AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3728 34-1645569
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
155 MONTROSE WEST AVENUE
SUITE 210
COPLEY, OH 44321
(330) 668-3061
(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.
155 MONTROSE WEST AVENUE
SUITE 210
COPLEY, OH 44321
(330) 668-3061
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
--------------------------
WITH COPIES TO:
STEPHEN A. SILVERMAN, ESQ. PETER P. WALLACE, ESQ.
SPOLIN & SILVERMAN MILBANK, TWEED, HADLEY & McCLOY
100 Wilshire Boulevard, Suite 940 601 S. Figueroa, 30th Floor
Santa Monica, California 90401 Los Angeles, California 90017
(310) 576-1221 (213) 892-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE (2)
Common Stock, Par Value, $.01 Shares $ $43,125,000 $13,068
(1) Includes 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.
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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(a) 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(a), MAY DETERMINE.
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DECRANE AIRCRAFT HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(a) OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND ITEM 501 OF REGULATION S-K
ITEM NO. AND CAPTION IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Forepart of the Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; "Additional Information"
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... "Prospectus Summary;" "Business;" "Risk Factors"
4. Use of Proceeds...................................... "Use of Proceeds"
5. Determination of Offering Price...................... "Underwriting"
6. Dilution............................................. "Dilution"
7. Selling Security Holders............................. Not applicable
8. Plan of Distribution................................. "Underwriting"
9. Description of Securities to be Registered........... "Description of Capital Stock"
10. Interests of Named Experts and Counsel............... Not applicable
11. Information with Respect to the Registrant........... "Prospectus Summary;" "Recent Developments;"
"Selected Consolidated Financial Data;"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations;" "Business;"
"Management;" "Principal Stockholders;" "Certain
Transactions;" "Description of Capital Stock;"
"Shares Eligible for Future Sale" Consolidated
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not applicable
SUBJECT TO COMPLETION, DATED JANUARY 17, 1997
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.
SHARES
[LOGO]
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
The shares of Common Stock of DeCrane Aircraft Holdings, Inc.
offered hereby are being sold by the Company. Prior to this offering, there has
been no public market for the Common Stock of the Company. It currently is
estimated that the initial public offering price will be between $ .00 and
$ .00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
Application has been made for quotation and trading of the Common Stock on
the Nasdaq National Market under the symbol "DAHX."
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
COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
Per Share........................ $ $ $
Total (3)........................ $ $ $
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock at the Price to Public,
less Underwriting Discounts and Commissions shown above, solely to cover
over-allotments, if any. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that the Common Stock will be available for delivery on or about
, 1997 at the offices of Schroder Wertheim & Co. Incorporated, New
York, New York.
SCHRODER WERTHEIM & CO. DEAN WITTER REYNOLDS INC.
, 1997
[PHOTOGRAPH OF SILHOUETTE OF AN AIRPLANE FLYING]
[PHOTOGRAPH OF AN AIRPLANE FLIGHT DECK]
[COMPANY LOGO]
The Company is a manufacturer of products and a provider of services for
certain niche markets of the commercial aircraft industry. The Company's
products and services typically are utilized to provide an interface between an
aircraft and its avionics systems, such as those pictured above.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
[PHOTOGRAPH OF CONTACTS] [PHOTOGRAPH OF CONNECTORS]
[PHOTOGRAPH OF BINS OF CONTACTS]
The variety of contacts manufactured by the The Company manufactures specialty connectors
Company conduct electronic signals or which are used within an aircraft to provide
electricity within an aircraft and must be an electronic or electrical link between
precision machined to conform to strict discreet wires or devices. Many of the
design tolerances. The Company manufactures connectors manufactured by the Company
millions of contacts each month. utilize the Company's contacts.
[PHOTOGRAPH OF HARNESS ASSEMBLIES] [PHOTOGRAPH OF INSTALLATION KITS]
The Company manufactures harness assemblies The Company manufactures avionics support
for use with aircraft avionics systems. The structures used to secure avionics systems
harness assemblies depicted utilize contacts within an aircraft. The connectors and
and connectors manufactured by the Company. harness assemblies manufactured by the
Company form the foundation of the
installation kits shown above.
[PHOTOGRAPH OF MAN AT A CAD STATION] [PHOTOGRAPH OF WOMAN SITTING IN AIRPLANE SEAT
WATCHING A VIDEO MONITOR]
The Company employs more than 50 engineers, Many of the Company's systems integration
who design, engineer and certify projects involve in-flight entertainment and
modifications to existing aircraft as part of passenger telecommunication systems.
the Company's systems integration efforts.
[PHOTOGRAPH OF MEN INSTALLING A SYSTEM ONTO AN AIRCRAFT]
The Company-employed, FAA-certified mechanics shown above are installing an
installation kit for a flight deck avionics system.
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. EXCEPT AS OTHERWISE
INDICATED, ALL OF THE INFORMATION IN THIS PROSPECTUS WITH REGARD TO SHARES AND
PER SHARE AMOUNTS PERTAINING TO THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER
SHARE (THE "COMMON STOCK"), HAS BEEN ADJUSTED TO GIVE EFFECT TO A REVERSE STOCK
SPLIT WHICH IS PART OF THE RECAPITALIZATION OF THE COMPANY (THE
"RECAPITALIZATION") DESCRIBED UNDER "DESCRIPTION OF CAPITAL STOCK--THE
RECAPITALIZATION." UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION.
THE COMPANY
The Company is a manufacturer of avionics components and a provider of
avionics systems integration services in certain niche markets of the commercial
aircraft industry. The products and services offered by the Company are utilized
primarily in commercial aircraft to connect, support and/or integrate various
avionics systems, including cabin management, in-flight entertainment and
passenger telecommunications systems ("cabin avionics systems") and navigation
and safety systems ("flight deck avionics systems"). The Company's targeted
markets consist of commercial aircraft and avionics original equipment
manufacturers ("OEMs"), the commercial aircraft retrofit market and the
commercial aircraft aftermarket. 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
to the commercial aircraft industry); (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). In addition, the Company 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 industry. The systems integration services provided by the
Company include design and engineering, Federal Aviation Administration ("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 believes that every commercial aircraft currently produced by
the Boeing Company ("Boeing"), Airbus Industrie ("Airbus") and McDonnell Douglas
Corporation ("McDonnell Douglas") contains components manufactured by the
Company. In addition, the Company has entered into supply agreements with
Boeing, pursuant to which the Company believes that it is the supplier of a
substantial majority of the contacts for all aircraft currently manufactured by
Boeing and is the sole-source supplier of certain connectors for in-flight
entertainment systems installed by Boeing on its 777 aircraft. As a result, the
Company expects to benefit from the continuing recovery of the commercial
aircraft industry. According to the 1996 CURRENT MARKET OUTLOOK (the "Boeing
Report") published by the Boeing Commercial Airplane Group, expenditures for new
aircraft production are expected to total approximately $230 billion for the
period 1996 through 2000. This compares to expenditures for new aircraft of
approximately $170 billion for the period 1991 through 1995. The Boeing Report
also estimates that for the period 1996 through 2000, revenue passenger miles
will increase from 1.6 trillion to 2.1 trillion and the worldwide fleet of
aircraft will increase from 11,000 to 13,500 (net of approximately 1,000
retirements). The Company believes that the increase in new aircraft production
is being driven by numerous factors, including: (i) a general increase in demand
for air travel; (ii) an increase in the capacity utilization (load factor) of
aircraft currently in service; (iii) an increase in the average age of the
worldwide aircraft
3
fleet; (iv) the cost-effectiveness of using new aircraft versus old aircraft;
and (v) a general improvement in the financial condition of the airline
industry.
