a product.
Through the use of a government Qualified Parts List ("QPL") and Qualified
Vendor's List ("QVL"), the customer is assured that a product or service has met
all of the requirements set forth in the mil-specs. Parts listed with a QPL
allow others to reliably design parts to interface with such parts as a result
of the mil-spec standards used. The Company believes that it holds more QPLs for
its contact product line than any other manufacturer.
SALES AND MARKETING
The Company's commercial aircraft products are sold through a group of
geographically assigned direct sales personnel and agents. Technical product
sales support for these sales personnel is provided through product line
managers and the Company's product engineering personnel. Customer service
communication is provided by geographically assigned sales correspondents
located in the Company's manufacturing facilities. The Company may also assign
responsibility for marketing, sales and/or services for certain key customers to
one of the Company's executives. The Company has four authorized distributors
who purchase, stock and resell certain of the Company's product lines.
The Company's systems integration services are sold by sales managers
employed by the Company who are assigned to geographic territories. Because of
the significant amount of technical engineering work required in the sales
process, these sales managers are generally assisted by a support team which
includes program management, installation and engineering personnel. The support
team specializes in one of: (i) in-flight entertainment; (ii) safety systems;
and (iii) GPS and navigation. At such time as the Company obtains a contract for
the system proposed by the sales manager, the support teams continue to manage
the project throughout the entire integration process.
CUSTOMERS
In 1997, the Company sold its products and services to approximately 1,300
customers. The Company's primary customers include aircraft and avionics OEMs,
airlines, aircraft component manufacturers and distributors, and aircraft repair
and modification companies. The Company's two largest customers for the fiscal
year ended December 31, 1997 were Boeing and Matsushita, which accounted for
approximately 19.0% and 11.1%, respectively, of the Company's consolidated
revenues. In addition, a
36
significant portion of the Company's sales of components are sold to Boeing
indirectly through sales to suppliers of Boeing.
Historically, the Company's systems integration operations have been
affected by the timing and magnitude of program awards, at times resulting in
quarterly and yearly fluctuations in revenue and earnings, such as the one-time
growth created by the 1997 contract to provide systems integration services for
IFT's in-flight entertainment system on 19 wide-body aircraft for Swissair. That
program has been substantially completed (in 16 of the 19 aircraft) as of
December 31, 1997, and no follow-on contracts have been booked with IFT.
However, the Company believes that it has lessened its exposure to such
fluctuations by developing capabilities in multiple major systems integration
areas: in-flight entertainment systems, safety systems, and GPS and other
navigation systems. The Company has secured orders for integration services in
each of these targeted areas. The Company believes that in 1998 it will more
than significantly offset the reduction in revenues related to the IFT business
with system integration services for in-flight entertainment systems for United
Airlines (through BE Aerospace, Inc.) and fire suppression and detection
services for Southwest Airlines (through Securaplane), Northwest Airlines
(through Kidde Safety) and American Airlines (through B.F. Goodrich/Whitaker),
as well as a cabin pressurization system for Northwest Airlines and Air Canada
(through the Hamilton Standard division of United Technologies, Inc. ("Hamilton
Standard")). The Company believes that potential retrofit opportunities exist
for the cabin pressurization system with other operators of DC9-30 and DC9-50
series aircraft. The timing and magnitude of program awards for systems
integration services may make other customers significant sources of
nonrecurring income in a single year. However, the Company believes that it will
continue to be able to significantly offset such year-to-year fluctuations with
new contracts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation--General."
Most of the Company's sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time. One contract provides that: (i) if the Company
reduces its prices or lead times of like quantity of comparable items to
customers other than Boeing, then the Company must sell on the same terms to
Boeing; and (ii) if other Boeing suppliers offer to sell to Boeing products
comparable to those of the Company at prices more than 5% lower than the prices
specified in such contract, the Company must either similarly reduce its prices
or permit Boeing to delete the affected products from the contract. Another
contract provides that Boeing is not obligated to order any products covered by
the agreement if: (i) Boeing's customers specify an alternate product; (ii) the
product in Boeing's judgement is not technologically competitive at the time;
(iii) Boeing changes the design of an aircraft such that the Company's products
are no longer required for such aircraft; or (iv) Boeing reasonably determines
that the Company cannot support Boeing's requirements for products in the
amounts and within the delivery schedules Boeing requires. The Company's
contracts with Boeing grant Boeing an irrevocable non-exclusive worldwide
license to use the Company's patents, designs, trade secrets, semiconductor mask
works and tooling related to the development, production and maintenance or
repair of products sold to Boeing upon the occurrence of certain events,
including: (i) the acquisition by or transfer to a third party of any of the
Company's rights to manufacture products for Boeing; (ii) upon various defaults
by the Company; and (iii) the bankruptcy of the Company. The Company generally
sells components and services to Matsushita pursuant to purchase orders, but
does not have any supply contracts with either company.
MANUFACTURING AND QUALITY CONTROL
The Company manufactures contacts, connectors, harness assemblies, dichroic
LCD devices and avionics support structures. Many of these products involve
similar manufacturing processes which have become core competencies of the
Company. The Company manufactures these products using process-specific
equipment and procedures that have been custom-designed or fabricated to provide
high-quality products at the lowest possible cost to the Company. The Company is
vertically integrated from concept
37
and design through final assembly, testing and certification for these
production processes. The Company believes this vertical integration is critical
to assuring product performance, customer service and competitive pricing.
The Company has implemented programs to reduce costs, including overhead
expenses, and maximize return on capital. In some cases these programs have
involved the use of proprietary equipment or processes which have enabled the
Company to reduce costs while maintaining high quality levels. For example, the
Company uses a proprietary selective plating process which allows the Company to
minimize the usage of gold when plating contacts. The Company has enhanced and
expanded the use of this process, as well as other plating processes.
Certain of the Company's customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers, including the Company, to comply with such standards. As a
result, the Company has developed and implemented comprehensive quality system
policies and procedures which meet or exceed the requirements of its customers.
Many of the Company's customers have recognized formally the effectiveness of
the Company's quality programs by issuing quality approval letters and awarding
quality compliance certificates. In addition, certain customers have authorized
the Company's inspection personnel to act as the authorized quality
representative of the customer. This authorization enables the Company to ship
directly into the inventory stockrooms of these customers, eliminating the need
for receiving inspection activities by these customers.
The Company uses sophisticated equipment and procedures to ensure the
quality of its products and to comply with mil-specs and FAA certification
requirements. The Company performs a variety of testing procedures, including
environmental testing under different temperature, humidity and altitude levels,
shock and vibration testing and X-ray fluorescent measurement. These procedures,
together with other customer approved techniques for document, process and
quality control, are used throughout the Company's manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components which the Company manufactures require the use of various raw
materials including gold, aluminum, copper, rhodium, plating chemicals and
plastics, the availability and prices of which may fluctuate. The price of raw
materials represents a significant portion of the sales price of many of the
Company's products. Although some of the Company's contracts have prices tied to
the price of raw materials, increases in raw materials prices cannot always be
recovered in product sale prices. The Company also purchases a variety of
manufactured component parts from various suppliers. Raw materials and component
parts are generally available from multiple suppliers at competitive prices.
However, any delay in the Company's ability to obtain necessary raw materials
and component parts may affect its ability to meet customer production needs.
PATENTS AND PROPRIETARY INFORMATION
The Company has various trade secrets, proprietary information, trademarks,
trade names, patents, copyrights and other intellectual property rights which
the Company believes, in the aggregate (but not individually), are important to
its business.
COMPETITION
The Company competes with a number of established companies that have
significantly greater financial, technological and marketing resources than the
Company. The Company believes that its ability to compete depends on high
product performance, short lead-time and timely delivery, competitive price, and
superior customer service and support.
38
The niche markets within the aircraft industry served by the Company are
relatively fragmented with several competitors for each of the products and
services provided by the Company. Due to the global nature of the commercial
airline industry, competition in these categories comes from both U.S. and
foreign companies. However, the Company knows of no single competitor that
provides the same range of products and services as those provided by the
Company.
The Company's principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. The Company's
principal competitor in the contact market is Deutch Engineered Connecting
Devices, a division of the Deutch Co. In the connector market, the Company's
principal competitors include ITT Canon (a division of ITT Corporation), AMP and
Radiall S.A. Several of these companies are also customers of the Company. The
Company's principal competitors for avionics support structures include smaller
companies such as Barry Controls, Inc., Electronic Cable Specialists ("ECS") and
Vibrachoc, a subsidiary of Compagnie Generale d'Electricite. The main competitor
for dichroic LCD devices is Cristalloid, Inc. The main competitors for
entertainment and cabin management products and systems for corporate jet
aircraft are Pacific Systems Corporation, Baker Electronics and DPI Labs.
Competitors which provide portions of systems integration services include ECS,
the engineering departments of certain airlines and numerous independent
airframe maintenance and modification companies.
BACKLOG
Bookings increased $30.1 million, or 36.7%, to $112.1 million for 1997
compared to $81.9 for 1996. The increase in bookings for 1997 includes a net
$12.3 million attributable to ADS, which was acquired in September 1996. As of
December 31, 1997, the Company had a sales order backlog of $48.2 million,
including $2.4 million for Audio, which was acquired on November 14, 1997
compared to $44.4 million as of December 31, 1996. Approximately 7.0% of the
purchase orders outstanding as of December 31, 1997 are scheduled for delivery
for 1999 and beyond.
Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year will be
materially affected by the timing of the Company's receipt of orders and the
speed with which those orders are filled. Accordingly, the Company's backlog at
December 31, 1997 is not necessarily indicative of actual shipments or sales for
any future period, and period-to-period comparisons may not be meaningful.
EMPLOYEES
As of December 31, 1997, the Company had 1,243 employees (including 144
temporary employees), of whom 146 were in engineering (including 17 temporary
employees), 39 were in sales, 933 were in manufacturing operations (including
118 temporary employees) and 125 were in finance and administration (including 9
temporary employees). None of the Company's employees are subject to a
collective bargaining agreement, and the Company has not experienced any
material business interruption as a result of labor disputes since it was
formed. The Company believes that it has a good relationship with its employees.
39
FACILITIES
The Company leases most of its facilities, with lease terms ranging from one
to nine years, as reflected in the following table.
[Enlarge/Download Table]
APPROXIMATE
SQUARE LEASE
LOCATION DESCRIPTION FOOTAGE EXPIRATION
---------------------------------------- -------------------------------------------- ------------- -----------
El Segundo, CA Manufacturing and engineering facility 81,300 2005
Garden Grove, CA Manufacturing and engineering facility 58,300 2004
Hatfield, PA Manufacturing and engineering facility 27,500 1999
Lugano, Switzerland Manufacturing facility 21,000 2001
Irvine, CA Manufacturing facility 16,400 1999
Wiltshire, United Kingdom Manufacturing facility 5,700 1998
El Segundo, CA Executive offices 5,000 2007
Santa Barbara, CA Engineering facility 3,500 2000
Seattle, WA Engineering facility 3,200 1999
Santa Ana, CA Engineering facility 1,300 1999
Additionally, the Company owns an 18,000 square foot manufacturing and
engineering facility in North Little Rock, Arkansas. The Company believes its
properties are in good condition and are adequate to support its operations for
the foreseeable future.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local, and foreign
environmental requirements, including those relating to discharges to air,
water, and land, the handling and disposal of solid and hazardous waste, and the
cleanup of properties affected by hazardous substances. In addition, certain
environmental laws, such as CERCLA and similar state laws, impose strict,
retroactive, and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. The Company has sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. The Company has received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency as to the
Company's use of certain such sites. In addition, some of the Company's
operations are located on properties which are contaminated to varying degrees.
However, the Company has not incurred, nor does it expect to incur, significant
costs to address such contamination because entities other than the Company have
been held primarily responsible for such contamination, the levels of
contamination are sufficiently low so as not to require remediation or the
Company is indemnified against such costs. In most cases the Company does not
believe that its liability for past waste disposal is material. However, in a
limited number of cases the Company does not have sufficient information to
assess its potential liability, if any. It is possible, given the retroactive
nature of CERCLA liability, that the Company will from time to time receive
additional notices of potential liability, relating to current or former
activities.
The Company has been and is in substantial compliance with environmental
requirements and believes it has no liabilities under environmental
requirements, except those which would not be expected to have a material
adverse effect on the Company's business, results of operations, or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's business and the Company might in the future incur
material costs to meet current or more stringent compliance, cleanup, or other
obligations pursuant to environmental requirements. See "Risk Factors--
Environmental Regulation" and "Business--Legal Proceedings."
40
LEGAL PROCEEDINGS
The Company's manufacturing facility in El Segundo, California, has received
several notices of violation related to its wastewater discharge permit. The
Company has taken various corrective measures. However, the Company continues to
experience difficulty in meeting the wastewater flow limitations contained in
its discharge permit and is evaluating additional measures, including seeking
modification to its permit. If the Company is not able to resolve these issues,
it may be required to install new treatment equipment. However, the cost for
such installation is not expected to be material, and the Company does not
believe that the notices will result in any material sanctions. See "Risk
Factors-- Environmental Regulation" and "Business--Environmental Matters."
The Company is a party to a license agreement with McDonnell Douglas (now a
part of Boeing) pursuant to which the Company may request certain data in order
to design and market modifications to aircraft manufactured by McDonnell
Douglas. The agreement provides that the Company will pay McDonnell Douglas a
royalty of five percent of the net sales price of all modifications sold by the
Company for which the Company has requested data from McDonnell Douglas. The
Company has requested data for a single modification, which modification the
Company believes is exempt from the obligation to pay royalties under the
agreement. In 1996, McDonnell Douglas made a demand for $650,000 for royalties.
The Company does not believe that it is obligated to McDonnell Douglas in any
amount. However, there can be no assurance that the Company will not be required
to pay royalties to McDonnell Douglas.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive officers of the Company as of December 31, 1997:
[Enlarge/Download Table]
NAME AGE POSITION
------------------------------------------------ ----------- ----------------------------------------------------------
R. Jack DeCrane 51 Chairman of the Board and Chief Executive Officer
R. G. MacDonald 67 Vice Chairman of the Board
Robert A. Rankin 45 Chief Financial Officer, Secretary and Treasurer
Roger L. Keller 53 Group Vice President of Systems
Charles H. Becker 51 Group Vice President of Components
James R. Bergman (a) 55 Director
Paul H. Cascio (b) 36 Director
Jonathan A. Sweemer (a)(b) 42 Director
Mitchell I. Quain 46 Director
------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The Company is currently evaluating other independent non-management
director candidates and anticipates that the Company's independent,
non-management directors will continue to represent a majority on each of the
Company's Audit Committee and Compensation Committee.
The Company's Board is divided into three classes. Directors of each class
will be elected at the annual meeting of stockholders of the Company (the
"Annual Meeting") held in the year in which the term of such class expires and
will serve thereafter for three years. Mr. MacDonald and Mr. Quain serve as
class I directors for a term expiring as of the Annual Meeting in 1998. Messrs.
Cascio and Bergman serve as class II directors for a term expiring as of the
Annual Meeting in 1999. Messrs. DeCrane and Sweemer serve as class III directors
for a term expiring as of the Annual Meeting in 2000.
R. Jack DeCrane is the founder of the Company and has been Chairman of the
Board of Directors of the Company since it was founded in December 1989. Mr.
DeCrane served as President of the Company, which office then included the
duties of chief executive officer, until April 1993 when he was elected to the
newly-created office of Chief Executive Officer. Prior to founding the Company,
Mr. DeCrane held various positions at the aerospace division of B.F. Goodrich.
Mr. DeCrane was a Group Vice President at the aerospace division of B.F.
Goodrich with management responsibility for three business units from 1986 to
1989. Mr. DeCrane is his own appointee to the Board under the terms of an
agreement between the Company and certain of its shareholders and lenders. See
"Certain Transactions Shareholders Agreement."
R. G. MacDonald has been Vice Chairman of the Company since December 1996.
Mr. MacDonald has been a member of the Board since December 1994, and was
President of the Company from April 1993 until December 1996. The office of
President of the Company included the duties of chief operating officer. Mr.
MacDonald was a consultant to the Company from February 1993 to April 1993.
Prior to joining the Company, he served as President and Chief Executive Officer
of MDB Systems, Inc., a manufacturer of ruggedized computer disk systems, from
1990 to 1993.
Robert A. Rankin has been Chief Financial Officer, Secretary and Treasurer
of the Company since November 1993. Mr. Rankin joined the Company in 1992 as
Senior Vice President of Tri-Star, which office then included the duties of
chief financial officer of the Company. Prior to joining the Company, he was
Vice President of Finance for the Chandler Evans Control Systems subsidiary of
Coltec Industries, Inc., an
42
aerospace company, from 1990 to 1992. He was employed by the aerospace division
of B.F. Goodrich from 1977 to 1989 in various capacities, the most recent of
which was as Controller of the aircraft wheel and brake business unit of B.F.
Goodrich.
Roger L. Keller has been Group Vice President of Systems of the Company
since December 1996. Mr. Keller has also served as President of Hollingsead
since December 1995, and was employed by the Company as Vice President of
Engineering, Sales and Program Management from May 1994 through November 1995.
Prior to joining the Company, he was Vice President of Engineering for Active
Noise and Vibration Technologies, Inc. from 1992 to 1994, and Vice President of
Sales, Marketing and Program Management for the Airtransport Services division
of Honeywell from 1986 to 1992.
Charles H. Becker has been Group Vice President of Components of the Company
since December 1996, and President of Tri-Star since December 1994. Prior to
joining the Company, Mr. Becker was President of the Interconnect Systems
Division of Microdot, Inc. from 1984 to 1994.
James R. Bergman has been a member of the Board since October 1991. He is a
founder and, since 1974, has been a general partner of DSV Associates, DSV
Partners III and DSV. Mr. Bergman is DSV's appointee to the Board under the
terms of an agreement between the Company and certain of its shareholders and
lenders. See "Certain Transactions--Shareholders Agreement." In August 1996, Mr.
Bergman became a general partner of Brantley Venture Partners III, L.P. (an
affiliate of Brantley). He is also a director of Maxim Integrated Products, Inc.
and Quad Systems Corporation.
Paul H. Cascio has been a member of the Board since September 1996. He is a
general partner of Brantley. Mr. Cascio also serves as Vice President and
Secretary of Brantley Capital Corporation. Mr. Cascio is Brantley's appointee to
the Board under the terms of an agreement between the Company and certain of its
shareholders and lenders. See "Certain Transactions--Shareholders Agreement."
From December 1987 through May 1996, when he became a general partner of
Brantley Venture Partners, Mr. Cascio was a Managing Director and head of the
Industrial Manufacturing and Services Group in the corporate finance department
at Dean Witter Reynolds Inc.
Jonathan A. Sweemer has been a member of the Board since February 1996. He
has been a member of Nassau Capital Partners, L.P. (which is, collectively with
NAS Partners I, L.L.C., referred to in this document as "Nassau") since January
1995. From May 1992 to December 1994, Mr. Sweemer was a Vice President for
Princeton University Investment Co. Mr. Sweemer is Nassau's appointee to the
Board under the terms of an agreement between the Company and certain of its
shareholders and lenders. See "Certain Transactions--Shareholders Agreement."
Mitchell I. Quain has been a member of the Board since May 1997. He is an
Executive Vice President of and has been a member of the board of Furman Selz
LLC since May 1997. From June 1975 to May 1997, he was a Managing Director of
and held other positions with Schroder & Co. Inc. Mr. Quain has more than 20
years of financial and operating experience. Certain stock options have been
granted to Mr. Quain, pursuant to a Board resolution providing for such options
for non-management directors who do not serve pursuant to the terms of the
Shareholder Agreement. See "Certain Transactions-- Independent Director."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and the four-most highly
compensated executive officers other than the Chief Executive Officer
(collectively the "Named Executive Officers") for the fiscal year ended December
31, 1997.
43
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and the four-most highly
compensated executive officers other than the Chief Executive Officer
(collectively the "Named Executive Officers") for the fiscal year ended December
31, 1997, 1996 and 1995.
[Enlarge/Download Table]
ANNUAL COMPENSATION
---------------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS/SAR(2) PAYOUTS
--------- --------- --------- ------------------- ----------- ----------------- -----------
R. Jack DeCrane 1997 $ 244,744 $ 220,000 $ -- 50,000
Chief Executive 1996 206,600 146,000 7,813 34,028
Officer and 1995 180,000 55,000 -- --
Chairman of the
Board
R.G. MacDonald 1997 184,859 102,000 10,536 4,000
Vice Chairman of 1996 177,437 82,000 13,200 --
the Board(4) 1995 173,607 35,000 8,292 --
Robert A. Rankin 1997 149,309 103,000 7,158 15,000
Chief Financial 1996 139,375 65,000 12,838 19,850
Officer and 1995 135,000 20,000 6,628 --
Secretary
Roger L. Keller 1997 163,866 -- 1,682 10,000
President of 1996 150,000 -- 2,083 19,850
Hollingsead and 1995 121,250 7,500 -- 14,179
Group Vice
President of
Systems(5)
Charles H. Becker 1997 174,492 102,000 6,168 15,000
President of 1996 148,750 65,000 9,103 19,850
Tri-Star and Group 1995 137,515 16,000 1,610 14,179
Vice President of
Components(6)
ALL OTHER
COMPENSATION(3)
-----------------
R. Jack DeCrane $ 29,411
Chief Executive --
Officer and --
Chairman of the
Board
R.G. MacDonald --
Vice Chairman of --
the Board(4) --
Robert A. Rankin --
Chief Financial 80,357
Officer and
Secretary
Roger L. Keller --
President of --
Hollingsead and 17,405
Group Vice
President of
Systems(5)
Charles H. Becker 18,000
President of 30,586
Tri-Star and Group --
Vice President of
Components(6)
--------------------------
(1) Amounts paid by the Company for premiums on health, life and long-term
disability insurance and automobile leases provided by the Company for the
benefit of the Named Executive Officer.
(2) Number of shares of Common Stock issuable upon exercise of options granted
during the last fiscal year.
(3) Relocation costs.
(4) Mr. MacDonald served as President of the Company through December 1996. Mr.
MacDonald became Vice Chairman of the Board in December 1996.
(5) Mr. Keller served as President of Hollignsead through December 1996. Mr.
Keller became Group Vice President of Systems in December 1996.
(6) Mr. Becker served as President of Tri-Star through December 1996. Mr. Becker
became Group Vice President of Components in December 1996.
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options granted to
the Named Executive Officers during the fiscal year ended December 31, 1997.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING % OF EXERCISE OR APPRECIATION(1)
OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION --------------------------
NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10%
------------------------------- ----------- --------------- ----------- ------------- ----------- -------------
R. Jack DeCrane................ 50,000 30.6% $ 16.75 2007 $ 526,699 $ 1,334,759
Robert A. Rankin............... 15,000 9.2% 16.75 2007 158,010 400,428
Roger L. Keller................ 10,000 6.1% 16.75 2007 105,340 266,952
Charles H. Becker.............. 15,000 9.2% 16.75 2007 158,010 400,428
Richard G. MacDonald........... 4,000 2.4% 16.75 2007 42,136 106,781
------------------------
(1) The potential realizable value assumes a rate of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the
full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future prices of the Common Stock
STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF UNEXERCISED
OPTIONS
The following table sets forth information about the stock options exercised
by the Named Executive Officers of the Company during the fiscal year ended
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS/ SAR AT
OPTIONS/SAR FY-END(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------ --------------- ------------- ------------------------- -------------------------
R. Jack DeCrane..................... -- -- 80,819/95,370 1,329,172/655,294
Robert A. Rankin.................... -- -- 16,448/32,581 269,315/247,930
Roger L. Keller..................... -- -- 13,047/30,982 210,897/305,098
Charles H. Becker -- -- 14,180/34,849 229,559/287,686
Richard G. MacDonald................ -- -- 45,372/15,342 747,324/187,814
------------------------
(1) Based on the common stock share price of $16.75 per share as of December 31,
1997, the measuring date.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
R. Jack DeCrane and the Company have entered into an employment agreement
pursuant to which Mr. DeCrane is to serve as Chief Executive Officer for a term
of four years, effective September 1, 1994. The agreement requires Mr. DeCrane
to devote his full business time to the Company and contains a covenant not to
compete with the Company for a period of 12 months following termination of the
agreement. The agreement provides for various benefits including: (i) an annual
salary of $180,000, which is subject to annual review and increase, but not
decrease; (ii) an annual bonus ranging from 30% to 70% of Mr. DeCrane's annual
base salary depending on the level of the Company's achievement of certain
performance goals; and (iii) vested stock options to purchase 77,982 shares of
Common Stock at an exercise price of $0.53 per share. Additionally, Mr. DeCrane
is also entitled to life insurance (in an amount at least equal to $1,000,000),
and health care benefits generally provided by the Company to other senior
executives. The agreement also provides for various payments to Mr. DeCrane or
his
45
beneficiaries in the event of his death, disability, or termination without
cause. In the event of his death, Mr. DeCrane's beneficiaries would be entitled
to: (i) a payment equal to Mr. DeCrane's then current salary for one year plus
his remaining bonus through year-end; and (ii) continuation of certain insurance
benefits for one year. Upon termination due to disability, Mr. DeCrane would be
entitled to: (i) receive the sum of his then current base salary for one year
plus his bonus through year end; and (ii) continuation of certain health
benefits for one year. In the event of a termination without cause by the
Company or Mr. DeCrane's resignation due to a material breach of the agreement
by the Company or the Company's request that he resign or retire, Mr. DeCrane
would be entitled to: (i) his then current base salary for one year and his
remaining bonus through the end of the year of termination plus an amount equal
to the amount earned in the immediately preceding year; (ii) continuation of
certain health benefits for a one year period; and (iii) reimbursement of
certain relocation and outplacement expenses.
R. G. MacDonald and the Company entered into a letter agreement, dated June
28, 1993, pursuant to which Mr. MacDonald is to receive for an unspecified term:
(i) an annual base salary of $150,000; (ii) an annual bonus ranging from 20% to
50% of his annual base salary depending on the Company's level of achievement of
certain performance goals; and (iii) the Company's standard benefit package with
the addition of an executive term life insurance policy in the amount of
$200,000. Under the agreement, Mr. MacDonald received options to purchase 56,714
shares of the Company's Common Stock at an exercise price of $0.53 per share.
Charles H. Becker and Tri-Star entered into a letter agreement, dated
November 28, 1994, pursuant to which Mr. Becker is to receive for an unspecified
term: (i) an annual base salary of $140,000; (ii) an annual bonus ranging from
10% to 40% of his annual base salary depending on Tri-Star's level of
achievement of certain performance goals; and (iii) other benefits available
under the Company's executive benefits program. Under the agreement, Mr. Becker
received options to purchase 14,179 shares of the Company's Common Stock at an
exercise price of $0.53 per share.
SHARE INCENTIVE PLAN
Under the Share Incentive Plan adopted by the Company in 1993 (the "Share
Incentive Plan"), the Company may grant to its eligible employees: (i) options
("Options") to purchase shares of Common Stock; (ii) shares of Common Stock that
vest upon the achievement of specified service or performance conditions within
a specified period of time (the "Restricted Shares"); and (iii) options to
receive payments based on the appreciation of Common Stock ("SARs"). Options,
Restricted Shares and SARs are collectively referred to as "Grants."
Under the Share Incentive Plan, the Company may grant Options that qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or Options that do not so
qualify. The Share Incentive Plan is to be administered by a committee selected
by the Company's Board and composed of at least two members of the Board (the
"Administrator"). The current members of the Administrator are Messrs. Bergman
and Sweemer. Restricted Shares may be granted to key employees of the Company at
the sole discretion of the Administrator. SARs may be specifically granted upon
the terms and conditions specified by the Administrator.
Grants are to be made to key employees of the Company designated by the
Administrator at its sole discretion. The Company has reserved 527,156 shares of
Common Stock for issuance under the Share Incentive Plan. The Share Incentive
Plan terminates on February 1, 2003, and thereafter no Grants may be made. In
June 1997, with the approval of the Administrator, the Company extended the
Share Incentive Plan to Mitchell I. Quain, an independent non-management
director of the Company, and issued 6,000 Options to Mr. Quain under the terms
of the Share Incentive Plan. See "Certain Transactions-Independent Director".
The exercise price of any Option may not be less than 100% (or 110% in the
case of an Option granted to a person owning (within the meaning of Section
424(d) of the Code) more than 10% of the
46
total combined voting power of all classes of stock of the Company) of the fair
market value of the Common Stock at the time of the grant of the Option. No
Option may be exercised after the expiration of ten years from the date of grant
of such Option. No Option may be sold, pledged, assigned or transferred in any
manner otherwise than by will or the laws of descent or distribution. The
purchase price of any shares of Common Stock purchased under an Option must be
paid in full at the time of the exercise of an Option in cash, by check or, if
permitted by the Administrator, by shares of Common Stock having a fair market
value on the date of the exercise equal to the purchase price or a combination
thereof.
In the event that a holder of a Grant (a "Grantee") ceases to be employed by
the Company for any reason other than death, retirement or disability or such
employee is terminated without cause, such Grants shall terminate upon the
termination of his employment, unless extended by the Administrator. In the
event of termination of employment due to death, retirement or disability of a
Grantee or in the event such termination is without cause, the Administrator may
allow the Grantee (or his estate) to exercise Options and SARs (to the extent
exercisable on the date of termination of employment) at any time within one
year after the date of such termination of employment. Restricted Shares held by
a Grantee will vest upon the Grantee's death and all restrictions will thereupon
lapse.
1996 INCENTIVE PLAN
In 1996 the Company introduced an incentive plan (the "1996 Incentive Plan")
for its management personnel tied to the Company's and each operating unit's
annual budget as approved each year by the Compensation Committee of the Board.
The 1996 Incentive Plan matrix provides for an annual bonus of up to 70% of the
employee's base salary if the Company or its relevant operating unit achieves
110% of budget. Fifty percent of the bonus is payable solely based on
performance of the Company or the relevant operating unit and the remainder is
payable upon the achievement by the employee of his or her individual objectives
in the discretion of the Chief Executive Officer of the Company or the President
of the relevant operating unit.
401(K) RETIREMENT PLAN
Effective April 1992, the Company adopted the Lincoln National Life
Insurance Company Non-Standardized 401(k) Salary Reduction Plan and Trust
Prototype Plan (the "401(k)"). The 401(k) allows employees as participants to
defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred
earnings, plus interest, as a retirement fund. The Company matched 25% of the
employee contribution for the fourth quarter of 1997 for up to 6% of the
employee's salary. In 1998, the Company intends to match 50% of the employee
contribution for up to 6% of the employee's salary. The full amount vested in a
participant's account will be distributed to a participant following termination
of employment, normal retirement or in the event of disability or death.
DIRECTORS' COMPENSATION
In June 1997 the Board adopted a policy of compensating any non-management
directors who do not serve pursuant to the terms of the Shareholder Agreement
(see "Certain Transactions--Shareholders Agreement") in an amount equal to
$6,000 per year plus $1,500 for each quarterly Board meeting attended. At
present, Mitchell I. Quain is the only director who qualifies for such
compensation. The other directors of the Company do not receive annual fees or
fees for attending meetings of the Board of Directors or committees thereof.
However, all directors are reimbursed for out-of-pocket expenses. In June 1997,
the Board also extended the Share Incentive Plan to such independent
non-management directors, and issued 6,000 Options to Mr. Quain under the terms
of the Share Incentive Plan. See "Certain Transactions--Independent Director".
47
LIMITATION ON DIRECTOR LIABILITY AND INDEMNIFICATION
Pursuant to the Certificate, and as permitted by Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases unlawful under Delaware law or any transaction in
which a director has derived an improper personal benefit. Such limitation of
liability has no effect on the availability of equitable remedies, such as
injunctive relief or rescission.
48
PRINCIPAL AND SELLING STOCKHOLDERS
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, MANAGEMENT AND SELLING
STOCKHOLDERS
The following chart provides information as to the beneficial ownership of
Common Stock as of December 31, 1997, as adjusted to give effect to the
application of the proceeds of the Offering, by: (i) each director and Named
Executive Officer; (ii) directors and executive officers of the Company as a
group; (iii) each person known to the Company to be the beneficial owner of 5%
or more of Common Stock, and (iv) each stockholder selling shares of Common
Stock as part of the Offering (the "Selling Stockholders").
[Enlarge/Download Table]
OWNERSHIP OF COMMON STOCK PRIOR TO
OWNERSHIP OF COMMON STOCK AFTER
THE OFFERING NUMBER OF THE OFFERING
----------------------------------- SHARES -------------------------------
PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP
------------------------------------------------ ---------------- ----------------- ------------ ------------ -----------------
Nassau Capital Partners L.P..................... 874,633(1) 16.5% 100,000 774,633 10.7%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer............................. 874,633(2) 16.5% 100,000 774,633 10.7%
22 Chambers Street
Princeton, NJ 08542
Brantley Venture Partners II, L.P............... 490,928 9.2% -- 490,928 6.8%
20600 Chagrin Blvd., Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio.................................. 490,928(3) 9.2% -- 490,928 6.8%
20600 Chagrin Blvd., Suite 1150
Cleveland, OH 44122
Wellington Management Company, LLP.............. 485,000(4) 9.1% -- 485,000 6.7%
75 State Street
Boston, Massachusetts 02109
Mellon Bank Corporation ........................ 436,600(5) 8.2% -- 436,600 6.0%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Artisan Partners Limited Partnership 391,200 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Artisan Investment Corporation.................. 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Andrew A. Ziegler............................... 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Carlene Murphy Ziegler.......................... 391,200(6) 7.4% -- 391,200 5.4%
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
The Dreyfus Corporation......................... 373,100(5) 7.0% -- 373,100 5.2%
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
The TCW Group, Inc. ............................ 304,100 5.7% -- 304,100 4.2%
865 South Figueroa Street
Los Angeles, California 90017
Robert Day...................................... 304,100(8) 5.7% -- 304,100 4.2%
200 Park Avenue, Suite 200
New York, New York 10166
DSV Partners, IV................................ 493,440 9.3% 216,180 277,260 3.8%
1920 Main St., Suite 820
Irvine, CA 92614
James R. Bergman................................ 493,440(7) 9.3% 216,180 277,260 3.8%
1920 Main St., Suite 820
Irvine, CA 92614
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[Enlarge/Download Table]
OWNERSHIP OF COMMON STOCK PRIOR TO
OWNERSHIP OF COMMON STOCK AFTER
THE OFFERING NUMBER OF THE OFFERING
----------------------------------- SHARES -------------------------------
PERCENTAGE OF OFFERED NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP HEREBY SHARES OWNERSHIP
------------------------------------------------ ---------------- ----------------- ------------ ------------ -----------------
Dreyfus Investment Advisors, Inc................ 273,100(9) 5.1% -- 273,100 3.8%
c/o Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennyslvania 15258
Mellon Bank N.A................................. 273,100(9) 5.1% -- 273,100 3.8%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Electra Investment Trust P.L.C.................. 471,639 8.9% 235,820 235,819 3.3%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane................................. 147,119(10) 2.8% 30,000 117,119 1.6%
2361 Rosecrans Avenue
El Segundo, California 90245
R. G. MacDonald................................. 53,879(11) 1.0% -- 53,879 *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Robert A. Rankin................................ 20,702(12) * -- 20,702 *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Charles H. Becker............................... 19,851(13) * -- 19,851 *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller................................. 13,047(14) * -- 13,047 *
12442 Knott Avenue
Garden Grove, California 92841
Mitchell I. Quain............................... 12,000(15) * -- 12,000 *
230 Park Avenue
New York, N.Y. 10169
All directors and executive officers as a group
(eight persons)............................... 2,125,599(16) 40.0% 346,180 1,779,419 24.6%
------------------------
* Less than 1%
(1) Includes 5,473 shares held by NAS Partners I L.L.C., an affiliate of Nassau
Capital Partners, L.P.