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 upturn because such systems typically are installed on a
retrofit basis by purchasers of aircraft and not by aircraft OEMs. The Company's
customers in these markets include AT&T Wireless Services, Inc. ("AT&T") for
passenger telecommunications systems, Interactive Flight Technologies, Inc.
("IFT") for in-flight casino-style gaming and video-on-demand systems,
Matsushita Avionics Systems ("Matsushita") for in-flight entertainment systems
and the Rockwell Collins Division ("Rockwell Collins") of Rockwell International
Corp. for flight deck avionics systems. The Company 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-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.
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft industry,
with a focus on the manufacture of avionics components and the integration of
avionics systems. Historically, the Company has demonstrated an ability to
increase revenues during times of industry decline which it attributes to
several actions, including: (i) the establishment of a balanced offering of
products and services for the OEM market, the retrofit market and the
aftermarket; (ii) the initiation of private labeling programs pursuant to which
the Company manufactures contacts for other connector manufacturers, including
certain of the Company's competitors; (iii) the development of new products such
as specialty connectors for Boeing's 777 aircraft; and (iv) the diversification
into new services such as the integration of in-flight entertainment systems. In
the future, the Company will seek to grow by: (i) capitalizing on growth in
commercial aircraft production; (ii) exploiting increased demand for cabin
avionics systems; (iii) expanding and diversifying the Company's systems
integration services; (iv) completing additional strategic acquisitions; and (v)
capitalizing on the Company's complementary products and services.
RECENT ACQUISITION ACTIVITY
The Company was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, the Company has
completed eight acquisitions of businesses or assets, three of which were
completed in 1996.
- In December 1996, the Company expanded its contact manufacturing
capability and capacity by purchasing certain manufacturing assets
(collectively, the "AMP Facility") from AMP, Inc. ("AMP"). The AMP
Facility enables the Company to produce contact blanks (unfinished
contacts) using a cold-heading manufacturing process which, when used for
high volume production, is more cost-effective than the Company's existing
screw machine operations. Therefore, the Company is seeking to optimize
its contact production by converting a portion of its existing high volume
manufacturing runs to the cold-heading process. The plating and finishing
of contact blanks produced at the AMP Facility will be conducted at the
existing facilities of the Company.
- In December 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services division (collectively, "Elsinore")
of Elsinore, L.P. The acquisition of Elsinore provided the Company with
the ability to issue certain FAA design approvals for modification to
designated aircraft through Elsinore's FAA-issued Designated Alteration
Station ("DAS") approval. As a systems integrator, the Company regularly
seeks such FAA approvals on behalf of its customers when it integrates a
system onto an aircraft. The ability to issue FAA approvals through
Elsinore eliminates the need, in most instances, for the Company to apply
to the FAA for
4
such approvals, thereby expediting the approval process. In addition, the
acquisition of Elsinore increased by approximately 50% the number of the
Company's engineering professionals dedicated to systems integration
functions.
- In September 1996, the Company acquired the Aerospace Display Systems
division ("ADS") of Allard Industries, Inc. ADS is a manufacturer of
dichroic LCD devices for use with flight deck avionics systems and it
believes that is the largest supplier of such devices to the commercial
aircraft industry. The acquisition of ADS expanded the Company's offering
of components used in flight deck avionics systems and strengthened its
position as a leading supplier of niche avionics components.
In addition, in February 1996, the Company acquired the remaining 25%
interest in Cory Components, Inc. ("Cory Components") which it did not already
own (the "Minority Interest Acquisition").
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 corporate offices are located at 155 Montrose West Avenue,
Suite 210, Copley, OH 44321. The Company's telephone number is (330) 668-3061.
All inquiries or notices should be directed to the attention of R. Jack DeCrane,
Chairman of the Board and Chief Executive Officer of the Company.
THE OFFERING
Common Stock offered................... shares
Common Stock to be outstanding after
the Offering......................... shares (1)
Use of Proceeds........................ To repay certain indebtedness. See "Use of
Proceeds."
Nasdaq National Market symbol.......... DAHX
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(1) Includes 152,915 shares of Common Stock issuable upon exercise of warrants
to purchase Common Stock (the "Nassau
Warrants") held by Nassau Capital Partners L.P. and NAS Partners I L.L.C.
(collectively, "Nassau") which will remain outstanding after the
Recapitalization. Does not include 172,155 shares of Common Stock reserved
for issuance pursuant to the Company's Amended and Restated 1993 Share
Incentive Plan (the "Share Incentive Plan").
5
SUMMARY CONSOLIDATED FINANCIAL DATA
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 48,197 $ 47,092 $ 55,839 $ 42,274 $ 43,059
Gross profit...................................... 11,939 10,685 12,376 9,896 9,782
Operating income.................................. 2,776 1,760 1,835 2,230 2,172
Income (loss) before cumulative effect of
accounting change and extraordinary item........ (636) (2,429) (3,446) (1,572) (1,097)
Net loss.......................................... (757) (2,693) (3,446) (1,572) (1,097)
Net loss applicable to common stockholders........ (865) (3,080) (4,003) (1,989) (1,941)
Income (loss) per common share:
Pro forma for the Recapitalization.............. $ (1.47) $ (.71)
Pro forma as adjusted (3).......................
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.............. 2,728 2,728
Pro forma as adjusted (4).......................
OTHER FINANCIAL DATA:
EBITDA (5)........................................ $ 6,195 $ 4,608 $ 5,174 $ 4,764 $ 4,479
Bookings (6)...................................... 46,830 47,896 50,785 37,406 53,863
Backlog at end of period (7)...................... 23,933 24,493 19,761 19,821 38,300
PRO FORMA
AS ADJUSTED(2)
-------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 65,791 $ 50,765
Gross profit...................................... 15,290 12,349
Operating income.................................. 2,972 3,292
Income (loss) before cumulative effect of
accounting change and extraordinary item........ 1,752 2,615
Net loss..........................................
Net loss applicable to common stockholders........
Income (loss) per common share:
Pro forma for the Recapitalization..............
Pro forma as adjusted (3)....................... $ $
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization..............
Pro forma as adjusted (4).......................
OTHER FINANCIAL DATA:
EBITDA (5)........................................
Bookings (6)......................................
Backlog at end of period (7)......................
SEPTEMBER 30, 1996
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(8)
----------- -----------
BALANCE SHEET DATA:
Working capital......................... $ 11,191 $ 16,620
Total assets............................ 54,228 52,553
Total debt.............................. 33,546 4,079
Mandatorily redeemable common stock
warrants.............................. 2,054 566
Stockholders' equity.................... 5,736 35,267
- ------------------------------
(1) Includes the effect of the Minority Interest Acquisition beginning February
20, 1996, the date on which the transaction occurred, and the results of ADS
beginning September 18, 1996, the date on which it was acquired.
(2) Pro forma for the Minority Interest Acquisition and the acquisition of ADS
as if they had occurred on January 1, 1995. Adjusted to reflect the sale by
the Company of shares of Common Stock in this offering (the
"Offering") and the application of the net proceeds therefrom as set forth
under "Use of Proceeds." Excludes an extraordinary charge of $3.0 million to
be incurred as a result of the repayment of debt with the net proceeds from
the Offering.
(3) Reflects the Recapitalization as well as the acquisitions and the Offering,
as described in Note (2) above. Does not include 525,000 shares of Common
Stock reserved for issuance pursuant to the Share Incentive Plan.