(2) Represents 869,160 shares held by Nassau Capital Partners, L.P. and 5,473
shares held by NAS Partners I L.L.C., affiliates of Mr. Sweemer.
(3) Represents shares held by Brantley of which Mr. Cascio is a general partner
of the general partner.
(4) Represents shares held by clients of Wellington, which in its capacity as
investment adviser may be deemed to control such shares.
(5) Includes 273,000 shares beneficially owned jointly among Mellon Bank
Corporation, Mellon Bank N.A., The Dreyfus Corporation and Dreyfus
Investment Advisors, Inc.
(6) Represents shares held by Artisan Partners Limited Partnership and
beneficially owned jointly with Artisan Investment Corporation, A. A.
Ziegler and C.M. Ziegler.
(7) Represents shares held by DSV of which Mr. Bergman is a general partner.
(8) Represents shares held by The TCW Group of which Mr. Day may be a
controlling person.
(9) Represents shares beneficially owned jointly among Mellon Bank Corporation,
Mellon Bank, N.A., The Dreyfus Corporation and Dreyfus Investment Advisers,
Inc.
(10) Includes 80,819 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(11) Includes 45,372 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(12) Includes 16,448 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(13) Includes 14,180 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(14) Includes 13,047 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(15) Includes 2,000 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
(16) Includes 171,866 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
December 31, 1997.
50
The Company and the Selling Shareholders have granted the underwriters a
30-day option to purchase up to 375,000 shares solely to cover over-allotments,
which additional shares are not included in the above table.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
James R. Bergman, a director of the Company, filed a Form 5 under Section
16(a) of the Exchange Act (a "Form 5") dated March 5, 1998, indicating a failure
to timely file a Form 3 under Section 16(a) of the Exchange Act (a "Form 3")
when required under Section 16(a), disclosing his indirect beneficial ownership
of a portion of the 493,439 shares of Common Stock directly owned by DSV (of
which he is a general partner) at the time of the IPO. The foregoing Form 5 was
required to have been filed by February 15, 1998.
Jonathan Sweemer, a director of the Company, filed a Form 5 dated February
25, 1998, indicating a failure to timely file: (i) a Form 3 with respect to
869,160 shares of Common Stock beneficially owned by Nassau Capital Partners
L.P., at the time of the IPO, and (ii) a Form 4 with respect to the acquisition
of 33,526 additional shares of Common Stock issued by the Company to Nassau
Capital Partners L.P. to correct a disputed calculation regarding the number of
shares that should have been issued as part of the Recapitalization. Mr. Sweemer
disclaims any beneficial interest in any of the foregoing shares. The foregoing
Form 5 was required to have been filed by February 15, 1998.
Nassau Capital Partners L.P., filed a Form 5 dated February 25, 1998,
indicating a failure to timely file: (i) a Form 3 disclosing its beneficial
ownership of 869,160 shares of Common Stock at the time of the IPO, and (ii) a
Form 4 with respect to the acquisition of 33,526 additional shares of Common
Stock issued by the Company to correct a disputed calculation regarding the
number of shares that should have been issued as part of the Recapitalization.
The foregoing Form 5 was required to have been filed by February 15, 1998.
Paul H. Cascio, a director of the Company, failed to file a Form 5 by
February 15, 1998, indicating a failure to timely file a Form 3, disclosing his
indirect beneficial ownership of the 490,928 shares of Common Stock directly
owned by Brantley Venture Partners, L.P. (of which he is a general partner of a
general partner), at the time of the IPO. On March 6, 1998, such Form 5 was sent
for filing.
51
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENT
Pursuant to the Fifth Amended and Restated Shareholders Agreement dated
January 10, 1997 (as amended, the "Shareholders Agreement") among the Company,
Nassau, Electra, Brantley, DSV and certain other parties, and subject to
election by the Company's stockholders, Nassau, Brantley and DSV each have the
right to nominate a representative to serve as a director so long as the
relevant stockholder owns at least 5% of the Common Stock (including Common
Stock which may be acquired upon exercise of warrants). See
"Management--Executive Officers and Directors." Following completion of the
Offering, Nassau, Brantley and DSV will beneficially own 10.7%, 6.8% and 3.8%,
respectively, of the issued and outstanding Common Stock. The Shareholders
Agreement also provides that Mr. DeCrane may nominate a director for election by
the Company's stockholders for so long as he is the Chief Executive Officer of
the Company.
RECAPITALIZATION; WAIVERS AND EXCHANGES OF SECURITIES
Effective immediately prior to the IPO, certain of the Company's
then-existing shareholders, including Nassau, Brantley, DSV and Electra
Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra"),
as well as the holders of the Lender Warrants, agreed to waive a number of
rights under the agreements by which such shareholders and warrant holders
acquired such rights from the Company, releasing the Company from certain
dividend payment requirements, voting requirements and certain other rights, as
well as eliminating certain negative and affirmative covenants contained
therein.
Upon consummation of the IPO and as part of the Recapitalization: (i) all of
the shares of preferred stock of the Company were exchanged for shares of Common
Stock; (ii) certain warrants were exchanged by Nassau and Electra for shares of
Common Stock; and (iii) certain convertible promissory notes and warrants to
purchase Common Stock held by Nassau and Electra were terminated. See
"Description of Common Stock--The Recapitalization". In December 1997, the
Company issued an additional 16,918 shares of Common Stock to Electra and 33,825
shares to Nassau to correct a disputed calculation regarding the number of
shares that should have been issued in the foregoing exchanges as part of the
Recapitalization.
Upon consummation of the IPO and as part of the Recapitalization, R.G.
MacDonald, Charles H. Becker, Robert A. Rankin and John Hinson, an officer of
the Company, exchanged an aggregate of 75,000 shares of preferred stock of the
Company for 21,268 shares of Common Stock. See "Description of Common Stock-The
Recapitalization".
Upon consummation of the IPO and as part of the Recapitalization, Electra,
DSV, Brantley and certain other parties exchanged all of the 6,847,705
outstanding shares of preferred stock of the Company for 1,941,804 shares of
Common Stock. See "Description of Common Stock--The Recapitalization".
INDEPENDENT DIRECTOR
In June 1997, the Company extended its Share Incentive Plan for employees to
independent non-management directors of the Company who are not appointed to the
Board pursuant to the Shareholders Agreement, and issued 6,000 Options to
Mitchell I. Quain, the only director presently qualifying for such plan.
52
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share.
COMMON STOCK
As of December 31, 1997, there were 5,318,563 shares of Common Stock
outstanding and held of record. An additional 527,156 shares were reserved for
issuance upon exercise of all outstanding options under the Share Incentive
Plan. Each holder of Common Stock is entitled to one vote for each share held
and does not have cumulative voting rights.
The holders of the Common Stock are entitled to elect all of the directors,
subject to the rights of certain stockholders and lenders under the Shareholders
Agreement to nominate candidates. The Common Stock is not convertible into any
other security. See "Certain Transactions--Shareholders Agreement."
Subject to the restrictions on payments of dividends imposed by the
Company's debt agreements, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any then
outstanding shares of preferred stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Undesignated
Preferred Stock, none of which was issued as of December 31, 1997. The Board,
without further action by the holders of Common Stock, may issue shares of
Undesignated Preferred Stock in one or more series and may fix or alter the
rights, preferences, privileges and restrictions, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation rates, liquidation preferences, conversion rights
and the description and number of shares constituting any wholly unissued series
of Undesignated Preferred Stock. The Board, without further approval of the
holders of Common Stock, may issue shares of Undesignated Preferred Stock with
rights that could adversely affect the rights of the holders of Common Stock.
The issuance of shares of Undesignated Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate action.
WARRANTS
Pursuant to Warrant Agreements dated September 18, 1996, the Company issued
the Lender Warrants to certain lenders under the Prior Credit Facility, which
entitled the holders to purchase 70,893 shares of Common Stock for $14.11 per
share and conferred certain other rights on the holders thereof. As of December
31, 1997, all of the Lender Warrants were exercised, and no other warrants were
outstanding.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, certain stockholders may
require the Company to use its best efforts to register such holders' Company
securities (including the Common Stock) under the Securities Act, in each case
pursuant to the procedures and subject to restrictions specified in the
Registration Rights Agreement.
53
Each party to the Registration Rights Agreement may require the Company to
file one registration statement to register securities owned by it for a
four-year period (subject to extension under certain limited circumstances). In
general, the Company is not required to effect the registrations described above
more than once in any nine month period or, if the Company intends in good faith
to file a registration statement pertaining to an underwritten public offering
by the Company, within 90 days. Also, the Company is not obligated to file more
than four registration statements, provided that if the Company effects a
registration at the request of a stockholder, no further demand by any other
party to such agreement may be made for a period of at least nine months.
In addition to the registration rights described above, each holder which is
a party to the Registration Rights Agreement may cause the Company to use its
best efforts to include such holder's Common Stock in any of the Company's
registered offerings ("piggyback offerings") of its Common Stock (other than
under Forms S-4 and S-8 of the Securities Act, or under other forms not
available for registering sales to the public) (subject to reduction to the
extent that the managing underwriter, if any, is of the opinion that such
inclusion would adversely affect the marketing of the securities to be sold
therein). The Registration Rights Agreement provides that the Company is to bear
the expenses of registrations described above, other than expenses consisting of
underwriting discounts and commissions applicable to securities sold by holders.
The Registration Rights Agreement also restricts the transfer of certain
shares of Common Stock held by the stockholders party to such agreement prior to
the registration and sale (or other registered disposition) of such Common Stock
under the Securities Act.
RECAPITALIZATION
On February 19, 1997, the Company, formerly an Ohio corporation, was
incorporated in the State of Delaware. Each outstanding share of common stock
and preferred stock, as well as all warrants and options, were exchanged for
substantially similar securities of the Delaware corporation.
Concurrent with the IPO, all of the Company's existing stockholders agreed
to and consummated a recapitalization and simplification of the Company's
capital structure (the "Recapitalization"), which included (i) the conversion of
all then-outstanding shares of preferred stock into Common Stock, (ii) the
exercise or exchange of all warrants for Common Stock, other than the Lender
Warrants (see "Description of Capital Stock--Warrants") and those which were
cancelled pursuant to their terms by the Offering; and (iii) a 3.53-for-one
reverse stock split.
Immediately after the Recapitalization but before giving effect to the IPO,
the Company had 2,551,690 shares of Common Stock, no shares of preferred stock
outstanding, and the Lender Warrants to purchase 70,893 shares of Common Stock,
which were subsequently exercised. See "Description of Capital Stock--Warrants".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS AND DELAWARE GENERAL CORPORATION LAW
SECTION 203
The provisions of the Company's Certificate and the Bylaws and the
provisions of Delaware law summarized in the succeeding paragraphs may be deemed
to have anti-takeover effects and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
CLASSIFIED BOARD. The Certificate provides that the Board will be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board will be
54
elected each year. Currently, the size of the Board is fixed at five members,
who are divided into three classes serving staggered three-year terms. However,
the Company is presently evaluating other director candidates and anticipates
that two additional independent, non-management directors will be added to the
Board upon the closing of the Offering or as soon thereafter as practicable. The
classified board provisions could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Company, even though such an attempt might be beneficial to the Company and the
stockholders. The Certificate also provides that a director may not be removed
from office unless for cause and the affirmative vote of the holders of at least
66 2/3% of the outstanding shares of capital stock (including any warrants with
voting rights) entitled to vote.
MERGERS AND SALES OF ASSETS. The Certificate provides that except as
provided in Section 203 of the General Corporation Law of the State of Delaware
(the "GCLSD") any merger or sale of substantially all of the assets of the
Company which has not been approved by at least two-thirds of the Board must be
approved by the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of capital stock (including any warrants with voting rights)
entitled to vote. Such provision may have the effect of preventing a merger or
sale of substantially all the Company's assets that a stockholder might consider
to be in such stockholder's best interest, including those which might result in
a premium over the market price for the shares held by stockholders.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective upon
consummation of the Offering the Certificate will prohibit stockholder action by
written consent in lieu of a meeting, and will provide that stockholder action
can be taken only at an annual or special meeting of stockholders. Such
provision may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting, unless a special meeting is called by
the Board, the Chairman of the Board, the Chief Executive Officer or President
of the Company.
ADVANCED NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Subject to the rules and regulations of the Securities and
Exchange Commission regarding the solicitation of proxies, the Bylaws establish
certain advance notice procedures with regard to stockholder proposals and the
nomination, other than by the direction of the Board or a committee thereof, of
candidates for election as directors. The Company may reject a stockholder
proposal or nomination that is not made in accordance with such procedures.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BYLAWS. The
Certificate provides that the affirmative vote of the holders of at least
66 2/3% of the outstanding shares of capital stock of the Company (including any
warrants with voting rights) then entitled to vote on the matter is required to
amend certain provisions of the Certificate, including those provisions relating
to the classification of the Board of Directors; the filling of vacancies on the
Board; removal of directors; the calling of special meetings of stockholders;
the prohibition of stockholder action without a meeting; indemnification of
directors, officers and others; the limitation on liability of directors; the
approval of any merger or sale of substantially all of the assets of the Company
which has not been approved by at least two-thirds of the Board; the Amendment
of the Bylaws; and the supermajority voting requirements in the Certificate. The
Certificate further provides that the Bylaws may be amended by the Board, except
with respect to the authorized number of directors, or by an affirmative vote of
the holders of not less than 66 2/3% of the total voting power of all
outstanding shares of capital stock of the Company (including any warrants with
voting rights) then entitled to vote on the matter. These voting requirements
will have the effect of making more difficult any amendment by stockholders,
even if a majority of the Company's stockholders believe that such amendment
would be in its best interests.
DELAWARE GENERAL CORPORATION LAW SECTION 203. The Company is subject to
Section 203 of the GCLSD, which imposes restrictions on "business combinations"
(as defined therein) with interested stockholders (being any person who acquired
15% or more of the Company's outstanding voting stock). In general, the Company
is prohibited from engaging in business combinations with an interested
55
stockholder, unless: (i) before such person became an interested stockholder,
the Board approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding for purposes of determining the number of shares outstanding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or subsequent to the date on which such person became an
interested stockholder, the business combination is approved by the Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the Company not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the earlier of the announcement of certain extraordinary
transactions involving the Company and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the Company's directors, if such extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to any person becoming an interested stockholder during the
previous three years or who were recommended for election or elected to succeed
such directors by a majority of such directors. By restricting the ability of
the Company to engage in business combinations with an interested person, the
application of Section 203 to the Company may provide a barrier to hostile or
unwanted takeovers.
VESTING OF MANAGEMENT RIGHTS UPON CERTAIN ACQUISITIONS. The terms of stock
option agreements between the Company and certain members of management provide
that all unvested options granted thereunder will vest upon either: (i) the
acquisition by any one purchaser or group of more than 50% of the voting power
of the stock of the Company; (ii) a replacement during any 12 month period of a
majority of the Board (whose appointment is not endorsed by a majority of the
Board prior to the date of such appointment); or (iii) the acquisition of assets
having more than one-third of the total fair market value of the assets of the
Company by any person or group of persons (a "Change of Control"). As of
December 31, 1997, options to purchase an aggregate of 300,816 shares of Common
Stock were unvested and subject to vesting upon a Change of Control, including
options to purchase 95,370, 15,342, 32,581, 30,982 and 34,849 shares of Common
Stock, by Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively.
56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
7,236,563 shares of Common Stock. Of these shares, all of the 2,500,000 shares
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) sold in this offering, and the 2,797,423 shares sold in the Company's IPO
are freely transferable without restriction if held by holders who are not
"affiliates" of the Company (as defined in the Securities Act).
The remaining 1,939,140 shares are "restricted securities" within the
meaning of Rule 144 adopted under the Securities Act. These restricted
securities were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act. The holders
of 1,827,701 of such restricted shares are subject to a 90-day lock-up period
following the Offering pursuant to agreements with the Underwriters. Upon the
expiration of that lock-up period: (i) all such restricted securities will be
available for resale pursuant to limitations of Rule 144; and (ii) the Company,
pursuant to its Certificate, may authorize the issuance of additional shares of
Common Stock and shares of one or more series of voting preferred stock. The
issuance of additional shares of capital stock could result in the dilution of
the voting power of the shares of Common Stock purchased in the Offering. In
addition, following the expiration of the 90-day lock-up period, pursuant to the
Registration Rights Agreement, certain stockholders have the right, subject to
the terms and conditions of the Registration Rights Agreement, to require the
Company to: (i) effect (in the aggregate) up to four registrations under the
Securities Act covering all or any portion of the shares of Common Stock held by
such stockholders, provided that if the Company effects a registration at the
request of a stockholder, no further demand may be made by any stockholder for a
period of at least nine months; and (ii) include all or any portion of such
stockholders' shares of Common Stock in any proposed registration by the Company
of shares of Common Stock (subject to reduction to the extent that the managing
underwriter, if any, is of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold therein).