(4) Pro forma for the Recapitalization and adjusted for the shares of Common
Stock offered hereby. Does not include 525,000 shares of Common Stock
reserved for issuance pursuant to the Share Incentive Plan.
(5) EBITDA represents earnings before interest expense (including amortization
of debt discounts), income taxes, depreciation, amortization (including
non-compete covenants, goodwill, and other intangibles) and minority
interest. EBITDA is presented because it may be used as one indicator of a
company's cash flow. The Company believes that EBITDA, while providing
useful information, should not be considered in isolation or as a substitute
for net income (loss) as an indicator of operating performance or as an
alternative to cash flow as a measure of liquidity, in each case determined
in accordance with generally accepted accounting principles. The Company
further believes that EBITDA is a meaningful measure of performance that is
commonly used in the aerospace industry to analyze comparable companies on
the basis of operating performance, leverage and liquidity.
(6) Bookings represent the total invoice value of purchase orders received
during the period.
(7) 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.
(8) Reflects: (i) the Recapitalization; and (ii) the sale by the Company of
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
POTENTIAL PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE DECIDING TO PURCHASE SHARES OF COMMON STOCK OFFERED HEREBY.
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 770 aircraft in 1991 to approximately 370 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."
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS
The Company has operated with substantial leverage and debt service
requirements since its first acquisition in 1990. As a result, since 1990, the
Company has experienced net losses in each year through 1995, despite positive
operating income. In addition, the Company was not in compliance with certain
financial covenants contained in its debt agreements at various times since its
inception. 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 existing debt agreements. Although the Company intends to use
the net proceeds of this Offering to repay a significant portion of its
outstanding indebtedness, 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. 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,
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 three largest customers are Boeing, AT&T and Matsushita, which
accounted for approximately 9.0%, 21.6% and 7.4%, respectively, of the Company's
consolidated revenues (pro forma for the acquisition of ADS) for the fiscal year
ended December 31, 1995 and 12.8%, 8.9% and 8.5%, respectively, of the Company's
consolidated revenues (pro forma for the acquisition of ADS) for the nine
7
months ended September 30, 1996. 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 Company expects that IFT, a new entrant into the in-flight entertainment
business and a publicly traded company, will be a significant customer in 1997.
The Company entered into a contract with IFT in July 1996 and expects to realize
a substantial portion of the revenues from such contract in 1997. The Company
will account for revenues generated under the IFT contract using the percentage
of completion method of accounting. Pursuant to this contract, which provides
for monthly progress payments, the Company will provide systems integration
services for IFT's new in-flight entertainment system (the "IFT System") on 21
wide-body aircraft for Swiss Air Transport Co. Ltd. ("Swissair"). The Swissair
contract is the first large-scale commercial application of the IFT System. Any
delays in installation or problems in implementation of the IFT System may
result in the deferral or loss of potential revenues from IFT. 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 DAS approvals giving the
holder the right to certify aircraft modifications on behalf of the FAA. The
ability of the Company to arrange for rapid government certification of its
systems integration services is essential 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 restriction or elimination of the use of such private repair stations or
DASs, either of which could have a material adverse effect on the Company. 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."
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. 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."
8
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 price, and superior customer service and
support. There can be no assurance that the Company will be able to compete
successfully with respect to these or other factors. See
"Business--Competition."
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. 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. In 1996, solely
in an effort to mitigate the effects of currency fluctuations, the Company began
to enter 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."
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 and giving effect to the
Recapitalization, (i) Nassau, (ii) DSV Partners, IV ("DSV"), (iii) Electra
Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra")
and (iv) Brantley Venture Partners, II, L.P. ("Brantley") will beneficially own
%, %, %, and %, respectively, of the issued and outstanding Common
Stock. Nassau's ownership percentage includes shares of Common Stock which may
be acquired upon exercise of the Nassau Warrants, which warrants give Nassau the
right to vote with respect to matters presented to holders of Common Stock. See
"Description of Capital Stock--Warrants." By virtue of their stockholdings, such
beneficial owners will be able to exercise significant control over the
Company's business, policies and affairs and, together, could cause the Company
to take actions that may be adverse to the Company's other stockholders. See
"Principal Stockholders." Also, Nassau, DSV, Brantley and the Company are
parties to a shareholders agreement which requires the Company for so long as
the applicable stockholder owns at least 5% of the Common Stock (including
shares which may be acquired upon exercise of warrants) to include on the
Company's slate of nominees for director a person designated by the applicable
stockholder. See "Certain Transactions--Shareholders Agreement."
9
EXCESS LOSS RISKS
The Company currently has in force aviation products insurance. To date, the
Company has not experienced any significant uninsured or insured
aviation-related claims or any material product liability claims. 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 REGULATION
The Company's business operations and facilities are subject to a number of
federal, state, local and foreign environmental laws and regulations. Although
the Company believes that its operations and facilities are in material
compliance with all federal, state, local and foreign environmental laws and
regulations, 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters," "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. Although the
Company maintains standard property and business interruption insurance, as well
as earthquake insurance on its primary manufacturing facility, an earthquake or
other natural disaster could have a material adverse effect on its business and
operating results. See "Business--Facilities."
REPURCHASE OF WARRANTS
The Company has issued the Nassau Warrants pursuant to which the holders
thereof may purchase up to 152,915 shares of Common Stock for $.035 per share.
Under certain circumstances the Nassau Warrants may be terminated prior to
December 31, 2000. However, commencing December 31, 2000, if such warrants
remain outstanding the holders of the Nassau Warrants may require the Company to
repurchase the Nassau Warrants at prices specified in the warrant agreements
relating to the Nassau Warrants. If the Company were to be required to
repurchase the Nassau Warrants, the Company is unable to predict the effect of
such a repurchase on its liquidity. Also, there can be no assurance that the
debt instruments of the Company existing at the time the Nassau Warrants are
required to be repurchased will permit the Company to repurchase the Nassau
Warrants. See "Description of Capital Stock--Warrants."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market will develop or, if
developed, will be sustained after the completion of the Offering. The initial
public offering price of the Common Stock offered hereby will be determined
through negotiations between the Company and the representatives of the
Underwriters and may not be indicative of future market prices. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price of the Common Stock. 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.
10
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
shares of Common Stock to be outstanding after the Offering and the
Recapitalization, 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 180-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 180-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 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 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
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 future for shares of the Common
Stock. See "Description of Capital Stock--Certain Certificate and Bylaw
Provisions and Delaware General Corporation Law Section 203."
DILUTION
Purchasers in the Offering will incur an immediate and substantial dilution
in the net tangible book value of their Common Stock. See "Dilution."
11
RECENT DEVELOPMENTS
PURCHASE OF AMP FACILITY
On December 12, 1996, the Company expanded its contact manufacturing
capability and capacity by purchasing the AMP Facility. 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 the
Company's existing screw machine operations. Therefore, the Company is seeking
to optimize its contact production by converting a portion of its existing high
volume manufacturing runs to the cold-heading process. The plating and finishing
of contact blanks produced at the AMP Facility will be conducted at the existing
facilities of the Company.
The purchase price of the AMP Facility (including related fees and expenses
and post-closing adjustments) was $7.0 million, $5.4 million of which was paid
at the closing. The balance of the purchase price is payable in early 1997. The
Company financed the cash portion of the purchase price through the issuance of
$5.0 million principal amount of the Senior Term Notes (as defined in "Use of
Proceeds") and a $.4 million drawdown under the Senior Revolver (as defined in
"Use of Proceeds"). The Company has entered into agreements to supply AMP with a
portion of its contact requirements for up to two years. In addition, as a
result of the purchase of the AMP Facility, the Company will have the
opportunity to make increased sales to certain distributors that formerly
purchased contacts from other entities within AMP. The AMP Facility was not
purchased as a separate, stand-alone business and no meaningful historical
financial data is available.