Factors such as announcements concerning the Company or its competitors,
investor perception of the Company, fluctuations in the Company's operating
results and general market conditions may cause the market price of the Common
Stock to fluctuate significantly. Sales of a substantial number of shares of
Common Stock in the public market after the Offering, or the expectation that
such sales could occur, could adversely affect the market price of the Common
Stock and the Company's ability to raise capital through a subsequent offering
of securities.
57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, Furman Selz LLC, and SBC Warburg Dillon Read Inc.,
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
[Enlarge/Download Table]
NUMBER OF
UNDERWRITER SHARES
----------------------------------------------------------------------------------------------------- -----------
BT Alex. Brown Incorporated..........................................................................
Furman Selz LLC......................................................................................
SBC Warburg Dillon Read Inc..........................................................................
-----------
Total................................................................................................ 2,500,000
-----------
-----------
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Representatives of the
Underwriters.
The Company and certain of the Selling Shareholders have granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 375,000 additional shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 2,500,000,
and the Company and the Selling Shareholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 2,500,000 shares are
being offered.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying bids
on the Nasdaq National Market limited by the bid prices of independent market
makers and making purchases limited by such prices and effected in response in
order flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified period and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the pricee of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will
58
not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with this offering.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company and the Selling Stockholders with
respect to certain civil liabilities, including liabilities under the Securities
Act.
Stockholders of the Company, holding in the aggregate 1,827,701 shares of
Common Stock, have agreed not to offer, sell or otherwise dispose of any of such
Common Stock for a period of 90 days after the date of this Prospectus without
the prior consent of the Representatives of the Underwriters. See "Shares
Eligible For Future Sale."
SBC Warburg Dillon Read Inc. is the successor firm to Dillon, Read & Co.
Inc.; Dillon, Read & Co. Inc. served as an underwriter of the Company's IPO
consummated in April 1997.
Furman Selz LLC is an affiliate of ING Baring (U.S.) Securities, Inc. and
ING (U.S.) Capital Corporation. ING Baring (U.S.) Securities, Inc. received a
fee of $23,498 from the representatives of the Company's IPO in April 1997. In
addition, ING (U.S.) Capital Corporation received approximately $24.7 million as
a result of: (i) being a prior lender under the Company's former senior
revolver; (ii) being a previous holder of the Company's senior notes; (iii) net
proceeds from the sales of the Company's common shares and warrants; and (iv)
receiving a success fee for the completion of the IPO. Additionally, Mitchell I.
Quain, an Executive Vice President of Furman Selz LLC, serves as a director of
the Company.
LEGAL MATTERS
The validity of the Common Stock offered by this Prospectus and certain
other legal matters will be passed upon for the Company by Spolin & Silverman,
Santa Monica, California. Certain legal matters will be passed upon for the
Underwriters by Morgan, Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of Audio International, Inc. and
subsidiary as of December 31, 1996 and 1995 and for each of the two years in the
period ended December 31, 1996 included in this Prospectus have been so included
in reliance on the report of Thomas & Thomas, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Act for registration of the shares
of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to do not purport to be complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved and each statement shall be deemed qualified by this reference. The
Registration Statement and the exhibits and schedules thereto may be inspected
and copied at the public reference facilities maintained by the
59
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the public reference facilities of the Commission's Regional
Offices: New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a site on the World Wide Web (http://
www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information also are available from the Commission's public reference facilities
and its website. So long as the Company is subject to periodic reporting
requirements of the Exchange Act, it will continue to furnish the reports, proxy
statements and other information required thereby to the Commission. The Company
furnishes its shareholders annual reports containing financial statements
audited by its independent auditors and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
------------------------
60
INDEX TO FINANCIAL STATEMENTS
[Enlarge/Download Table]
PAGE
---------
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and
1997................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............... F-6
Notes to Consolidated Financial Statements............................................................... F-7
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
Report of Independent Accountants........................................................................ F-31
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited).......... F-32
Consolidated Statements of Income for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 (Unaudited).......................................................... F-33
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997 (Unaudited)....................................................... F-34
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997 (Unaudited).......................................................... F-35
Notes to Consolidated Financial Statements............................................................... F-36
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1996 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
February 24, 1998
F-2
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents................................................................ $ 320 $ 206
Accounts receivable, net................................................................. 13,185 18,152
Inventories.............................................................................. 19,573 25,976
Prepaid expenses and other current assets................................................ 812 782
--------- ---------
Total current assets................................................................... 33,890 45,116
Property and equipment, net................................................................ 12,187 14,054
Other assets, principally intangibles, net................................................. 23,189 39,967
--------- ---------
Total assets......................................................................... $ 69,266 $ 99,137
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................................................... $ 1,974 $ 568
Current portion of long-term obligations to unaffiliated lenders......................... 3,004 858
Convertible subordinated notes payable to related parties................................ 2,922 --
Accounts payable......................................................................... 7,420 8,032
Accrued expenses......................................................................... 7,241 6,911
Income taxes payable..................................................................... 843 3,975
--------- ---------
Total current liabilities.............................................................. 23,404 20,344
--------- ---------
Long-term liabilities
Long-term obligations
Unaffiliated lenders................................................................... 28,323 37,412
Related parties........................................................................ 6,027 --
Deferred income taxes.................................................................... 3,312 1,758
Minority interest........................................................................ 85 96
--------- ---------
Total long-term liabilities............................................................ 37,747 39,266
--------- ---------
Commitments and contingencies (Note 18)
Mandatorily redeemable common stock warrants............................................... 6,879 --
--------- ---------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value (no par value prior to February
19, 1997), 8,314,018 shares authorized; 6,847,705 shares issued and outstanding as of
December 31, 1996 (none as of December 31, 1997)....................................... 13,850 --
Undesignated preferred stock, $.01 par value, 10,000,000 shares initially authorized as
of February 19, 1997; none issued and outstanding...................................... -- --
Common stock, no par value, 4,253,550 shares authorized; 85,593 shares issued and
outstanding prior to February 19, 1997................................................. 216 --
Common stock, $.01 par value, 9,924,950 shares authorized as of February 19, 1997;
5,318,563 shares issued and outstanding as of December 31, 1997 (none as of December
31, 1996).............................................................................. -- 53
Additional paid-in capital............................................................... -- 51,057
Accumulated deficit...................................................................... (12,951) (11,444)
Foreign currency translation adjustment.................................................. 121 (139)
--------- ---------
Total stockholders' equity............................................................. 1,236 39,527
--------- ---------
Total liabilities and stockholders' equity........................................... $ 69,266 $ 99,137
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- -----------
Revenues...................................................................... $ 55,839 $ 65,099 $ 108,903
Cost of sales................................................................. 43,463 49,392 80,247
--------- --------- -----------
Gross profit............................................................ 12,376 15,707 28,656
--------- --------- -----------
Operating expenses
Selling, general and administrative expenses................................ 9,426 10,747 15,756
Amortization of intangible assets........................................... 1,115 709 905
--------- --------- -----------
Total operating expenses.................................................. 10,541 11,456 16,661
--------- --------- -----------
Income from operations........................................................ 1,835 4,251 11,995
Other expenses (income)
Interest expense
Unaffiliated lenders...................................................... 2,628 2,807 2,520
Related parties........................................................... 1,193 1,441 634
Other (income) expenses..................................................... 297 (85) 131
Minority interests.......................................................... 85 193 112
--------- --------- -----------
Income (loss) before provision for income taxes and extraordinary item........ (2,368) (105) 8,598
Provision for income taxes.................................................... 1,078 712 3,344
--------- --------- -----------
Income (loss) before extraordinary item....................................... (3,446) (817) 5,254
Extraordinary loss from debt refinancing, net of income tax benefit........... -- -- 2,078
--------- --------- -----------
Net income (loss)............................................................. (3,446) (817) 3,176
Adjustment to redemption value of mandatorily redeemable common stock
warrants.................................................................... 696 (4,320) (2,203)
Cumulative convertible preferred stock dividends.............................. (557) (1,220) (442)
--------- --------- -----------
Net income (loss) applicable to common stockholders........................... $ (3,307) $ (6,357) $ 531
--------- --------- -----------
--------- --------- -----------
Income (loss) per common share
Basic
Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .69
Extraordinary loss from debt refinancing.................................. -- -- (.55)
--------- --------- -----------
Net income (loss)......................................................... $ (38.45) $ (73.92) $ .14
--------- --------- -----------
--------- --------- -----------
Diluted
Income (loss) before extraordinary item................................... $ (38.45) $ (73.92) $ .62
Extraordinary loss from debt refinancing.................................. -- -- (.42)
--------- --------- -----------
Net income (loss)......................................................... $ (38.45) $ (73.92) $ .20
--------- --------- -----------
--------- --------- -----------
Pro forma for the Recapitalization and initial public offering, before
extraordinary item (Unaudited)
Basic................................................................... -- -- $ 1.16
Diluted................................................................. -- -- $ 1.10
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
[Enlarge/Download Table]
COMMON STOCK
--------------------------------------------------
NO PAR VALUE $.01 PAR VALUE FOREIGN
CUMULATIVE ------------------------ ------------------------ CURRENCY
CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- TRANSLATION
PREFERRED OF OF PAID-IN ULATED ADJUST-
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT MENT
------------ ----------- ----------- --------- ------------- ----------- --------- -------------
Balance, December 31,
1994..................... $ 5,549 85,593 $ 58 -- $ -- $ -- $ (5,057) $ 216
Net loss.................. -- -- -- -- -- -- (3,446) --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- 696 --
Translation adjustment.... -- -- -- -- -- -- -- 287
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1995..................... 5,549 85,593 58 -- -- -- (7,807) 503
Net loss.................. -- -- -- -- -- -- (817) --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- (4,320) --
Issuance of cumulative
convertible preferred
stock, net............... 8,301 -- -- -- -- -- -- --
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions...... -- -- -- -- -- -- (7) --
Stock option compensation
expense.................. -- -- 158 -- -- -- -- --
Translation adjustment.... -- -- -- -- -- -- -- (382)
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1996..................... 13,850 85,593 216 -- -- -- (12,951) 121
Delaware reorganization
and reverse stock
split.................... -- (85,593) (216) 85,593 1 215 -- --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- -- (2,203) --
Recapitalization
Conversion of preferred
stock into common
stock................. (13,850) -- -- 1,941,804 19 13,831 -- --
Cashless exercise and
conversion of
warrants.............. -- -- -- 524,293 6 6,097 -- --
Cancellation of
mandatorily redeemable
common stock
warrants.............. -- -- -- -- -- -- 1,143 --
Initial Public Offering
Proceeds from the
offering, net......... -- -- -- 2,700,000 27 28,229 -- --
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment
and reclassification
of warrants no longer
redeemable............ -- -- -- -- -- 1,836 -- --
Common shares issued
pursuant to anti-
dilution provisions... -- -- -- 50,743 -- 609 (609) --
Cashless exercise of
common stock warrants.... -- -- -- 16,130 -- -- -- --
Net income................ -- -- -- -- -- -- 3,176 --
Stock option compensation
expense.................. -- -- -- -- -- 240 -- --
Translation adjustment.... -- -- -- -- -- -- -- (260)
------------ ----------- ----------- --------- --- ----------- --------- ------
Balance, December 31,
1997..................... $ -- -- $ -- 5,318,563 $ 53 $ 51,057 $ (11,444) $ (139)
------------ ----------- ----------- --------- --- ----------- --------- ------
------------ ----------- ----------- --------- --- ----------- --------- ------
TOTAL
---------
Balance, December 31,
1994..................... $ 766
Net loss.................. (3,446)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... 696
Translation adjustment.... 287
---------
Balance, December 31,
1995..................... (1,697)
Net loss.................. (817)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... (4,320)
Issuance of cumulative
convertible preferred
stock, net............... 8,301
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions...... (7)
Stock option compensation
expense.................. 158
Translation adjustment.... (382)
---------
Balance, December 31,
1996..................... 1,236
Delaware reorganization
and reverse stock
split.................... --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... (2,203)
Recapitalization
Conversion of preferred
stock into common
stock................. --
Cashless exercise and
conversion of
warrants.............. 6,103
Cancellation of
mandatorily redeemable
common stock
warrants.............. 1,143
Initial Public Offering
Proceeds from the
offering, net......... 28,256
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment
and reclassification
of warrants no longer
redeemable............ 1,836
Common shares issued
pursuant to anti-
dilution provisions... --
Cashless exercise of
common stock warrants.... --
Net income................ 3,176
Stock option compensation
expense.................. 240
Translation adjustment.... (260)
---------
Balance, December 31,
1997..................... $ 39,527
---------
---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Cash flows from operating activities
Net income (loss)............................................................. $ (3,446) $ (817) $ 3,176
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
Depreciation and amortization............................................... 4,542 4,343 5,372
Extraordinary loss from debt refinancing.................................... -- -- 2,078
Unrealized loss on forward foreign exchange contracts....................... -- -- 469
Deferred income taxes....................................................... 867 88 (1,281)
Other, net.................................................................. 70 188 185
Changes in assets and liabilities
Accounts receivable....................................................... 2,256 (3,069) (3,159)
Inventories............................................................... (2,962) (2,665) (4,956)
Prepaid expenses and other assets......................................... 274 (3) (136)
Accounts payable.......................................................... (1,004) 1,891 (361)
Accrued expenses.......................................................... 682 2,477 (1,041)
Income taxes payable...................................................... 178 525 4,295
--------- --------- ---------
Net cash provided by operating activities............................... 1,457 2,958 4,641
--------- --------- ---------
Cash flows from investing activities
Purchase of stock of Audio International, Inc., net of cash acquired.......... -- -- (23,597)
Purchase of net assets of Aerospace Display Systems........................... -- (11,693) --
Purchase of minority stockholder's interest................................... -- (5,207) --
Purchase of net assets and stock of Elsinore Engineering Services and Elsinore
Aerospace Services, Inc..................................................... -- (1,300) --
Capital expenditures.......................................................... (1,203) (5,821) (3,842)
Other, net.................................................................... (259) 5 (370)
--------- --------- ---------
Net cash used for investing activities.................................. (1,462) (24,016) (27,809)
--------- --------- ---------
Cash flows from financing activities
Initial public offering and application of the net proceeds
Proceeds from sale of common stock in the offering, net of $3,467 for
underwriting discounts, commissions and expenses paid in 1997............. -- -- 28,933
Borrowings under new credit facility, net of deferred financing costs of
$463...................................................................... -- -- 12,312
Repayment of debt, including $273 in prepayment penalties and expenses...... -- -- (42,160)
Financing of acquisitions
Revolving line of credit borrowings......................................... -- 6,399 23,597
Proceeds from issuance of cumulative convertible preferred stock and
mandatorily redeemable common stock warrants, net......................... -- 8,805 --
Senior term loan borrowings................................................. -- 5,000 --
Convertible subordinated note borrowings from related parties............... -- 3,000 --
Promissory note principal payments.......................................... -- -- (1,095)
Net borrowings under revolving line of credit agreements...................... 1,972 1,191 2,906
Principal payments on capitalized lease and other long-term obligations....... (1,665) (2,001) (1,675)
Proceeds from issuance of cumulative convertible preferred stock, net......... -- 112 --
Payment of deferred financing costs........................................... -- (851) --
Other, net.................................................................... (266) (604) 139
--------- --------- ---------
Net cash provided by financing activities............................... 41 21,051 22,957
--------- --------- ---------
Effect of foreign currency translation on cash.................................. 33 22 97
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ 69 15 (114)
Cash and cash equivalents at beginning of period................................ 236 305 320
--------- --------- ---------
Cash and cash equivalents at end of period...................................... $ 305 $ 320 $ 206
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company")
manufactures avionics components and provides avionics systems integration
services in certain niche markets of the commercial and high-end corporate jet
aircraft industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
prior years' financial statements to conform to the 1997 presentation.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from two to
twenty years. Building and building improvements are depreciated using the
straight-line method over their estimated useful lives of forty years. Leasehold
improvements are amortized using the straight-line method over their estimated
useful lives or remaining lease term, whichever is less. Expenditures for
maintenance and repairs are expensed as incurred. The costs for improvements are
capitalized. Upon retirement or disposal, the cost and accumulated depreciation
of property and equipment are reduced and any gain or loss is recorded in income
or expense.
F-7
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from
fifteen to thirty years. Other intangibles are amortized on a straight-line
basis over their estimated useful lives, ranging from ten to twenty years.
Revolving credit agreement deferred financing costs are amortized on a
straight-line basis over the term of the agreement. Term debt deferred financing
costs are amortized using the interest method over the terms of their respective
agreements.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts at December 31, 1996 and 1997. The estimated fair value
of foreign currency forward exchange contracts is based on quotes obtained from
various financial institutions that deal in this type of instrument.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's U.K. and Swiss subsidiaries have
been translated into U.S. dollars from their functional currencies, pounds
sterling and Swiss francs, respectively, in the consolidated financial
statements. Assets and liabilities have been translated at the exchange rate on
the balance sheet date and income statement amounts have been translated at
average exchange rates in effect during the period. The net translation
adjustment is reflected as a component of stockholders' equity (deficit).
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $(314,000), $71,000
and $(72,000) for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-8
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Refer to Note 16 for information
concerning the pro forma effect on results of operations assuming the fair value
method of measuring compensation expense related to the employee stock option
plan was utilized as described in SFAS 123.
REVENUE RECOGNITION
Revenues from the sale of manufactured products, except for products
manufactured under long-term contracts, are recorded when products are shipped.
Revenues on long-term contracts are recognized using the
percentage-of-completion method based on costs incurred to date compared with
total estimated costs at completion. Unbilled accounts receivable were $465,000
and $654,000 at December 31, 1996 and 1997, respectively. Unbilled accounts
receivable are expected to be billed during the succeeding twelve-month period.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share are computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Note
17). As the Company's historical capital structure is not indicative of its
structure after the Company's recapitalization and initial public offering (Note
2), pro forma income per common share is presented for 1997 and reflects the
recapitalization, the initial public offering and the application of the
proceeds therefrom, as if both had occurred January 1, 1997 (Note 17).
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company is required to adopt SFAS 130
for its fiscal year beginning January 1, 1998; to enhance comparability,
reclassification of financial statements for earlier periods is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosure about operating in segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The Company is
F-9
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
required to adopt SFAS 131 for its fiscal year ending December 31, 1998.
Comparative information for earlier years must be restated to conform to the
requirements of this standard.
NOTE 2 - RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company (the "Recapitalization").
Completion of the Recapitalization was a condition to the consummation of the
Company's initial public offering (the "IPO") and, was effective concurrent
therewith. The IPO was consummated on April 16, 1997.
The Recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock
("Preferred Stock") into 1,941,804 shares of common stock; (ii) the cashless
exercise and conversion of all 52,784 and 9,355 issued and outstanding Preferred
Stock warrants and common stock warrants, respectively, into a total of 16,585
shares of common stock; (iii) the cashless exercise of 508,497 mandatorily
redeemable common stock warrants (the "Redeemable Warrants") into a total of
507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable
Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the Recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the Recapitalization. Concurrent with the
consummation of the IPO, the mandatory redemption feature of these warrants was
terminated and, as a result, the value ascribed thereto was reclassified to
stockholders' equity as additional paid-in capital.
On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares
of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net
of $2,268,000 for underwriting discounts and commissions, together with
approximately $12,775,000 of proceeds from borrowings under a new credit
facility were used to repay amounts due under the Company's senior revolving
line of credit, senior term notes, senior subordinated notes and convertible
notes.
NOTE 3 - ACQUISITIONS
AUDIO INTERNATIONAL
On November 14, 1997, the Company purchased all of the outstanding stock of
Audio International, Inc. ("Audio International"). Audio International provides
premium, customized aircraft entertainment and cabin management products and
systems for the high-end corporate jet market.
The total purchase price was $24,726,000 in cash at closing, including
$726,000 in acquisition related costs, plus contingent consideration aggregating
a maximum of $6,000,000 payable over two years based on future attainment of
defined performance criteria. The acquisition was funded with borrowings under
the Company's revolving line of credit facility.
The acquisition was accounted for as a purchase and the $20,110,000
difference between the purchase price, excluding the contingent consideration,
and the fair value of the net assets acquired was recorded as goodwill and is
being amortized over 30 years. The amount of contingent consideration paid
F-10
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
in the future, if any, will increase goodwill and will be amortized
prospectively over the remaining period of the initial 30-year term.
The consolidated results of operations for the year ended December 31, 1997
include the operating results of Audio International subsequent to November 13,
1997.
MINORITY STOCKHOLDER'S 25% INTEREST
On February 20, 1996, the Company purchased the remaining 25% of a
subsidiary's stock it did not already own from the subsidiary's minority
stockholder (the "Minority Stockholder") for a total purchase price of
$5,748,000, including $334,000 of acquisition related costs and expenses (the
"Minority Interest Acquisition"). The purchase price consisted of $4,873,000
paid in cash at closing and a $600,000 non-interest bearing obligation payable
to the Minority Stockholder. The cash portion of the purchase price was funded
with the proceeds from the sale of Preferred Stock and Redeemable Warrants.
The acquisition was accounted for as a purchase and the $5,498,000
difference between the purchase price and 25% of the fair value of the net
assets acquired was recorded as goodwill and is being amortized over 26 years,
representing the remaining useful life of the goodwill recorded upon the initial
75% acquisition in October 1991.
The consolidated results of operations for the year ended December 31, 1996
include 100% of the operating results of the subsidiary subsequent to February
20, 1996. For the periods prior to February 20, 1996, the consolidated results
of operations include a charge for the Minority Stockholder's 25% ownership
interest.
For the periods prior to February 20, 1996, the Minority Stockholder, who is
also President of the subsidiary, was compensated pursuant to an employment
agreement. The employment agreement was cancelled as of February 20, 1996. For
the years ended December 31, 1995 and 1996, the Minority Stockholder earned
compensation of $851,000 and $22,000, respectively.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased for cash substantially all of
the assets, subject to certain liabilities assumed, of the Aerospace Display
Systems division ("ADS") of Allard Industries, Inc. ("Allard"). The total
purchase price was $13,395,000, including $402,000 in acquisition related costs.
ADS develops and manufactures dichroic liquid crystal displays and modules for
commercial and military avionics systems.
The acquisition was funded with the proceeds from the sale of Preferred
Stock, convertible subordinated notes and Redeemable Warrants, borrowings under
the Company's revolving line of credit and a $2,000,000 non-interest bearing
obligation payable to certain Allard stockholders.
The acquisition was accounted for as a purchase and the $7,425,000
difference between the purchase price and the fair value of the net assets
acquired was recorded as goodwill and is being amortized over 30 years.
The consolidated results of operations for the year ended December 31, 1996
include the operating results of ADS subsequent to September 18, 1996.
F-11
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division of Elsinore, L.P. (collectively,
"Elsinore"). Elsinore provides engineering services to the commercial aircraft
industry. The total purchase price was $2,443,000, including $300,000 of
acquisition related costs. The purchase price consisted of $1,000,000 paid in
cash at closing and a $1,250,000 15% promissory note payable to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION AND IPO
Unaudited pro forma consolidated results of operations are presented in the
table below for the two years ended December 31, 1997 and are pro forma for the
Recapitalization, the IPO and the application of the net proceeds therefrom
(Note 2). For 1996, the results are also pro forma as if the Audio
International, Minority Interest and ADS acquisitions were consummated on
January 1, 1996; the pro forma effect of the Elsinore acquisition is not
material and, accordingly, is not reflected. For 1997, the results are pro forma
as if the Audio International acquisition was consummated on January 1, 1997.
Amounts are in thousands, except per share data.
[Enlarge/Download Table]
PRO FORMA FOR THE
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
--------- -----------
Revenues.......................................................... $ 82,939 $ 121,334
Income before extraordinary item.................................. 2,284 5,252
Income applicable to common stockholders, before extraordinary
item............................................................ 2,284 5,252
Pro forma income per common share, before extraordinary item
Basic......................................................... $ .45 $ .99
Diluted....................................................... .44 .94
Pro forma weighted average number of common shares outstanding
Basic......................................................... 5,021 5,304
Diluted....................................................... 5,209 5,606
The above information reflects adjustments for depreciation, amortization,
general and administrative expenses, minority interest and interest expense
based on the new cost basis and debt structure of the Company. In 1997, income
excludes the effect of a $2,078,000 extraordinary loss incurred in connection
with the Company's debt refinancing (Note 11).
F-12
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $379,000
and $487,000 at December 31, 1996 and 1997, respectively.
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
commercial and high-end corporate jet aircraft industries. Generally, the
Company does not require collateral or other security to support accounts
receivable subject to credit risk. Under certain circumstances, deposits or cash
on delivery terms are required. The Company maintains reserves for potential
credit losses and generally, such losses have been within management's
expectations.
SIGNIFICANT CUSTOMERS
Three customers each accounted for more than 10% of the Company's
consolidated revenues, as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Customer A....................................................... 8.9% 15.8% 19.0%
Customer B....................................................... 25.4% 7.7% 1.1%
Customer C....................................................... 8.7% 7.2% 11.2%
Complete loss of either Customer A or C could have a significant adverse
impact on the results of operations expected in future periods. During the year
ended December 31, 1997, Customer A acquired another customer of the Company.
The above amounts for Customer A include the Company's revenue from the acquired
customer after its acquisition. For the year ended December 31, 1997, revenue
from Customer A would have been 20.9% had the acquisition been consummated on
January 1, 1997.
NOTE 5 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Raw material........................................................... $ 12,350 $ 14,224
Work-in process........................................................ 2,717 4,655
Finished goods......................................................... 4,506 7,097
--------- ---------
Total inventories.................................................... $ 19,573 $ 25,976
--------- ---------
--------- ---------
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $1,378,000 and $125,000 at December 31, 1996
and 1997, respectively.
F-13
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Machinery and equipment.................................................................. $ 16,637 $ 18,151
Tooling.................................................................................. 2,944 3,133
Computer equipment, furniture and fixtures............................................... 2,462 3,660
Land, buildings and leasehold improvements............................................... 1,676 3,580
---------- ----------
Total cost............................................................................. 23,719 28,524
Accumulated depreciation and amortization.............................................. (11,532) (14,470)
---------- ----------
Net property and equipment........................................................... $ 12,187 $ 14,054
---------- ----------
---------- ----------
Property and equipment under capital leases included above consists of the
following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Machinery and equipment.................................................................... $ 920 $ 1,160
Computer equipment, furniture and fixtures................................................. 306 455
--------- ---------
Total cost............................................................................... 1,226 1,615
Accumulated depreciation and amortization.................................................. (347) (523)
--------- ---------
Net property and equipment............................................................. $ 879 $ 1,092
--------- ---------
--------- ---------
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
On December 12, 1996, the Company purchased all of the manufacturing assets
and inventory relating to the cold-heading manufacturing facility of the
Qualitronix Division of AMP, Inc. (the "AMP Facility"). The purchase price of
$6,802,000 (including $2,433,000 of inventory purchased) consisted of $5,399,000
paid in cash at closing with the balance paid in January 1997. The $2,213,000
difference between the purchase price and the fair value of the individual
assets acquired was recorded as an intangible asset and is being amortized over
15 years.
F-14
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - OTHER ASSETS
Other assets includes the following and is net of accumulated amortization
for the respective periods as parenthetically noted (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Goodwill (net of $808 and $1,682).......................................................... $ 19,756 $ 38,592
Deferred financing costs (net of $1,368 and $64) (Note 11)................................. 2,296 399
Other intangibles (net of $164 and $194)................................................... 274 596
Other non-amortizable assets............................................................... 863 380
--------- ---------
Other assets, net........................................................................ $ 23,189 $ 39,967
--------- ---------
--------- ---------
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Salaries, wages, compensated absences and payroll related taxes.............................. $ 2,842 $ 3,410
Other accrued expenses....................................................................... 4,399 3,501
--------- ---------
Total accrued expenses..................................................................... $ 7,241 $ 6,911
--------- ---------
--------- ---------
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings outstanding as of December 31, 1996 and 1997 includes
the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Promissory note, 15% interest and principal payable as described below.......................... $ 1,250 $ --
Short-term revolving line of credit............................................................. 724 568
--------- ---------
Total short-term borrowings................................................................... $ 1,974 $ 568
--------- ---------
--------- ---------
The promissory note was issued on December 5, 1996 in conjunction with the
Elsinore acquisition and was payable to the former owners. The promissory note,
as adjusted (Note 3), was repaid during 1997.
The Company's Swiss subsidiary has a short-term revolving line of credit
with a Swiss bank under which Swiss franc denominated borrowings of $724,000 and
$568,000 were outstanding at December 31, 1996 and 1997, respectively. Interest
on the line accrues at the bank's prime rate (5.25% at December 31, 1997) plus
0.25%. The line of credit is guaranteed by the Company.
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
In conjunction with the ADS acquisition, the Company sold 15% convertible
subordinated notes ("Convertible Notes") and Redeemable Warrants to a group of
investors, who are also related parties
F-15
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
(Note 22). As described in Note 14, $124,000 of the aggregate $3,000,000
proceeds was allocated to Redeemable Warrants in the consolidated financial
statements. The corresponding reduction in the recorded principal amount of the
notes was treated as debt discount and amortized as interest expense over the
life of the notes. The principal balance of the notes, plus accrued interest,
was paid with a portion of the IPO proceeds.
NOTE 11 - LONG-TERM OBLIGATIONS
Long-term obligations outstanding includes the following (amounts in
thousands):
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Senior revolving line of credit............................................................ $ -- $ 36,000
Note payable to Arkansas Development Finance Authority, principal and interest at rates
ranging from 5.25% to 6.0%, secured by land, building and equipment...................... -- 712
Capital lease obligations and equipment term financing, with interest at 4.34 % to 18.08%,
secured by equipment..................................................................... 662 547
Acquisition financing payable to sellers
Payable to Allard stockholders (for the ADS acquisition), due in monthly installments of
$56,000 through August 18, 1999........................................................ 1,531 1,011
Payable to Minority Stockholder (for the Minority Interest acquisition), due in monthly
installments of $33,000 through December 15, 1997...................................... 383 --
Debt repaid with IPO proceeds
Senior revolving line of credit.......................................................... 11,982 --
Senior term notes........................................................................ 16,769 --
Senior subordinated debt payable to related parties (Note 22)............................ 6,027 --
--------- ---------
Total long-term obligations............................................................ 37,354 38,270
Less current portion................................................................... (3,004) (858)
--------- ---------
Long-term obligations, less current portion.......................................... $ 34,350 $ 37,412
--------- ---------
--------- ---------
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO (Note 2),
together with approximately $12,775,000 of proceeds from borrowings under a new
credit facility, to repay the following: (i) senior revolving line of credit
borrowings of $15,356,000; (ii) senior term notes aggregating $16,531,000; (iii)
senior subordinated notes payable to related parties aggregating $7,000,000; and
(iv) Convertible Notes payable to related parties aggregating $3,000,000. In
conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a
$1,149,000 write-off of unamortized original issued discounts; and (iii) a
$344,000 charge for a prepayment penalty and other related expenses.
F-16
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
SENIOR CREDIT FACILITY
Concurrent with the completion of the IPO, the Company obtained a new credit
agreement with a group of banks for a $40 million senior revolving line of
credit, expiring in April 2002 (the "Credit Facility"). The Credit Facility was
amended in November 1997 in conjunction with the Audio International acquisition
to provide a $60 million revolving line of credit. Borrowings under the Credit
Facility are secured by assets totaling $96,122,000 as of December 31, 1997. At
December 31, 1997, additional borrowings of $24,000,000 were available under the
Credit Facility. In February 1998, the Credit Facility was further amended to
provide for a $75 million revolving line of credit.
The Company, at its option, may elect to pay interest on Credit Facility
borrowings based on either the prime rate or Interbank Offered Rate (IBOR) plus
defined margins. The Company is required to pay a commitment fee, up to a
maximum 0.375%, on the unused portion of the Credit Facility. The weighted-
average interest rate on borrowings outstanding was 7.03% as of December 31,
1997. Interest rate margins and commitment fee rates are reset quarterly, based
upon a defined leverage ratio. The maximum interest rate margins are 0.75% above
the prime rate or 2.00% above the IBOR rate.
The Credit Facility contains certain restrictive covenants which require the
Company to: (i) maintain certain defined financial ratios such as interest
coverage, leverage and working capital, and minimum levels of net worth; and
(ii) limit capital expenditures, including capital lease obligations, and
additional indebtedness which may be incurred. The Credit Facility also
prohibits the Company from paying any cash dividends on its common stock.
ARKANSAS DEVELOPMENT FINANCE AUTHORITY
The note was assumed in conjunction with the Audio International acquisition
and is guaranteed by its former stockholders. The acquisition agreement provides
that the Company must obtain a release of the former stockholders' guarantees.
The Company is evaluating various alternatives including repayment of the note
by borrowing under the Credit Facility. The note is classified as a long-term
obligation as of December 31, 1997.
ACQUISITION FINANCING PAYABLE TO SELLERS
In conjunction with the Minority Interest Acquisition and the ADS
acquisition, the sellers provided financing that is payable in monthly
installments over an eighteen-month and a three-year period, respectively. The
Minority Stockholder and ADS payment obligations are non-interest bearing;
original issue discounts of 9.75% and 11.5%, respectively, are being amortized
over the payment obligation terms. Unamortized debt discounts were $264,000 and
$100,000 as of December 31, 1996 and December 31, 1997, respectively.