ACQUISITION OF ELSINORE
On December 5, 1996, the Company expanded its systems integration
capabilities with the acquisition of Elsinore. Elsinore provides the Company
with the ability to issue certain FAA design approvals for modifications to
designated aircraft, which the Company believes is a key competitive advantage
for winning systems integration contracts. By acquiring Elsinore, the Company is
seeking to capitalize on increased outsourcing trends by aircraft OEMs, avionics
OEMs and airlines. By integrating the employees of Elsinore into its existing
operations, the Company increased by approximately 50% the number of the
Company's engineering professionals dedicated to its systems integration
functions. The acquisition of Elsinore also provided the Company with an
important new customer in the aircraft industry, Daimler Benz Aerospace Airbus
GmbH ("Daimler Benz Aerospace"), and the opportunity to obtain additional new
customers.
The purchase price of Elsinore (including related fees and expenses) was
$2.6 million, which the Company financed through (i) a drawdown under the Senior
Revolver of $1.3 million and (ii) the issuance to the seller of a note (the
"Seller Note") in a maximum principal amount of $1.3 million and bearing
interest at a rate of 15% per annum. The Seller Note will become due February
15, 1997 and is subject to reduction based on certain working capital
adjustments. In 1995, Elsinore generated revenues of approximately $3.7 million.
ACQUISITION OF ADS
On September 18, 1996, the Company expanded its presence in flight deck
avionics components with the acquisition of ADS, a manufacturer of dichroic LCD
devices for use with flight deck avionics systems. The acquisition of ADS, which
the Company believes is the largest supplier of dichroic LCD devices in the
commercial aircraft industry, is consistent with the Company's strategy to
achieve growth in operations and market share through strategic acquisitions.
The Company believes that the acquisition of ADS will allow it to capitalize on
the upturn in aircraft OEM production by increasing its revenue content per
aircraft as well as by enhancing the Company's position with its major
customers.
The purchase price of ADS (including related fees and expenses and
post-closing adjustments) was $13.3 million, including $2.0 million which the
Company is obligated to pay over the next three years. The Company financed the
cash portion of the purchase price through: (i) the issuance of $3.0 million of
Series E Preferred Stock and warrants to purchase 49,079 shares of Common Stock;
(ii) the issuance of $3.0 million of
12
Convertible Notes (as defined in "Use of Proceeds"), together with warrants to
purchase 49,079 shares of Common Stock; and (iii) an increase in and subsequent
drawdown under the Company's Senior Revolver of $5.4 million. In 1995, ADS
generated revenues of $10.0 million.
IFT CONTRACT
On July 30, 1996, the Company entered into an agreement with IFT to
integrate the IFT System into 21 wide-body Swissair aircraft. The Swissair
project represents the first broad-based installation of an interactive
in-flight casino-style gaming and video-on-demand system in a commercial
aircraft fleet. The Company expects to realize a substantial portion of the
revenues from such contract in 1997. The Company will account for revenues
generated under the IFT contract using the percentage of completion method of
accounting.
13
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be $31.5 million, assuming an initial public offering price of
$ per share and after deducting underwriting discounts and commissions and
estimated expenses of the Offering. The Company estimates that it will use the
net proceeds from the Offering, together with approximately $9.2 million of the
proceeds from a new credit facility (the "New Credit Facility") which the
Company is in negotiations to obtain (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources"), to repay amounts due under the Company's revolving line of credit
(the "Senior Revolver"), the Company's senior term notes (the "Senior Term
Notes"), the Company's 15% Convertible Notes due 1997 (the "Convertible Notes")
and the Company's 12% Senior Subordinated Notes due 2001 (the "Senior
Subordinated Notes"), as described below.
The Company will use approximately $13.7 million to repay in full amounts
due under the Senior Revolver, of which $9.1 million was outstanding as of
September 30, 1996. Of the amounts outstanding under the Senior Revolver, $8.0
million bears interest at the Eurodollar Rate plus 4.5% per annum (10.0% as of
September 30, 1996), with the remainder bearing interest at the lender's prime
rate plus 3.25% per annum (11.5% as of September 30, 1996). Amounts outstanding
under the Senior Revolver become due on September 18, 1999. In September 1996,
the Company borrowed $5.4 million under the Senior Revolver to fund a portion of
the ADS purchase price. In December 1996, the Company borrowed $1.3 million and
$.4 million under the Senior Revolver to fund a portion of the purchase prices
of Elsinore and the AMP Facility, respectively.
The Company will use approximately $17.0 million to repay in full amounts
outstanding under the Senior Term Notes. Of the amounts outstanding under the
Senior Term Notes, $12.0 million bears interest at the Eurodollar Rate plus 5.0%
(10.5% as of September 30, 1996) and $5.0 million bears interest at a rate equal
to 3.5% above the greater of (i) the lender's prime rate or (ii) the federal
funds rate plus 1.5% (11.8% as of December 31, 1996). The Senior Term Notes
mature on September 30, 2001 and require quarterly payments of principal in
varying amounts. The Company issued $5.0 million of Senior Term Notes in
December 1996 to fund a portion of the purchase price of the AMP Facility.
The Company will use $3.0 million to repay in full amounts outstanding under
the Convertible Notes. The Convertible Notes bear interest at a rate of 15.0%
per annum, which is payable quarterly. The Company has certain rights to defer
cash interest payments. The Convertible Notes mature on the earlier of June 30,
1997 or the consummation of the Offering. The Company issued the Convertible
Notes in September 1996 to fund a portion of the purchase price of ADS.
The Company will use $7.0 million to repay in full the Senior Subordinated
Notes. The Senior Subordinated Notes bear interest at a rate of 12.0% per annum
and mature on December 31, 2001.
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 debt agreements prohibit payment of dividends, and the
Company expects that any future debt agreements also will include such
prohibitions.
14
CAPITALIZATION
The following table sets forth as of September 30, 1996: (i) the
consolidated capitalization of the Company; and (ii) the pro forma consolidated
capitalization of the Company giving effect to the Recapitalization and the sale
of shares of Common Stock offered hereby and the application of the
net proceeds therefrom as described in "Use of Proceeds" (assuming an initial
public offering price of $ . per share), as if these transactions had occurred
on September 30, 1996. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus.
SEPTEMBER 30, 1996
--------------------------
PRO FORMA AS
ACTUAL ADJUSTED (2)
--------- ---------------
(IN THOUSANDS)
Short-term debt:
Short-term borrowings.............................................................. $ 530 $ 530
Current portion of long-term debt
Senior Term Notes................................................................ 1,745 --
Other (1)........................................................................ 1,146 1,146
Convertible Notes.................................................................. 2,882 --
--------- ---------------
Total short-term debt............................................................ $ 6,303 $ 1,676
--------- ---------------
--------- ---------------
Long-term debt:
Senior Revolver.................................................................... $ 9,143 $ --
Senior Term Notes.................................................................. 10,377 --
New Credit Facility (3)............................................................ -- 659
Senior Subordinated Notes.......................................................... 5,979 --
Other (1).......................................................................... 1,744 1,744
--------- ---------------
Total long-term debt............................................................. 27,243 2,403
--------- ---------------
Mandatorily redeemable common stock warrants......................................... 2,054 566
--------- ---------------
Stockholders' equity:
Cumulative convertible preferred stock............................................. 13,850 --
Common stock, no par value, 4,253,550 shares authorized;
85,593 shares issued and outstanding............................................. 62 --
Common Stock, $.01 par value, shares authorized; shares issued and
outstanding (4).................................................................. --
Additional paid-in capital......................................................... --
Accumulated deficit (5)............................................................ (8,406) (11,434)
Foreign currency translation adjustment............................................ 230 230
--------- ---------------
Total stockholders' equity....................................................... 5,736
--------- ---------------
Total capitalization (6)............................................................. $ 35,033 $
--------- ---------------
--------- ---------------
- ------------------------------
(1) Includes capital lease obligations, equipment financing facility and
acquisition financing payable to the sellers in conjunction with the
Minority Interest Acquisition and the acquisition of ADS.
(2) Does not reflect borrowings of $9.6 million used to fund the acquisition of
Elsinore and the purchase of the AMP Facility, which occurred subsequent to
September 30, 1996. See "Recent Developments."
(3) Reflects New Credit Facility borrowings which, together with the net
proceeds from the Offering, will be used to repay the debt outstanding as
presented in the table above as of September 30, 1996. See "Use of
Proceeds."
(4) Includes shares of Common Stock offered hereby. Does not include
525,000 shares of Common Stock reserved for issuance pursuant to the Share
Incentive Plan.
(5) Pro forma as adjusted reflects an extraordinary charge of $3.0 million to be
incurred as a result of the debt repayment from the net proceeds from the
Offering. The extraordinary charge is comprised of: (i) $1.6 million for
unamortized deferred financing costs; (ii) $1.0 million for unamortized
original issue discounts; and (iii) $.4 million for a prepayment penalty.
(6) Total capitalization consists of long-term debt, mandatorily redeemable
common stock warrants and stockholders' equity.
15
DILUTION
As of September 30, 1996, giving effect to the Recapitalization, the
Company's net tangible book value (deficit) was ($8.5 million), or ($3.45) per
share of Common Stock. Net tangible book value per share represents the amount
of the Company's total tangible assets reduced by the amount of its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of shares of Common Stock
in the Offering and the application of the net proceeds therefrom as described
in "Use of Proceeds," the Company's net tangible book value as of September 30,
1996 would have been $ million, or $ per share. This represents an
immediate increase in net tangible book value of $ per share to existing
shareholders and an immediate dilution of $ per share to purchasers of
shares of Common Stock in the Offering. The following table illustrates this per
share dilution:
Assumed initial public offering price per share............... $
Net tangible book value per share before the Offering (1)... $
Increase per share attributable to new investors............
---------
Net tangible book value per share after the Offering..........
---------
Dilution per share to new investors........................... $
---------
---------
- ------------------------------
(1) Includes 152,915 shares of Common Stock issuable upon exercise of the Nassau
Warrants. Does not include 525,000 shares of Common Stock reserved for
issuance pursuant to the Share Incentive Plan.
The following table sets forth the total consideration and the average price
per share to be paid by the purchasers of the Common Stock offered hereby and
the total consideration paid and average price per share paid by existing
stockholders (based on an assumed initial public offering price of $ per
share).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -----------
Existing stockholders.................. 2,460,967 % $ 14,946,000 % $ 6.07
New investors.......................... % %
----------- ----- -------------- -----
Total................................ 100.0% $ 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations and balance
sheet data for the Company as of and for the year ended August 31, 1991, the
four months ended December 31, 1991, and the years ended December 31, 1992,
1993, 1994 and 1995 have been derived from the Company's audited consolidated
financial statements. The selected consolidated financial data as of and for the
nine months ended September 30, 1995 and 1996 have been derived from the
Company's unaudited consolidated financial statements, which in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim information. The
results of operations for the interim periods are not necessarily indicative of
results of operations for the full year. 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."
FOUR MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
AUG 31, DEC 31, -----------------------------------------------------
1991 1991 (1) 1992 1993 1994 1995
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 7,206 $ 9,760 $ 42,620 $ 48,197 $ 47,092 $ 55,839
Cost of sales........................... 3,973 6,931 32,470 36,258 36,407 43,463
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 3,233 2,829 10,150 11,939 10,685 12,376
Selling, general and administrative
expenses.............................. 1,983 1,997 6,851 7,953 7,716 9,426
Amortization of intangible assets....... 539 338 1,209 1,210 1,209 1,115
----------- ----------- ----------- ----------- ----------- -----------
Operating income........................ 711 494 2,090 2,776 1,760 1,835
Interest expense........................ 871 621 2,779 2,940 3,244 3,821
Other (income) expense, net............. 122 80 (213) (148) 332 382
----------- ----------- ----------- ----------- ----------- -----------
Loss before provision for income taxes,
cumulative effect of accounting change
and extraordinary item................ (282) (207) (476) (16) (1,816) (2,368)
Provision for income taxes (3).......... -- (128) (299) (620) (613) (1,078)
----------- ----------- ----------- ----------- ----------- -----------
Loss before cumulative effect of
accounting change and extraordinary
item.................................. (282) (335) (775) (636) (2,429) (3,446)
Cumulative effect of accounting change
(4)................................... -- -- -- (121) -- --
Extraordinary loss from debt refinancing
(5)................................... -- -- -- -- (264) --
----------- ----------- ----------- ----------- ----------- -----------
Net loss................................ $ (282) $ (335) $ (775) $ (757) $ (2,693) $ (3,446)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders.......................... $ (282) $ (335) $ (775) $ (865) $ (3,080) $ (4,003)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization.... $ (1.47)
Pro forma as adjusted (6)............. $
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.... 2,728
Pro forma as adjusted (7).............
OTHER FINANCIAL DATA:
EBITDA (8).............................. $ 1,302 $ 1,276 $ 5,124 $ 6,195 $ 4,608 $ 5,174
Bookings (9)............................ N/A N/A 50,325 46,830 47,896 50,785
Backlog at end of period (10)........... N/A 17,595 25,330 23,933 24,493 19,761
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------------
1995 1996 (2)
----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 42,274 $ 43,059
Cost of sales........................... 32,378 33,277
----------- -----------
Gross profit............................ 9,896 9,782
Selling, general and administrative
expenses.............................. 6,764 7,072
Amortization of intangible assets....... 902 538
----------- -----------
Operating income........................ 2,230 2,172
Interest expense........................ 2,856 2,821
Other (income) expense, net............. 304 183
----------- -----------
Loss before provision for income taxes,
cumulative effect of accounting change
and extraordinary item................ (930) (832)
Provision for income taxes (3).......... (642) (265)
----------- -----------
Loss before cumulative effect of
accounting change and extraordinary
item.................................. (1,572) (1,097)
Cumulative effect of accounting change
(4)................................... -- --
Extraordinary loss from debt refinancing
(5)................................... -- --
----------- -----------
Net loss................................ $ (1,572) $ (1,097)
----------- -----------
----------- -----------
Net loss applicable to common
stockholders.......................... $ (1,989) $ (1,941)
----------- -----------
----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization.... $ (.71)
Pro forma as adjusted (6)............. $
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.... 2,728
Pro forma as adjusted (7).............