F-17
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1997 (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDING DECEMBER 31,
1998................................................................................................. $ 942
1999................................................................................................. 633
2000................................................................................................. 46
2001................................................................................................. 17
2002................................................................................................. 36,728
Thereafter........................................................................................... 4
---------
Total aggregate maturities......................................................................... 38,370
Less unamortized debt discount..................................................................... (100)
---------
Total long-term obligations...................................................................... $ 38,270
---------
---------
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Domestic.......................................................................... $ (2,534) $ (855) $ 7,509
Foreign........................................................................... 166 750 1,089
--------- --------- ---------
Total........................................................................... $ (2,368) $ (105) $ 8,598
--------- --------- ---------
--------- --------- ---------
F-18
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provisions for income taxes are as follows (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Current
U.S. federal...................................................................... $ 60 $ 269 $ 3,231
State and local................................................................... 24 194 968
Foreign........................................................................... 127 161 426
--------- --------- ---------
Total current................................................................... 211 624 4,625
--------- --------- ---------
Deferred
U.S. federal...................................................................... 751 70 (1,021)
State and local................................................................... 226 21 (279)
Foreign........................................................................... (110) (3) 19
--------- --------- ---------
Total deferred.................................................................. 867 88 (1,281)
--------- --------- ---------
Total provision
U.S. federal...................................................................... 811 339 2,210
State and local................................................................... 250 215 689
Foreign........................................................................... 17 158 445
--------- --------- ---------
Total provision................................................................. $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Gross deferred tax liabilities
Tax effect on earnings of subsidiary not consolidated for tax purposes........ $ 2,431 $ 2,688 $ 2,688
Depreciable and amortizable assets............................................ 781 991 996
Other......................................................................... 367 279 409
--------- --------- ---------
Gross deferred tax liabilities.............................................. 3,579 3,958 4,093
--------- --------- ---------
Gross deferred tax (assets)
Inventory..................................................................... (1,376) (1,798) (2,811)
Loss carryforwards............................................................ (1,391) (1,238) (865)
Accrued expenses.............................................................. (220) (605) (697)
State income taxes............................................................ -- -- (194)
Allowance for doubtful accounts............................................... (41) (68) (159)
Other......................................................................... (122) -- (184)
--------- --------- ---------
Gross deferred tax (assets)................................................. (3,150) (3,709) (4,910)
--------- --------- ---------
Deferred tax assets valuation allowance......................................... 2,681 3,063 2,575
--------- --------- ---------
Net deferred tax liability.................................................... $ 3,110 $ 3,312 $ 1,758
--------- --------- ---------
--------- --------- ---------
F-19
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Income tax (benefit) at U.S. statutory rates......................................... $ (805) $ (36) $ 2,923
Increase (decrease) resulting from
Tax on earnings of subsidiary not consolidated for tax purposes.................... 977 92 --
Book benefit not provided (provided) for net operating loss carryforwards.......... 773 172 (488)
Amortization of assets and other expenses not deductible for income tax purposes... 68 137 441
State income taxes, net of federal benefit......................................... 16 157 482
Lower tax rates on earnings of foreign subsidiaries................................ (11) (65) (116)
Other, net......................................................................... 60 255 102
--------- --------- ---------
Income tax at effective rates.................................................... $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
Approximately $2,543,000 of the Company's loss carryforwards remained at
December 31, 1997 for federal income tax purposes. The carryforwards expire in
varying amounts through 2012. No benefit for the remaining loss carryforwards
has been recognized in the consolidated financial statements. The amount of loss
carryforwards that may be utilized in the future are subject to limitations
because of the occurrence of a change in control of the Company, as defined in
the Internal Revenue Code. A change in control occurred during 1996 as a result
of certain equity transactions and upon completion of the IPO. The amount of
loss carryforwards that may be used in the future is limited to approximately
$800,000 in each year for federal income tax purposes until fully utilized. The
deferred tax asset valuation allowance was reduced in 1997 by $488,000 to
reflect the amount of federal and state tax loss carryforwards that has been
utilized to reduce 1997 current income taxes.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks.
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general economic hedge against foreign inventory
procurement and manufacturing costs. Market value gains and losses on forward
foreign exchange contracts are recognized in the consolidated statements of
operations and aggregated a realized net loss of $316,000 and $487,000 for the
years ended December 31, 1996 and 1997, respectively (none in the year ended
December 31, 1995).
At December 31, 1997, the Company has twelve open forward exchange contracts
with one of its senior lenders to purchase a total of CHF 9,836,000 for
$7,200,000 at rates ranging between 1.341 and 1.391 CHF per U.S. dollar.
Settlement of the contracts is to occur in twelve equal monthly amounts of
$600,000 from January 15, 1998 through December 15, 1998. As of December 31,
1997, the Company has recognized in cost of sales an unrealized market value
loss of $469,000 on the open contracts.
F-20
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
NOTE 14 - MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
Mandatorily redeemable common stock warrants (the "Redeemable Warrants")
were issued in conjunction with various debt and equity transactions. During
1997, all Redeemable Warrants were either exercised or cancelled in conjunction
with the Recapitalization and IPO (Note 2). The table below summarizes the
transactions during the three-year period ended December 31, 1997 (amounts in
thousands, except share data).
[Enlarge/Download Table]
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
Balance, December 31, 1994................................................................ $ 2,329 446,296
Adjustment to estimated redemption value.................................................. (696) --
--------- -----------
Balance, December 31, 1995................................................................ 1,633 446,296
Issued in conjunction with sale of Preferred Stock to finance Minority Interest
acquisition............................................................................. 492 194,618
Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS
acquisition............................................................................. 248 98,158
Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock.............. 7 2,868
Issued in conjunction with debt agreement amendment....................................... 179 70,893
Adjustment to estimated redemption value.................................................. 4,320 --
--------- -----------
Balance, December 31, 1996................................................................ 6,879 812,833
Adjustment to redemption value to reflect the IPO per share price......................... 2,203 --
Cashless exercise and conversion pursuant to the Recapitalization......................... (6,103) (508,497)
Cancelled pursuant to the Recapitalization................................................ (1,143) (95,368)
Cancelled upon debt repayment with IPO proceeds........................................... (1,657) (138,075)
Reclassification of warrants no longer mandatorily redeemable to additional paid-in
capital................................................................................. (179) (70,893)
--------- -----------
Balance, December 31, 1997................................................................ $ -- --
--------- -----------
--------- -----------
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which included, in part, an earnings multiple. During the years
ended December 31, 1995 and 1996, the Company increased (decreased) by
$(696,000) and $4,320,000, respectively, the amount ascribed to the Redeemable
Warrants to reflect estimated redemption value. Concurrent with the consummation
of the Recapitalization and IPO, the Company increased the redemption value by
$2,203,000 to reflect the $12.00 per share IPO price. The adjustments to
redemption value were charged (credited) to accumulated deficit.
F-21
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of December 31, 1996, the number of cumulative convertible preferred
shares authorized to be issued consisted of 8,314,018 shares in various series
("Preferred Stock"). All Preferred Stock was without par value. As of December
31, 1994, 1995 and 1996, there were 4,022,705, 4,022,705 and 6,847,705 shares
outstanding, respectively. At December 31, 1996, the Company also had Preferred
Stock warrants outstanding to purchase a total of 52,784 preferred shares at an
exercise price of $1.263 per share.
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its Preferred Stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the Recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of Preferred Stock
were converted into .28357 of a share of common stock. The Recapitalization also
provided for the cashless exercise and conversion of all Preferred Stock
warrants into 10,206 common shares. There were no shares of Preferred Stock or
warrants to purchase Preferred Stock outstanding as of December 31, 1997.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the
Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable
Warrants to purchase 194,618 common shares to a related party (Note 22).
Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable
Warrants to reflect their estimated fair market value on the issuance date. The
proceeds from the sale, net of issuance costs of $558,000, were used to fund the
Minority Interest Acquisition.
On September 18, 1996, the Company sold 750,000 preferred shares at $4.00
per share and issued Redeemable Warrants to purchase 49,079 common shares to
related parties (Note 22). Proceeds from the sale aggregating $124,000 were
ascribed to the Redeemable warrants to reflect their estimated fair market value
o the issuance date. The proceeds from the sale, net of issuance costs of
$137,000, were used to fund the ADS Acquisition.
NOTE 16 - COMMON STOCK
At December 31, 1996 the Company was authorized to issue 4,253,550 common
shares, without par value and, in addition to the Redeemable Warrants, had
issued non-redeemable warrants to purchase a total of 9,355 common shares at an
exercise price of $4.454 per share. On February 19, 1997, in conjunction with
reorganizing as a Delaware corporation, the Company established a $.01 par value
for its common stock and increased to 9,924,950 the number of common shares
authorized. As of December 31, 1997, a total of 527,156 common shares were
reserved for issuance upon exercise of stock options outstanding under the
Company's stock option plan.
As part of the Recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. As described in Note 2, Redeemable Warrants to purchase
70,893 common shares at an exercise price of $14.11 per share remained after the
Recapitalization. Concurrent with the consummation of the IPO, the mandatory
redemption feature of these warrants was terminated and, consequently, became
non-redeemable warrants. In December 1997, the holders of these warrants elected
to exercise all of the warrants on a cashless basis and convert the warrants
into 16,130 common shares. No non-redeemable warrants were outstanding as of
December 31, 1997.
F-22
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - COMMON STOCK (CONTINUED)
The Company has a qualified stock option plan for key employees under which
options to purchase common shares may be granted. The plan permits the granting
of incentive stock options, as defined by Section 422 of the Internal Revenue
Code, non-qualified stock options, restricted stock options and stock
appreciation rights. The plan expires in 2003. Options generally vest in equal
installments over five years from the date of grant and remain exercisable until
December 31, 2002.
The following table summarizes the status of the Company's stock option plan
at December 31, 1995, 1996, and 1997 and the activity for the three years ended
December 31, 1997:
[Enlarge/Download Table]
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
Options outstanding at beginning of
year..................................... 185,029 $ 0.529 208,423 $ 0.529 355,001 $ 1.724
Granted................................... 37,573 0.529 147,031 3.413 163,662 15.574
Cancelled................................. (14,179) 0.529 (453) 0.529 (17,403) 6.228
--------- --------- ---------
Options outstanding at end of year........ 208,423 0.529 355,001 1.724 501,260 6.089
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year........ 85,581 0.529 141,845 0.633 200,444 0.921
--------- --------- ---------
--------- --------- ---------
The following table summarizes information about stock options outstanding
and stock options exercisable at December 31, 1997:
[Enlarge/Download Table]
OPTIONS OUSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
------------------- --------------- ----------------- -------------- --------------- --------------
$0.529 - $1.234 303,998 7.0 years $ 0.724 194,556 $ 0.622
7.053 - 16.75 197,262 9.7 years 14.357 5,888 10.802
--------------- ---------------
501,260 8.1 years 6.089 200,444 0.921
--------------- ---------------
--------------- ---------------
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 approximated the fair market value
of the underlying common stock on the grant date. The exercise price of certain
options granted from February 1996 to January 1997 were deemed to be below the
fair market value of the underlying common stock on the grant date and such
difference is being recognized as additional compensation expense in the
consolidated financial statements on a straight line basis over the vesting
period of the underlying options. Compensation expense recognized was $158,000
and $240,000 for the years ended December 31, 1996 and 1997, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent
F-23
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - COMMON STOCK (CONTINUED)
with the method of SFAS 123, the Company's net income (loss) and net income
(loss) per common share would have been as follows (amounts in thousands, except
per share data):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Net income (loss)
As reported.................................................................... $ (3,446) $ (817) $ 3,176
Pro forma...................................................................... (3,446) (822) 3,129
Net income (loss) per common share
Basic
As reported.................................................................. (38.45) (73.92) .14
Pro forma.................................................................... (38.45) (73.98) .13
Diluted
As reported.................................................................. (38.45) (73.92) .20
Pro forma.................................................................... (38.45) (73.98) .19
Weighted-average fair value of options granted
Compensatory stock options..................................................... -- 5.91 5.70
Non-compensatory stock options................................................. 0.10 0.10 5.08
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%; expected life of 2.5 years; and expected stock price volatility of
39.9%. The fair value for options granted prior to the IPO was estimated on the
dates of grant using a minimum value method, assuming a risk-free interest rate
of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option
pricing models, the minimum value method excludes stock price volatility, which
could not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS 123 in providing the pro
forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED)
Income (loss) per common share ("EPS") have been computed pursuant to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which became effective after December 15, 1997; all periods prior
thereto have been restated to conform with the provisions of this statement.
F-24
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED) (CONTINUED)
The following table provides a reconciliation of both income (loss) before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilizes the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares (amounts in thousands, except per share
data).
[Enlarge/Download Table]
YEAR ENDED
DECEMBER 31, 1997
--------------------------
PRO FORMA
AS FOR RE-
1995 1996 REPORTED CAPITALIZATION
--------- --------- ----------- AND IPO
-------------
(UNAUDITED)
Income (loss) applicable to common shares - Numerator
Before extraordinary item..................................... $ (3,446) $ (817) $ 5,254 $ 6,154
Adjustment to Redeemable Warrant redemption value............. 696 (4,320) (2,203) --
Preferred Stock dividends..................................... (557) (1,220) (442) --
--------- --------- ----------- -------------
Income (loss) applicable to common shares (basic)........... (3,307) (6,357) 2,609 6,154
Preferred Stock dividends..................................... -- -- 442 --
--------- --------- ----------- -------------
Income (loss) applicable to common shares (diluted)......... $ (3,307) $ (6,357) $ 3,051 $ 6,154
--------- --------- ----------- -------------
--------- --------- ----------- -------------
Shares - Denominator
Weighted average common shares outstanding (basic)............ 86 86 3,803 5,304
Add dilutive effect of
Preferred Stock outstanding prior to conversion............. 1,141 1,710 559 --
Common stock options........................................ -- 188 302 302
Warrants outstanding prior to cancellation, conversion or
exercise.................................................. 389 660 228 --
Less antidilutive effect of potential common shares......... (1,530) (2,558) -- --
--------- --------- ----------- -------------
Weighted average common shares outstanding (diluted)...... 86 86 4,892 5,606
--------- --------- ----------- -------------
--------- --------- ----------- -------------
EPS - Income (loss) before extraordinary item
Basic......................................................... $ (38.45) $ (73.92) $ .69 $ 1.16
Diluted....................................................... (38.45) (73.92) .62 1.10
Pro forma for Recapitalization and IPO assumes each occurred on January 1,
1997 (Note 2). Therefore, pro forma income per common share, before
extraordinary item, is computed using pro forma income before adjustment to
redemption value of Redeemable Warrants and preferred stock dividends. Pro forma
income before extraordinary item also reflects the sale by the Company of
2,700,000 shares of common stock in the IPO and the application of the net
proceeds therefrom.
F-25
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to a license agreement with McDonnell Douglas
Corporation (now part of The Boeing Company) pursuant to which the Company may
request certain data in order to design and market modifications to aircraft
manufactured by McDonnell Douglas. The agreement provides that the Company will
pay McDonnell Douglas a royalty of five percent of the net sales price of all
modifications sold by the Company for which the Company has requested data from
McDonnell Douglas. The Company has requested data for a single modification,
which modification the Company believes is exempt from the obligation to pay
royalties under the agreement. In 1996, McDonnell Douglas made a demand for
$650,000 for royalties. The Company does not believe that it is obligated to
McDonnell Douglas in any amount. However, there can be no assurance that the
Company will not be required to pay royalties to McDonnell Douglas.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of these matters, as well as the
matters discussed in the preceding paragraphs, will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
LEASE COMMITMENTS
The Company leases certain facilities and equipment under various capital
and operating leases. Certain leases require payment of property taxes and
include escalation clauses. Future minimum capital and operating lease
commitments under non-cancelable leases are as follows as of December 31, 1997
(amounts in thousands):
[Enlarge/Download Table]
CAPITAL OPERATING
LEASES LEASES
----------- -----------
Year ending December 31,
1998.................................................................. $ 318 $ 2,909
1999.................................................................. 203 2,732
2000.................................................................. 50 2,274
2001.................................................................. 21 1,855
2002.................................................................. 17 1,771
2003 and thereafter................................................... 9 5,547
----- -----------
Total minimum payments required....................................... 618 17,088
-----------
-----------
Less amount representing future interest cost......................... (71)
-----
Recorded obligation under capital leases............................ 547
-----
-----
F-26
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense charged to operations for the years ended December 31,
1995, 1996 and 1997 was $1,531,000, $1,614,000 and $2,065,000, respectively.
NOTE 19 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
During the three years ended December 31, 1997, the Company paid the
following amounts in cash (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Interest........................................................................... $ 3,275 $ 2,983 $ 2,842
Income taxes....................................................................... 33 132 300
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred during the
three years ended December 31, 1997, as follows (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Debt incurred for the acquisition of machinery and equipment....................... $ 33 $ 414 $ 182
Financing provided by sellers in connection with acquisitions...................... -- 3,492 --
Liabilities assumed in connection with acquisitions................................ -- 2,687 2,581
The Recapitalization and IPO described in Note 2 included a series of
noncash transactions.
F-27
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - FOREIGN OPERATIONS AND EXPORT REVENUES
FOREIGN OPERATIONS
The Company operates in one business segment - avionics components
manufacturing and integration services. Domestic and foreign operations consist
of (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenues
Gross revenues
United States.......................................................... $ 54,394 $ 64,383 $ 109,490
Western Europe......................................................... 9,388 10,882 12,240
----------- ----------- -----------
Total gross revenues................................................. 63,782 75,265 121,730
----------- ----------- -----------
Less interarea transfers
United States.......................................................... (814) (1,496) (2,448)
Western Europe......................................................... (7,129) (8,670) (10,379)
----------- ----------- -----------
Total interarea transfers............................................ (7,943) (10,166) (12,827)
Net revenues
United States.......................................................... 53,580 62,887 107,042
Western Europe......................................................... 2,259 2,212 1,861
----------- ----------- -----------
Total net revenues................................................... $ 55,839 $ 65,099 $ 108,903
----------- ----------- -----------
----------- ----------- -----------
Income from operations
United States............................................................ $ 1,354 $ 3,727 $ 10,833
Western Europe........................................................... 501 746 1,572
Interarea eliminations................................................... (20) (222) (410)
----------- ----------- -----------
Total income from operations........................................... $ 1,835 $ 4,251 $ 11,995
----------- ----------- -----------
----------- ----------- -----------
Consolidated assets
United States............................................................ $ 34,425 $ 67,889 $ 98,076
Western Europe........................................................... 6,490 6,015 6,421
Interarea eliminations................................................... (4,586) (4,638) (5,360)
----------- ----------- -----------
Total consolidated assets.............................................. $ 36,329 $ 69,266 $ 99,137
----------- ----------- -----------
----------- ----------- -----------
Interarea sales are accounted for at prices that the Company believes would
be equivalent to unaffiliated customer sales. Interarea transfers and
eliminations reflect the shipment of raw component parts between areas.