OTHER FINANCIAL DATA:
EBITDA (8).............................. $ 4,764 $ 4,479
Bookings (9)............................ 37,406 53,863
Backlog at end of period (10)........... 19,821 38,300
17
DECEMBER 31,
AUG 31, DEC 31, -----------------------------------------------------
1991 1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................... $ 2,143 $ 782 $ 5,091 $ (637) $ 11,459 $ 12,583
Total assets............................ 10,532 32,548 33,911 34,653 37,685 36,329
Total debt.............................. 7,132 17,459 20,604 19,653 23,874 24,672
Redeemable preferred stock and
warrants.............................. 2,168 5,548 5,711 5,818 2,329 1,633
Stockholders' equity (deficit).......... (355) (578) (1,679) (2,618) 766 (1,697)
SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
BALANCE SHEET DATA:
Working capital......................... $ 11,477 $ 11,191
Total assets............................ 37,077 54,228
Total debt.............................. 23,183 33,546
Redeemable preferred stock and
warrants.............................. 2,329 2,054
Stockholders' equity (deficit).......... (505) 5,736
- --------------------------
(1) Includes the results of the Tri-Star Companies beginning October 15, 1991,
the date on which they were acquired.
(2) Includes the effect of the Minority Interest Acquisition beginning February
20, 1996, the date on which the transaction occurred, and the results of ADS
beginning September 18, 1996, the date on which it was acquired.
(3) Prior to the Minority Interest Acquisition 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 1991 to 1995 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, a charge
for unamortized debt discounts and a prepayment penalty incurred as result
of the refinancing by the Company of a substantial portion of its debt in
November 1994 (the "1994 Refinancing").
(6) Pro forma for the Minority Interest Acquisition and the acquisition of ADS
as if they had occurred on January 1, 1995. Adjusted to reflect the sale by
the Company of shares of Common Stock in the Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds." Excludes a $3.0 million extraordinary charge to be incurred as a
result of the debt repayment with the net proceeds from the Offering.
(7) Pro forma for the Recapitalization and adjusted for the shares of
Common Stock offered hereby. Does not include 525,000 shares of Common Stock
reserved for issuance pursuant to the Share Incentive Plan.
(8) EBITDA represents earnings before interest expense (including amortization
of debt discounts), income taxes, depreciation, amortization (including
non-compete covenants, goodwill and other intangibles) and minority
interest. EBITDA is presented because it may be used as one indicator of a
company's cash flow. The Company believes that EBITDA, while providing
useful information, should not be considered in isolation or as a substitute
for net income (loss) as an indicator of operating performance or as an
alternative to cash flow as a measure of liquidity, in each case determined
in accordance with generally accepted accounting principles. The Company
further believes that EBITDA is a meaningful measure of performance that is
commonly used in the aerospace industry to analyze comparable companies on
the basis of operating performance, leverage and liquidity.
(9) Bookings represent the total invoice value of purchase orders received
during the period.
(10) 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.
18
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, 1995: (i) the Minority Interest Acquisition; (ii) the
acquisition of ADS; (iii) the Recapitalization; and (iv) the sale by the Company
of 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 does not include the acquisition of
Elsinore because such inclusion would not have had a material effect on such
data.
The Unaudited Pro Forma Consolidated Financial Data for the year ended
December 31, 1995 reflects the combination, with appropriate adjustments, of the
audited consolidated financial statements of the Company for the year ended
December 31, 1995 and the audited financial statements of ADS for the year ended
December 31, 1995.
The Unaudited Pro Forma Consolidated Financial Data for the nine months
ended September 30, 1996 reflects the combination, with appropriate adjustments,
of the unaudited consolidated financial statements of the Company for the nine
months ended September 30, 1996 and the unaudited financial statements of ADS
for the period from January 1 through September 18, 1996, 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.
19
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
DECRANE
AIRCRAFT AEROSPACE
HOLDINGS, DISPLAY ACQUISITION PRO
INC. SYSTEMS ADJUSTMENTS FORMA
------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................ $ 55,839 $ 9,952 $ -- $ 65,791
Cost of sales........................... 43,463 6,594 444(1) 50,501
------------- ----------- ----------- -----------
Gross profit............................ 12,376 3,358 (444) 15,290
Selling, general and administrative
expenses.............................. 9,426 1,991 (882)(2) 10,535
Amortization of intangible assets....... 1,115 -- 468(3) 1,583
------------- ----------- ----------- -----------
Operating income........................ 1,835 1,367 (30) 3,172
Interest expense........................ 3,821 150 1,955(4) 5,926
Other expenses.......................... 382 -- -- 382
------------- ----------- ----------- -----------
Income (loss) before (provision) benefit
for income taxes...................... (2,368) 1,217 (1,985) (3,136)
(Provision) benefit for income taxes.... (1,078) (495) 1,484(6) (89)
------------- ----------- ----------- -----------
Income (loss)........................... $ (3,446) $ 722 $ (501) $ (3,225)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders.......................... $ (4,003) $ 722 $ (501) $ (3,782)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization.... $ (1.47)(11)
Pro forma as adjusted.................
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.... 2,728(11)
Pro forma as adjusted.................
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -------------
Revenues................................ $ -- $ 65,791
Cost of sales........................... -- 50,501
----------- -------------
Gross profit............................ -- 15,290
Selling, general and administrative
expenses.............................. 200(7) 10,735
Amortization of intangible assets....... -- 1,583
----------- -------------
Operating income........................ (200) 2,972
Interest expense........................ (5,177)(8) 749
Other expenses.......................... -- 382
----------- -------------
Income (loss) before (provision) benefit
for income taxes...................... 4,977 1,841
(Provision) benefit for income taxes.... -- (9) (89)
----------- -------------
Income (loss)........................... $ 4,977 $ 1,752
----------- -------------
----------- -------------
Income (loss) applicable to common
stockholders.......................... $ 5,534(10) $ 1,752
----------- -------------
----------- -------------
Income (loss) per common share:
Pro forma for the Recapitalization....
Pro forma as adjusted................. $ (13)
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization....
Pro forma as adjusted................. (13)
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data.
20
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
DECRANE
AIRCRAFT AEROSPACE
HOLDINGS, DISPLAY ACQUISITION PRO
INC. SYSTEMS ADJUSTMENTS FORMA
------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................ $ 43,059 $ 7,706 $ -- $ 50,765
Cost of sales........................... 33,277 4,855 284(1) 38,416
------------- ----------- ----------- -----------
Gross profit............................ 9,782 2,851 (284) 12,349
Selling, general and administrative
expenses.............................. 7,229 1,286 (203)(2) 8,312
Amortization of intangible assets....... 538 -- 214(3) 752
Gain on litigation settlement........... (157) -- -- (157)
------------- ----------- ----------- -----------
Operating income........................ 2,172 1,565 (295) 3,442
Interest expense........................ 2,821 52 935(4) 3,808
Other expenses.......................... 183 -- (89)(5) 94
------------- ----------- ----------- -----------
Income (loss) before (provision) benefit
for income taxes...................... (832) 1,513 (1,141) (460)
(Provision) benefit for income taxes.... (265) (615) 814(6) (66)
------------- ----------- ----------- -----------
Income (loss)........................... $ (1,097) $ 898 $ (327) $ (526)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders.......................... $ (1,941) $ 898 $ (327) $ (1,370)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization.... $ (.71)(11)
Pro forma as adjusted.................
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.... 2,728(11)
Pro forma as adjusted.................
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -------------
Revenues................................ $ -- $ 50,765
Cost of sales........................... -- 38,416
----------- -------------
Gross profit............................ -- 12,349
Selling, general and administrative
expenses.............................. 150(7) 8,462
Amortization of intangible assets....... -- 752
Gain on litigation settlement........... -- (157)
----------- -------------
Operating income........................ (150) 3,292
Interest expense........................ (3,291)(8) 517
Other expenses.......................... -- 94
----------- -------------
Income (loss) before (provision) benefit
for income taxes...................... 3,141 2,681
(Provision) benefit for income taxes.... -- (9) (66)
----------- -------------
Income (loss)........................... $ 3,141 $ 2,615
----------- -------------
----------- -------------
Income (loss) applicable to common
stockholders.......................... $ 3,985(10) $ 2,615
----------- -------------
----------- -------------
Income (loss) per common share:
Pro forma for the Recapitalization....
Pro forma as adjusted................. $ (12)
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization....
Pro forma as adjusted................. (13)
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data.
21
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Represents an increase in depreciation expense to reflect a $1.7 million
increase in the fair value of assets acquired in the acquisition of ADS. The
acquired assets are being depreciated using the straight-line method over
their remaining estimated useful lives, ranging from two to five years.
(2) For the year ended December 31, 1995, represents: (i) an increase in
depreciation expense of $85,000 to reflect an increase in the fair value and
useful lives of assets acquired in the acquisition of ADS; (ii) a decrease
of $666,000 in minority shareholder compensation expense paid pursuant to an
employment agreement which was cancelled upon the closing of the Minority
Interest Acquisition, net of $185,000 of estimated compensation that would
have been earned during the period as provided for in the post-acquisition
employment agreement; and (iii) a decrease in selling, general and
administrative expenses of $301,000 reflecting a reversal of corporate
expenses allocated to ADS by its former owner, net of estimated incremental
corporate expenses of ADS to the Company.
For the nine months ended September 30, 1996, represents: (i) an increase
in depreciation expense of $54,000 to reflect an increase in the fair value
and useful lives of assets acquired in the acquisition of ADS; and (ii) a
decrease in selling, general and administrative expenses of $257,000
reflecting a reversal of corporate expenses allocated to ADS by its former
owner, net of estimated incremental corporate expenses of ADS to the
Company.
(3) Represents an increase in amortization expense of: (i) $208,000 and $26,000
for the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively, pertaining to the amortization on a straight-line basis
over 26 years of $5.3 million of goodwill related to the Minority Interest
Acquisition; and (ii) $260,000 and $188,000 for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively, pertaining
to the amortization on a straight-line basis over 30 years of $7.7 million
of goodwill related to the ADS acquisition.
(4) Represents: (i) additional interest expense for indebtedness incurred to
finance the acquisition of ADS and the Minority Interest Acquisition of $2.1
million and $1.0 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively; and (ii) a reversal of
interest expense allocated to ADS by its former owner of $150,000 and
$52,000 for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively, for debt obligations not assumed by the
Company.
(5) Represents the reversal of the minority stockholder's 25% equity in the
earnings of a consolidated subsidiary prior to the Minority Interest
Acquisition. For the year ended December 31, 1995, the subsidiary incurred a
net loss of $2,000 and, as a result, the minority stockholder's 25% equity
interest in the operating results was immaterial.
(6) Represents a reduction in the provision for income taxes to reflect income
tax expense assuming the taxable income of ADS and the Company's Cory
Components subsidiary, which was formerly 75% owned, was included in the
Company's consolidated federal and state income tax returns for the periods
presented and offset against the net operating losses incurred by the
Company's other operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively.
(7) Represents incremental 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 directors' and
officers' liability insurance premiums.
(8) Represents a decrease in interest expense to reflect the sale by the
Company of shares of Common Stock in the Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds."
(9) Increases in pro forma taxable income would have been offset by the
utilization of net operating loss carryforwards. Therefore, no adjustment to
the provision for income taxes is necessary.
(10) Reflects the elimination of preferred share dividends as a result of the
Recapitalization and the effect of the Offering adjustments.
(11) See "Notes to Consolidated Financial Statements."
(12) Reflects the Recapitalization as well as the acquisition and Offering
adjustments.
(13) Reflects the shares resulting from the Recapitalization and the Offering.
22
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. The Company commenced operations in October 1990 with the
acquisition of Hollingsead International, Inc. ("Hollingsead"), a manufacturer
of avionics support structures at the time of the acquisition. In October 1991,
the Company acquired Tri-Star Electronics International, Inc. ("Tri-Star"),
Tri-Star Electronics Europe, S.A. ("Tri-Star Europe"), 75% of Cory Components,
and 74.5% of Tri-Star Technologies ("TST") (collectively, the "Tri-Star
Companies") which primarily manufacture contacts, connectors and harness
assemblies for the commercial aircraft industry. In February 1996, the Company
completed the Minority Interest Acquisition. In September 1996, the Company
acquired ADS, a manufacturer of dichroic LCD devices and in December 1996, the
Company acquired Elsinore and purchased the AMP Facility.
From 1991 to 1995, a period of declining demand for new aircraft, the
Company's management refocused and expanded the businesses the Company acquired
in the Hollingsead and Tri-Star Companies transactions. The Company has
established Hollingsead, which was solely a manufacturing company when acquired,
as a full-service systems integrator of avionics concentrated in the retrofit
market. Concurrently, the Company has enhanced the market positions of the
Tri-Star Companies as a leading supplier of certain avionics components in the
OEM market. The Company's ability to improve the performance of its acquired
businesses is reflected in the revenue growth of Hollingsead and the Tri-Star
Companies, which increased 31.0% on a consolidated basis between 1992 and 1995.
This growth occurred despite a steep decline in new aircraft deliveries from a
peak of approximately 770 in 1991 to a low of approximately 370 in 1995,
according to the S&P Report. Specific contributors to the Company's growth
during this period of decline included: (i) the establishment of a balanced
offering of products and services for the OEM market, the retrofit market and
the aftermarket; (ii) the initiation of private labeling programs pursuant to
which the Company manufactures contacts for other connector manufacturers,
including certain of the Company's competitors; (iii) the development of new
products such as speciality connectors for Boeing's 777 aircraft; and (iv) the
diversification into new services such as the integration of in-flight
entertainment systems.
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. Specifically, the
Company's systems integration operations have been dominated in recent years by
sales to AT&T relating to the integration of AT&T's in-flight passenger
telecommunications systems. The Company believes it has lessened its exposure to
these fluctuations by developing capabilities in three additional major systems
integration areas: in-flight entertainment systems, satellite communication and
navigation systems, and safety systems. The Company has secured orders for
integration services in each of these targeted areas: in-flight entertainment
systems for Swissair (through IFT), satellite communication systems for American
Airlines, Inc. ("American Airlines") (through Rockwell Collins and Triad
International Maintenance Corporation ("TIMCO")), and safety systems for a major
package delivery service. In addition, the Company continues to provide systems
integration services to AT&T.
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. Accordingly, the Company
has been, and will continue to be, exposed to fluctuations in the currency
exchange rate between the U.S. Dollar and the Swiss Franc. Due to the weakening
of the U.S. Dollar against the Swiss Franc in 1995, the cost of contact blanks
in U.S. Dollars increased by $.9 million over 1994 levels. In 1996, solely in an
effort to mitigate the effects of currency fluctuations, the Company entered
into forward exchange contracts at fixed rates and plans to continue this
forward exchange program in the future.
23
Materials constitute approximately 45% of the cost of a finished contact.
The most significant portion of the material cost is gold, although the use of
copper is also substantial. The Company is and will continue to be exposed to
fluctuations in gold and copper prices. The Company has undertaken programs to
reduce the use of gold in the Company's plating operations. These programs, on a
comparable basis, have saved the Company an estimated $.7 million for the nine
months ended September 30, 1996 compared to the same period in 1995. In addition
to providing cost savings, the Company believes that these programs reduced its
exposure to gold price fluctuations.
Prior to the Minority Interest Acquisition 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 1991 to 1995 which primarily relates
to Cory Components. Separately, as of December 31, 1995, the Company had net
operating loss carry-forwards ("NOLs") of approximately $4.1 and $2.0 for
federal and state income tax purposes, respectively. These NOLs expire in
varying amounts through 2010. The amount of NOLs that may be utilized in the
future may be subject to limitations due to a change in control of the Company.