Operating income excludes net interest expense, other income (expense) and
minority interests that are directly attributable to the related operations.
Corporate assets are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $5,161,000, $6,484,000 and
$12,430,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Export revenues are primarily derived from sales to customers located in Western
Europe, the Far East and Canada.
F-28
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - EMPLOYEE BENEFIT PLANS
The Company's Swiss subsidiary sponsors a defined contribution pension plan
covering substantially all of its employees as required by Swiss law.
Contributions and costs, which are shared equally by the Company and the
employees, are determined as a percentage of each covered employees' salary.
Company contributions and costs associated with the plan were $148,000, $151,000
and $157,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Substantially all of the Company's domestic employees are eligible to
participate in a 401(k) defined contribution plan (the "Plan"). Participation in
the Plan is at the discretion of each individual employee who is eligible to
participate. Each participating employee is permitted to contribute up to a
maximum amount defined in the Plan. The Company and its subsidiaries may make
periodic discretionary matching contributions to the Plan. The Company made
matching contributions of $41,000 during the year ended December 31, 1997. No
matching contributions were made to the plan during the years ended December 31,
1995 and 1996. The costs associated with administering the plan were not
significant for any period presented.
NOTE 22 - RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period....................................................... $ 912 $ 983 $ 358
Accrued and payable as of year end............................................. -- 43 --
Purchase of Convertible Notes, Preferred Stock and Redeemable Warrants in
conjunction with ADS acquisition............................................... -- 2,000 --
Fees and expenses earned......................................................... -- 36 --
Debt repaid with IPO proceeds
Senior subordinated debt....................................................... -- -- 7,000
Convertible Notes.............................................................. -- -- 1,000
Investors
Purchases of debt and equity securities
Preferred Stock and Redeemable Warrants in conjunction with Minority Interest
acquisition.................................................................. -- 6,500 --
Convertible Notes, Preferred Stock and Redeemable Warrants in conjunction with
ADS acquisition.............................................................. -- 4,000 --
Fees and expenses earned......................................................... -- 74 --
Convertible Notes
Interest earned during the period.............................................. -- 86 98
Interest accrued and payable as of year end.................................... -- 86 --
Repaid with IPO proceeds....................................................... -- -- 2,000
F-29
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 - RELATED PARTY TRANSACTIONS (CONTINUED)
Each related party is described below:
Senior Subordinated Lenders - Own 8.9% of the Company's issued and
outstanding common stock at December 31, 1997, were represented on the Company's
Board of Directors in 1995 and 1996, and provided a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 10, 11, 14, 15 and
16). The ownership percentage reflects the cashless exercise and conversion of
all Preferred Stock, Preferred Stock warrants, common stock warrants and
Redeemable Warrants into 451,370 common shares in conjunction with the
Recapitalization (Note 2).
Investors - Own 16.4% of the Company's issued and outstanding common stock
at December 31, 1997, are represented on the Company's Board of Directors, and
provided a portion of the Company's Convertible Notes and Preferred Stock
financing (Notes 10, 14, 15 and 16). The ownership percentage reflects the
cashless exercise and conversion of all Preferred Stock and Redeemable Warrants
into 840,808 common shares in conjunction with the Recapitalization (Note 2).
F-30
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Audio International, Inc.
North Little Rock, Arkansas
We have audited the accompanying consolidated balance sheets of Audio
International, Inc. and subsidiary as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits of the consolidated financial
statements referred to in the preceding paragraph provide a reasonable basis for
our opinion.
In our previously issued auditors' reports dated April 4, 1996, and February
21, 1997, we did not express an opinion on the consolidated statements of
income, stockholders' equity, or cash flows for the year ended December 31,
1995, since we had not audited such statements. In accordance with your
subsequent instructions, we have now audited the consolidated statement of
income, stockholders' equity, and cash flows for the year ended December 31,
1995, in accordance with generally accepted auditing standards. Accordingly, our
present opinion on these financial statements, as presented herein, is different
from that expressed in our previous reports.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 12, the Company prepared its financial statements for
years prior to 1995 on the income tax basis of accounting. Effective January 1,
1995, the Company adopted generally accepted accounting principles for the
preparation of its financial statements, and accordingly, appropriate
adjustments have been made to retained earnings as of January 1, 1995.
THOMAS & THOMAS
Little Rock, Arkansas
February 21, 1997
(Except for paragraph 3 above, as to
which the date is December 17, 1997)
F-31
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1995 1996
--------- --------- SEPTEMBER 30,
1997
---------------
(UNAUDITED)
ASSETS
Current assets
Cash in financial institutions............................................. $ 3 $ 46 $ 311
Repurchase agreements...................................................... 471 1,543 467
Receivables
Trade, net............................................................... 633 1,207 2,526
Employees and other...................................................... 29 13 10
Inventories................................................................ 831 1,503 1,538
Prepaid income taxes....................................................... 55 -- --
Deferred income taxes...................................................... 30 38 350
--------- --------- -------
Total current assets..................................................... 2,052 4,350 5,202
Property and equipment, net.................................................. 1,243 1,299 1,538
Other assets
Other investments.......................................................... -- 100 100
Utility deposits........................................................... 1 1 1
--------- --------- -------
Total assets............................................................. $ 3,296 $ 5,750 $ 6,841
--------- --------- -------
--------- --------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Construction contract payable.............................................. $ 269 $ -- $ --
Accounts payable, trade.................................................... 438 426 272
Accrued expenses........................................................... 154 312 785
Income taxes payable....................................................... -- 817 471
Current portion of long-term debt.......................................... 39 44 45
--------- --------- -------
Total current liabilities................................................ 900 1,599 1,573
--------- --------- -------
Long-term debt, excluding current portion.................................... 579 724 702
Deferred income taxes........................................................ 31 23 36
--------- --------- -------
Total liabilities........................................................ 1,510 2,346 2,311
--------- --------- -------
Stockholders' equity
Common stock, $1 par value, 1,000 shares authorized, 129 shares issued and
outstanding.............................................................. -- -- --
Additional paid-in capital................................................. 601 601 601
Contributed capital........................................................ 90 90 90
Retained earnings.......................................................... 1,095 2,713 3,839
--------- --------- -------
Total stockholders' equity............................................... 1,786 3,404 4,530
--------- --------- -------
Total liabilities and stockholders' equity............................. $ 3,296 $ 5,750 $ 6,841
--------- --------- -------
--------- --------- -------
The accompanying notes are an integral part of these financial statements.
F-32
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
Sales and service revenues, net....................................... $ 5,182 $ 10,134 $ 7,535 $ 11,162
Cost of sales and service............................................. 2,710 4,667 3,527 6,180
--------- --------- --------- ---------
Gross profit........................................................ 2,472 5,467 4,008 4,982
Selling, general and administrative expenses.......................... 2,174 2,926 1,959 3,230
--------- --------- --------- ---------
Operating income.................................................... 298 2,541 2,049 1,752
Other income (expense)
Investment income................................................... 15 32 18 31
Interest expense.................................................... (28) (45) (34) (31)
Gain (loss) on disposal of assets, net.............................. (38) 11 5 (2)
Other............................................................... -- 5 6 --
--------- --------- --------- ---------
Income before income taxes........................................ 247 2,544 2,044 1,750
Provision for income taxes............................................ 66 926 733 624
--------- --------- --------- ---------
Net income........................................................ $ 181 $ 1,618 $ 1,311 $ 1,126
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements.
F-33
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
[Enlarge/Download Table]
COMMON STOCK
------------------------ ADDITIONAL
NUMBER OF PAID-IN CONTRIBUTED RETAINED
SHARES AMOUNT CAPITAL CAPITAL EARNINGS TOTAL
----------- ----------- ------------- --------------- ----------- ---------
Balance, December 31, 1994.................. 100 -- $ 1 $ 90 $ 853 $ 944
Restatement of beginning balance............ -- -- -- -- 61 61
Issuance of common stock.................... 29 -- 600 -- -- 600
Net income.................................. -- -- -- -- 181 181
--- --- ----- --- ----------- ---------
Balance, December 31, 1995.................. 129 -- 601 90 1,095 1,786
Net income.................................. -- -- -- -- 1,618 1,618
--- --- ----- --- ----------- ---------
Balance, December 31, 1996.................. 129 -- 601 90 2,713 3,404
--- --- ----- --- ----------- ---------
Net income (Unaudited)...................... -- -- -- -- 1,126 1,126
--- --- ----- --- ----------- ---------
Balance, September 30, 1997 (Unaudited)..... 129 -- $ 601 $ 90 $ 3,839 $ 4,530
--- --- ----- --- ----------- ---------
--- --- ----- --- ----------- ---------
The accompanying notes are an integral part of these financial statements
F-34
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
Cash flows from operating activities
Net income............................................................ $ 181 $ 1,618 $ 1,311 $ 1,126
--------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities
(Gain) loss on disposal of assets, net.............................. 38 (11) (2) 5
Depreciation........................................................ 94 151 81 104
(Increase) decrease in operating assets
Accounts receivable, trade........................................ (103) (573) (763) (1,319)
Accounts receivable, employee and other........................... (22) 16 16 3
Inventories....................................................... (472) (672) (578) (35)
Prepaid income taxes.............................................. (55) 55 55 --
Deferred income taxes............................................. -- (8) 30 (312)
Increase (decrease) in operating liabilities
Accounts payable.................................................. 353 (12) 110 (154)
Accrued expenses.................................................. 22 158 144 473
Construction contract payable..................................... 269 (269) (269) --
Income taxes payable.............................................. (137) 817 636 (346)
Deferred income taxes............................................. 4 (8) (30) 13
--------- --------- --------- ---------
Total adjustments, net.......................................... (9) (356) (570) (1,568)
--------- --------- --------- ---------
Net cash provided by (used by) operating activities................. 172 1,262 741 (442)
--------- --------- --------- ---------
Cash flows from investing activities
Payments for purchase of property and equipment, net.................. (994) (197) (125) (348)
Other investments..................................................... -- (100) -- --
Repayments of stockholder loans....................................... (240) -- -- --
Other assets.......................................................... (1) -- -- --
--------- --------- --------- ---------
Net cash used by investing activities............................... (1,235) (297) (125) (348)
--------- --------- --------- ---------
Cash flows from financing activities
Proceeds from common stock issuance................................... 600 -- -- --
Payments on long-term debt............................................ (15) (18) (14) (35)
Proceeds from issuance of long-term debt.............................. 597 168 152 14
--------- --------- --------- ---------
Net cash provided by (used by) financing activities................. 1,182 150 138 (21)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents................ 119 1,115 754 (811)
Cash and cash equivalents, beginning of period.......................... 355 474 474 1,589
--------- --------- --------- ---------
Cash and cash equivalents, end of period................................ $ 474 $ 1,589 $ 1,228 $ 778
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements
F-35
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Audio International, Inc. (the Company), an Arkansas Corporation, was
incorporated January 2, 1987 for the primary purpose of designing, manufacturing
and marketing audio and video systems for the aviation industry. On February 16,
1995, the Company formed a new corporation, Audio International Sales, Inc. (a
Foreign Sales Corporation), in the Virgin Islands which is a wholly-owned
subsidiary of the Company. Foreign sales accounted for approximately 7.2% and
6.9% of total revenues for the years ended December 31, 1995 and 1996, and
approximately 6.2% and 13.9% of total revenues for the nine months ended
September 30, 1996 and 1997, respectively.
CONSOLIDATION
The accompanying financial statements present the consolidated accounts of
the Company and its wholly-owned subsidiary. Accordingly, the consolidated
financial statements include all of the assets, liabilities, income, expenses,
and cash flows for these companies. All significant intercompany transactions
and balances have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts receivable. The
balance of the allowance at December 31, 1995 and 1996, was $20,000, and at
September 30, 1997 was $174,000.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Major renewals and betterments
are capitalized while replacements, maintenance, and repairs which do not
improve or extend the life of an asset are expensed. Property and equipment is
depreciated over the estimated useful lives of the various assets using the
straight-line method for financial statement purposes.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Current income taxes are based on taxable income for federal and
state tax reporting purposes.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, management considers all
highly liquid debt instruments, including repurchase agreements, with an
original maturity of three months or less to be cash equivalents.
F-36
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Current operations are charged with all research, engineering, and product
development expenses which amounted to approximately $376,000 and $640,000 for
the years ended December 31, 1995 and 1996, and approximately $428,000 and
$742,000 for the nine months ended September 30, 1996 and 1997, respectively.
WARRANTY RESERVE
The financial statements include product warranty reserves of approximately
$25,000 and $62,000 at December 31, 1995 and 1996, and $109,000 at September 30,
1997. The reserve, which is classified as a current liability for financial
statement purposes, is based upon estimates of future costs associated with
fulfilling warranty obligations.
ADVERTISING EXPENSE
Advertising expenditures, including production cost related to various units
utilized for demonstrations and display, are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash in financial institutions, repurchase
agreements, and trade accounts receivable. The Company places its cash and
temporary cash investments with high credit quality institutions. At times such
deposits may be in excess of insurance limits. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for the year ended December 31, 1995, have been reclassified
to conform with the presentation of the December 31, 1996 amounts. The
reclassifications have no effect on net income for the years ended December 31,
1995 or 1996.
NOTE 2 - REPURCHASE AGREEMENTS
The Company is party to a contract with a local bank under which all
operating funds on deposit with the bank are invested in repurchase agreements
on a daily basis. The bank maintains, as collateral
F-37
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 2 - REPURCHASE AGREEMENTS (CONTINUED)
for the benefit of the Company, certain securities in its investment portfolio.
The collateral consists of United States government obligations, obligations of
United States government agencies, or other obligations guaranteed by the United
States government. The securities are held by an agent bank or registered in the
agent's name as an owner or pledgee at the Federal Reserve Bank. Interest, at a
rate determined by the bank, is paid on a daily basis. The agreements are
repurchased by the bank upon presentation of any check or other withdrawal of
funds from the Company's operating account.
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
[Download Table]
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
(UNAUDITED)
Raw materials $ 546 $ 863 $ 879
Work-in-process 147 403 492
Finished goods 138 237 167
--------- --------- -------
Total inventories $ 831 $ 1,503 $ 1,538
--------- --------- -------
--------- --------- -------
NOTE 4 - PROPERTY AND EQUIPMENT
During 1995 the City of North Little Rock Industrial Development Corporation
conveyed title to certain land to the Company for consideration of $10 and an
agreement that the Company would locate its new facility on the property. This
land, and the related contribution of capital, was recorded for financial
statement purposes at its estimated fair market value of $90,000 at the date of
receipt.
The following is a summary of property and equipment (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1995 1996
------------ --------- --------- SEPTEMBER 30,
1997
---------------
(UNAUDITED)
Land, contributed............................................. -- $ 90 $ 90 $ 90
Building and improvements..................................... 40 years 727 786 915
Machinery and equipment....................................... 3-7 years 536 658 846
Office furniture and equipment................................ 3-7 years 70 96 96
Motor vehicles................................................ 5 years 111 95 90
--------- --------- -------
1,534 1,725 2,037
Accumulated depreciation.................................... (291) (426) (499)
--------- --------- -------
Net property and equipment................................ $ 1,243 $ 1,299 $ 1,538
--------- --------- -------
--------- --------- -------
The Company substantially completed construction of its new facility, and
moved its operations from leased facilities, in December 1995. This change in
facilities resulted in losses from abandonment of leasehold improvements of
approximately $42,000.
F-38
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 5 - OTHER INVESTMENTS
In December 1996, the Company entered into a contract with an unrelated
entity, whereby the Company advanced the entity $100,000 to be used to
manufacture and develop certain products for the Company. The advance payment
will be recovered through annual discounts on Company purchases of products from
the entity over the term of the contract.
NOTE 6 - BANK LINE OF CREDIT
A revolving line of credit, which bears interest at the lender's prime rate,
is provided to the Company under the terms of a credit agreement dated June 15,
1996. The terms of the agreement allow the Company to borrow up to $200,000. The
line of credit is secured by amounts on deposit with the financial institution.
There was no balance outstanding on this line of credit at December 31, 1995 or
1996, or at September 30, 1997.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -----------------
(UNAUDITED)
Payroll.......................................................................... $ 52 $ 107 $ 366
Vacation......................................................................... 36 54 54
Payroll taxes withheld and accrued............................................... 33 75 65
Reserve for warranties........................................................... 25 61 109
Other............................................................................ 8 15 191
--------- --------- -----
Total accrued expenses......................................................... $ 154 $ 312 $ 785
--------- --------- -----
--------- --------- -----
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
[Enlarge/Download Table]
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -----------------
(UNAUDITED)
Note payable to Arkansas Development Finance Authority; due in annual
installments through May, 2011, including interest ranging from 5.25% to 6.0%,
secured by property and equipment.............................................. $ 597 $ 750 $ 724
Notes payable to bank; secured by vehicles; payable in monthly installments
including interest at 7.3%, through February, 2000............................. 21 18 23
--------- --------- -----
618 768 747
Current portion.................................................................. (39) (44) (45)
--------- --------- -----
Long-term debt, excluding current portion...................................... $ 579 $ 724 $ 702
--------- --------- -----
--------- --------- -----
F-39
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 8 - LONG-TERM DEBT (CONTINUED)
During the year ended December 31, 1996, the Company obtained permanent
financing, which refinanced its interim note on its new facility. Thus, the note
has been classified as long-term debt as of December 31, 1995 and 1996, for
financial statement purposes. This debt requires a reserve account for monthly
deposits to provide for the next installment of debt service. The balance in
this account, which totaled $-0- and $43,000 at December 31, 1995 and 1996,
respectively, and $43,000 at September 30, 1997, is included in Cash in
Financial Institutions. The terms of the note also require the Company to meet
certain restrictive debt covenants, which have been met as of December 31, 1995
and 1996 and September 30, 1997.
Cash payments for interest on all debt amounted to $23,000 and $46,000 for
the years ended December 31, 1995 and 1996, and $34,000 and $35,000 for the nine
months ended September 30, 1996 and 1997, respectively.
Maturities of long-term debt, based upon the Company's monthly sinking fund
and other debt requirements, is as follows at December 31, 1996 (amounts in
thousands):
[Enlarge/Download Table]
Year ending December 31,
1997.................................................................................................... $ 44
1998.................................................................................................... 39
1999.................................................................................................... 44
2000.................................................................................................... 41
2001.................................................................................................... 40
Thereafter.............................................................................................. 560
---------
Total................................................................................................. $ 768
---------
---------
Maturities of long-term debt based upon the Company's monthly sinking fund
and other debt requirements, is as follows at September 30, 1997 (amounts in
thousands):
[Enlarge/Download Table]
Twelve months ending September 30,
1998.................................................................................................... $ 45
1999.................................................................................................... 44
2000.................................................................................................... 43
2001.................................................................................................... 41
2002.................................................................................................... 40
Thereafter.............................................................................................. 534
---------
Total................................................................................................. $ 747
---------
---------
F-40
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 9 - INCOME TAXES
Income tax expense (benefit) is summarized as follows (amounts in
thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
----- ---------
Current:
Federal........................................................................................ $ 61 $ 794
State.......................................................................................... 1 149
--- ---------
Total current................................................................................ 62 943
--- ---------
Deferred:
Federal........................................................................................ 4 (14)
State.......................................................................................... 0 (3)
--- ---------
Total deferred............................................................................... 4 (17)
--- ---------
Total provision for income taxes........................................................... $ 66 $ 926
--- ---------
--- ---------
The actual income tax expense differs from "expected" tax expense (computed
by applying appropriate U.S. Federal corporate income tax rates to income before
income taxes) primarily due to the effects of state income tax, Federal and
state tax credits, nondeductible life insurance premiums, Foreign Sales
Corporation income exclusions and entertainment expenses.
Cash payments for income taxes amounted to $259,000 and $88,000 for the
years ended December 31, 1995 and 1996, and $55,000 and $1,302,000 for the nine
months ended September 30, 1996 and 1997, respectively.
The Company's deferred tax assets and deferred tax liabilities are as
follows (amounts in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----- -----
Current deferred tax assets, net.................................................................. $ 30 $ 38
Noncurrent deferred tax liabilities, net.......................................................... 31 23
--- ---
Net deferred tax asset (liability).............................................................. $ (1) $ 15
--- ---
--- ---
The Company's deferred tax assets and deferred tax liabilities result
primarily from the use of accelerated methods of depreciation for tax purposes;
bad debt reserves, accrued warranty expense and accrued vacation expense being
recorded for financial statement purposes; and different inventory valuations
for tax and book purposes.
In assessing of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
F-41
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 9 - INCOME TAXES (CONTINUED)
temporary differences become deductible. Based upon the level of historical
taxable income, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code and therefore includes certain salary
deferral features for eligible employees. Employees may elect to contribute up
to fifteen percent of their gross earnings to the plan. The Company makes
matching contributions equal to employee contributions up to 3% of each
participating employee's salary. Matching contributions to the plan were
approximately $25,000 and $40,000 for the years ended December 31, 1995 and
1996, and $29,000 and $41,000 for the nine months ended September 30, 1996 and
1997, respectively.
NOTE 11 - BUSINESS CONCENTRATIONS
The majority of the Company's sales and service revenues are generated
through customers in the private aviation industry located throughout the United
States. At any given time, certain customers may account for significant
portions of the Company's business. The Company's largest six customers
accounted for approximately 58% and 63% of net sales for the years ended
December 31, 1995 and 1996, and 61% and 64% of net sales for the nine months
ended September 30, 1996 and 1997, respectively.
NOTE 12 - RESTATEMENT OF BALANCES
Effective January 1, 1995, the Company adopted generally accepted accounting
principles for the preparation of its financial statements. In previous years,
the records and financial statements of the Company were prepared on the income
tax basis of accounting. Certain adjustments have been applied to the beginning
retained earnings in order to restate amounts in accordance with generally
accepted accounting principles.
An analysis of these adjustments, and the restated beginning retained
earnings, is as follows (amounts in thousands):
[Enlarge/Download Table]
January 1, 1995 balance, as previously reported........................................................... $ 853
Adjustments for expense accruals and reserves............................................................. (70)
Adjustments for inventory, property and equipment valuations.............................................. 131
---------
January 1, 1995 balance, as restated.................................................................... $ 914
---------
---------
NOTE 13 - COMMON STOCK ISSUANCE
During 1995, the Company and its shareholders entered into an agreement
under which twenty-nine shares of the Company's $1 par value capital stock were
to be issued to a new shareholder in exchange for consideration of $600,000
deposited with the Company during 1995. In addition, the then existing
shareholders of the Company each would sell seven shares of their capital stock
to the new
F-42
AUDIO INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
NOTE 13 - COMMON STOCK ISSUANCE (CONTINUED)
shareholder, creating a one-third interest for each of the three shareholders.
This agreement was consummated February 20, 1996. For comparative financial
statement purposes, certain reclassifications have been made to reflect this
transaction as of December 31, 1995. Thus, at December 31, 1995 and 1996, one
hundred and twenty-nine of the Company's one thousand authorized shares were
considered to be issued and outstanding.
The stock acquisition agreement contained additional provisions requiring
the employment of each of the three shareholders for a minimum of five years
from the date of the agreement and various other provisions related to bonus
arrangements and fringe benefits.
NOTE 14 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
On November 14, 1997, the Company's stockholders entered into an acquisition
agreement, under which all shares of the Company were acquired by DeCrane
Aircraft Holdings, Inc.
F-43
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
[Download Table]
PAGE
-----
Prospectus Summary............................. 3
The Company.................................... 3
Risk Factors................................... 7
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 25
Management..................................... 42
Principal and Selling Stockholders............. 49
Certain Transactions........................... 52
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 57
Underwriting................................... 58
Legal Matters.................................. 59
Experts........................................ 59
Additional Information......................... 59
Index to Financial Statements.................. F-1
2,500,000 SHARES
J
COMMON STOCK
------------
PROSPECTUS
------------
BT ALEX. BROWN
FURMAN SELZ LLC
SBC WARBURG DILLON READ INC.
, 1998
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--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
[Enlarge/Download Table]
ITEM AMOUNT
------------------------------------------------------------- ---------------------------------------
SEC Registration Fee.........................................
NASD Filing Fee..............................................
Blue Sky Filing Fees and Expenses............................
Printing and Engraving Costs.................................
Transfer Agent Fees..........................................
Legal Fees and Expenses......................................
Accounting Fees and Expenses.................................
Miscellaneous................................................
Total......................................................
All amounts are estimated except for the SEC Registration Fee and the NASD
Filing Fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
The provision does not, however, eliminate or limit the personal liability of a
director: (i) for any breach of such director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under the
Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of the Company protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of the Company or a stockholder thereof to
successfully prosecute an action against a director for breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or recision based upon a director's
breach of his duty of care. The Commission has taken the position that the
provision will have no effect on claims arising under the Federal securities
laws.
In addition, the Certificate of Incorporation and the Company's Bylaws
provide for mandatory indemnification rights, subject to limited exceptions, to
any director or executive officer of the Company who by reason of the fact that
he or she is a director or officer of the Company, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director or officer in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
GCLSD. The Company may from time to time agree to provide similar
indemnifications to certain employees and other agents.
The Company also maintains directors' and officers' liability insurance.
In addition, the Underwriting Agreement provides for indemnification by the
Underwriters of the Registrant, its directors and officers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) Pursuant to a Securities Purchase Agreement dated February 9, 1996 among
the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John Hinson, an
officer of the Company, the Company sold 75,000 shares of Series C preferred
stock for a purchase price of $1.50 per share. The sale of these securities was
exempt from registration pursuant to Section 4(2) of the Act.
(2) Pursuant to a Securities Purchase Agreement dated as of February 20,
1996 between the Company and Nassau, the Company issued for an aggregate
purchase price of $6.5 million: (i) 2,000,000 shares of Series D Preferred
Stock, and (ii) warrants to purchase 194,618 shares of Common Stock. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Act.
(3) Pursuant to a Securities Purchase Agreement dated September 18, 1996
among the Company, [Nassau and Electra,] the Company sold (i) $2.0 million
aggregate principal amount of 15% convertible notes and 49,079 warrants to
purchase Common Stock, for a purchase price of $3.0 million, and (ii) 750,000
shares of Series E Preferred Stock and 49,079 warrants to purchase Common Stock,
for a purchase price of $3.0 million. The issuance of such securities was exempt
from registration under Section 4(2) of the Act.
(4) Pursuant to an Amended and Restated Credit Agreement dated as of
September 18, 1996 among the Company, ING (U.S.) Capital Corporation and
Provident Bank the Company issued to 70,892 warrants to purchase Common Stock as
additional consideration for amendments to the Prior Credit Facility. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A filed
April 14, 1997)
5.1 Opinion of Spolin & Silverman (re legality)
10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead International,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------------
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o Michael E. Allard(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1, Registration
No. 333-19939)
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela Nazarian,
Trustees of the Nazarian Family Trust(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard, Trustee
of the Gerald R. Allard Revocable Trust of 1994(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 among the Company,
Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV
Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation,
Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I L.L.C.
10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company, Banc
One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV Partners,
IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra
Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS Partners I
L.L.C.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development Corporation,
Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El Segundo, CA(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, ADS Acquisition,
Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star Technologies, Inc.,
Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory Holdings, Inc., Cory
Components, Inc., Hollingsead International, Inc., Hollingsead International Limited, The Provident
Bank, and Internationale Nederlanden (U.S.) Capital Corporation(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number
6-5752-0002(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------------
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0004(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January
1, 1995 through December 31, 1999(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing
Commercial Airplane Group and Tri-Star Electronics International(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard, Trustee of
the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o John Allard, The
Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David and Angela Nazarian,
Trustees of the Nazarian Family Trust, the principal shareholders of Allard, the Company and ADS
Acquisition, Inc.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition, Inc.,
William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker
Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital Partners
L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital Partners L.P.
and NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among the
Company, Electra Investment Trust P.L.C. and Electra Associates, Inc.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
II-4
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------------
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker,
Robert Rankin(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company
and The Lincoln National Life Insurance Company.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the
Recapitalization.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank of
America Illinois, as agent and lender, and the other lenders party thereto(incorporated by reference
to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft Holdings,
Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.(incorporated
by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft Holdings,
Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto.
10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead International,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown, Richard
Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to Exhibit 2.1 to
the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for real
property in Garden Grove California
11.1 Statement regarding computation of per share earnings of the Company*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Spolin & Silverman (included in Exhibit 5.1)
23.3 Consent of Thomas & Thomas
24.1 Power of Attorney (appears on signature page)
II-5
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------------
27 Financial Data Schedule
------------------------
* To be filed by Amendment.
(B) FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the Closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
This Amendment to Registration Statement and Power of Attorney, pursuant to
the requirements of the Securities Act of 1933, as amended, has been signed on
its behalf by the undersigned, thereunto duly authorized, in the State of
California, on this 6th day of March, 1998.
[Download Table]
DECRANE AIRCRAFT HOLDINGS, INC.
By: /s/ R. JACK DECRANE
-----------------------------------------
R. Jack DeCrane
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints R. Jack
DeCrane, R.G. MacDonald and Robert A. Rankin, and each of them, his true and
lawful attorneys-in-fact and agents, with the full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and to take such actions in, and file with the appropriate
authorities in, whatever states said attorneys-in-fact and agents, and each of
them, shall determine, such applications, statements, consents and other
documents as may be necessary or expedient to register securities of the Company
for sale, granting unto said attorneys-in-fact and agents full power and
authority to do so and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents or any of them, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof and the
registrant hereby confers like authority on its behalf. This Registration
Statement and Power of Attorney, pursuant to the requirement of the Securities
Act of 1933, as amended, have been signed below by the following persons in the
capacities and on the dates indicated.
[Download Table]
SIGNATURE CAPACITY DATE
------------------------------ -------------------------- -------------------
/s/ R. JACK DECRANE Chairman of the Board,
------------------------------ Chief Executive Officer March 6, 1998
R. Jack DeCrane and Director
/s/ R. G. MACDONALD
------------------------------ Vice Chairman of the Board March 6, 1998
R. G. MacDonald and Director
Chief Financial Officer,
/s/ ROBERT A. RANKIN Secretary and Treasurer
------------------------------ (principal accounting March 6, 1998
Robert A. Rankin officer)
II-7
[Download Table]
SIGNATURE CAPACITY DATE
------------------------------ -------------------------- -------------------
/s/ JAMES R. BERGMAN
------------------------------ Director March 6, 1998
James R. Bergman
/s/ PAUL H. CASCIO
------------------------------ Director March 6, 1998
Paul H. Cascio
/s/ MITCHELL I. QUAIN
------------------------------ Director March 6, 1998
Mitchell I. Quain
/s/ JONATHAN A. SWEEMER
------------------------------ Director March 5, 1998
Jonathan A. Sweemer
II-8
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO OTHER BALANCE AT
CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------------------------------------ ------------- ------------- ---------------- ----------- -------------
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts........... $ 243,000 $ 66,000 $ 62,000(A) $ 112,000 $ 259,000
Reserve for excess, slow moving and
potentially obsolete material........... $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts........... $ 259,000 $ 68,000 $ 71,000(B) $ 19,000 $ 379,000
Reserve for excess, slow moving and
potentially obsolete material........... $ 1,154,000 $ 1,055,000 -- $ 116,000 $ 2,093,000
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts........... $ 379,000 $ 111,000 $ 174,000(C) $ 177,000 $ 487,000
Reserve for excess, slow moving and
potentially obsolete material........... $ 2,093,000 $ 1,374,000 $ 59,000(D) $ 162,000 $ 3,364,000
------------------------
[Download Table]
(A) Comprised of the following:
Effect of foreign currency translation; $ 3,000
Recovery of amounts previously written off. 59,000
------------
$ 62,000
------------
------------
(B) Comprised of the following:
Effect of foreign currency translation; $ (4,000)
Recovery of amounts previously written off; 20,000
Attributable to companies acquired. 55,000
------------
$ 71,000
------------
------------
(C) Attributable to company acquired.
(D) Attributable to companies acquired.
EXHIBIT INDEX
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION PAGE
----------- ---------------------------------------------------------------------------------------------- -----------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
3.2 Bylaws of Registrant(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A
filed April 14, 1997)
5.1 Opinion of Spolin & Silverman (re legality)
10.1 1993 Share Incentive Plan(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack
DeCrane(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o John R. Allard(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o Michael E. Allard(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela
Nazarian, Trustees of the Nazarian Family Trust(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard,
Trustee of the Gerald R. Allard Revocable Trust of 1994(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 among the
Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack
DeCrane, DSV Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.)
Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners
L.P. and NAS Partners I L.L.C.
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EXHIBIT
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10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company,
Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane,
DSV Partners, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital
Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and
NAS Partners I L.L.C.(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development
Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El
Segundo, CA(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, ADS
Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star
Technologies, Inc., Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory
Holdings, Inc., Cory Components, Inc., Hollingsead International, Inc., Hollingsead
International Limited, The Provident Bank, and Internationale Nederlanden (U.S.) Capital
Corporation(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0002(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0004(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory Components,
January 1, 1995 through December 31, 1999(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between
Boeing Commercial Airplane Group and Tri-Star Electronics International(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard,
Trustee of the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o
John Allard, The Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David
and Angela Nazarian, Trustees of the Nazarian Family Trust, the principal shareholders of
Allard, the Company and ADS Acquisition, Inc.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition,
Inc., William Lyon, and Elsinore LP(incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
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10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the
Whitaker Corporation and DeCrane Aircraft Holdings, Inc.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components,
Inc.(incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital
Partners L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C.(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital
Partners L.P. and NAS Partners I L.L.C.(incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among
the Company, Electra Investment Trust P.L.C. and Electra Associates, Inc.(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker(incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles
Becker, Robert Rankin(incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the
Company and The Lincoln National Life Insurance Company.(incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the
Recapitalization.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank
of America Illinois, as agent and lender, and the other lenders party thereto(incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party
thereto.(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No.
1), filed November 14, 1997)
10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party
thereto.
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10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead
International, Inc.(incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown,
Richard Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc.(incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.38 Lease among Kilroy Reality, L.P., Kilroy Realty Corporation and Hollingsead International for
real property in Garden Grove California
11.1 Statement regarding computation of per share earnings of the Company*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Spolin & Silverman (included in Exhibit 5.1)
23.3 Consent of Thomas & Thomas
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
------------------------
* To be filed by Amendment.
Dates Referenced Herein and Documents Incorporated by Reference
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