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:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
Revenues.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 75.2 77.3 77.8 76.6 77.3
----- ----- ----- ----- -----
Gross profit.............................................. 24.8 22.7 22.2 23.4 22.7
Selling, general and administrative expenses.............. 16.5 16.4 16.9 16.0 17.2
Amortization of intangible assets......................... 2.5 2.6 2.0 2.1 1.2
----- ----- ----- ----- -----
Operating income.......................................... 5.8 3.7 3.3 5.3 5.0
Interest expense.......................................... 6.1 6.9 6.8 6.8 6.6
Other (income) expense, net............................... (.3) .7 .7 .7 .4
----- ----- ----- ----- -----
Loss before provision for income taxes, cumulative effect
of change in accounting principle and extraordinary
item.................................................... (0.0) (3.9) (4.2) (2.2) (1.9)
Provision for income taxes................................ (1.3) (1.3) (1.9) (1.5) (.6)
----- ----- ----- ----- -----
Loss before cumulative effect of change in accounting
principle and extraordinary item........................ (1.3) (5.2) (6.2) (3.7) (2.5)
Cumulative effect on prior years of change in accounting
for income taxes........................................ (.3) -- -- -- --
Extraordinary loss from debt refinancing.................. -- (.6) -- -- --
----- ----- ----- ----- -----
Net loss.................................................. (1.6) (5.7) (6.2) (3.7) (2.5)
----- ----- ----- ----- -----
----- ----- ----- ----- -----
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUES. Revenues increased $.8 million, or 1.9%, to $43.1 million for the
nine months ended September 30, 1996 from $42.3 million for the nine months
ended September 30, 1995. Revenues increased primarily due to the following: (i)
an increase in sales of specialty connectors for cabin management and in-flight
entertainment systems on Boeing's 777 aircraft; (ii) an increase in sales of
harness assemblies for in-flight entertainment systems; (iii) growth in contact
sales driven by new aircraft production rate increases and growth in the
Company's private labeling programs; and (iv) the inclusion of the revenues of
ADS for approximately two weeks in the nine months ended September 30, 1996.
24
Partially offsetting this increase was a decline in sales to AT&T of $8.4
million, reflecting the completion in 1995 of a major systems integration
program primarily for American Airlines.
GROSS PROFIT. Gross profit decreased $.1 million, or 1.2%, to $9.8 million
for the nine months ended September 30, 1996 from $9.9 million for the nine
months ended September 30, 1995. Gross profit as a percent of revenues decreased
to 22.7% for the nine months ended September 30, 1996 from 23.4% for the nine
months ended September 30, 1995. This decrease was attributable to the decline
in sales to AT&T, as described above, which caused a shift in revenue mix from
higher margin systems integration revenues to lower margin contact sales.
Partially offsetting this decline was an improvement in gross profit as a
percent of revenues from the sale of contacts for the nine months ended
September 30, 1996, as compared to the nine months ended September 30, 1995.
This improvement resulted from sustained price increases, increased sales
volume, lower wage-related expenses and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $.4 million, or 6.9%, to $7.2 million
for the nine months ended September 30, 1996 from $6.8 million for the nine
months ended September 30, 1995. SG&A expenses as a percent of revenues
increased to 16.8% for the nine months ended September 30, 1996 from 16.0% for
the nine months ended September 30, 1995. SG&A expenses increased primarily
because 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. This increase in SG&A expenses was
offset partially by the elimination of a $.5 million management fee as a result
of the Minority Interest Acquisition.
OPERATING INCOME. Operating income remained essentially unchanged for the
nine months ended September 30, 1996 from the nine months ended September 30,
1995. A decrease in operating income resulting from the factors described above
was offset by a decline of $.4 million in amortization of intangible assets as a
result of the termination of certain non-compete agreements.
INTEREST EXPENSE. Interest expense remained essentially unchanged for the
nine months ended September 30, 1996 from the nine months ended September 30,
1995.
NET LOSS. Net loss decreased $.5 million, or 30.2%, to $1.1 million for the
nine months ended September 30, 1996 from a net loss of $1.6 million for the
nine months ended September 30, 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.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
REVENUES. Revenues increased $8.7 million, or 18.6%, to $55.8 million for
1995 from $47.1 million for 1994. This increase was attributable to an
additional $6.8 million in sales to AT&T in 1995 relating to a major systems
integration program primarily for American Airlines, as well as increased sales
of: (i) products and services for in-flight entertainment systems; (ii)
connectors for cabin management and in-flight entertainment systems on Boeing's
777 aircraft; and (iii) contacts through the Company's private labeling program.
Partially offsetting this increase was a decline in sales of contacts to
aircraft OEMs in 1995 due to lower production rates for new aircraft and a
decline in systems integration reserves reflecting the completion of two systems
integration programs in early 1995.
GROSS PROFIT. Gross profit increased $1.7 million, or 15.8%, to $12.4
million for 1995 from $10.7 million for 1994. Gross profit as a percent of
revenues decreased marginally to 22.2% for 1995 from 22.7% for 1994. The
decrease in gross profit as a percent of revenues primarily resulted from
increased material cost of approximately $.9 million caused by the weakness of
the U.S. Dollar relative to the Swiss Franc.
25
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.7
million, or 22.2%, to $9.4 million for 1995 from $7.7 million for 1994. SG&A
expenses as a percent of revenues increased marginally to 16.9% for 1995 from
16.4% for 1994. This increase resulted from an effort to develop further the
sales, accounting and senior management functions of the Company's operating
subsidiaries in anticipation of continued revenue growth.
OPERATING INCOME. Operating income remained essentially unchanged from 1994
at $1.8 million for 1995 as a result of the factors discussed above and a
marginal decrease in amortization of intangible assets.
INTEREST EXPENSE. Interest expense increased $.6 million, or 17.8%, to $3.8
million for 1995 from $3.2 million for 1994 due to higher outstanding
indebtedness. The 1994 Refinancing resulted in lower effective interest rates
and higher outstanding indebtedness.
NET LOSS. Net loss increased $.7 million, or 28.0%, to $3.4 million for
1995 from a net loss of $2.7 million for 1994 as a result of the factors
described above and a higher tax provision for Cory Components, which was not
consolidated for income tax purposes.
FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1993
REVENUES. Revenues decreased $1.1 million, or 2.3%, to $47.1 million for
1994 from $48.2 million for 1993. This decline in revenues reflects: (i) the
completion in 1993 of two systems integration programs totaling $3.3 million in
sales; and (ii) lower contact sales to aircraft OEMs as aircraft production
rates declined. Partially offsetting this decline were increased sales of
specialty connectors for cabin management and in-flight entertainment systems on
Boeing's 777 aircraft, as well as growth of the Company's private labeling
programs for contacts and connectors.
GROSS PROFIT. Gross profit decreased $1.2 million, or 10.5%, to $10.7
million for 1994 from $11.9 million for 1993. Gross profit as a percent of
revenues decreased from 24.8% for 1993 to 22.7% for 1994. This decline was
attributable to a shift in revenue mix resulting from the growth of the
Company's private labeling programs for contacts and connectors, which had lower
gross profits as a percent of revenues than the two systems integration programs
which were completed in 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased $.3
million, or 3.0%, to $7.7 million for 1994 from $8.0 million for 1993 as the
Company reduced SG&A expenses to offset a decrease in sales volume. As a percent
of revenues, SG&A expenses decreased marginally to 16.4% for 1994 from 16.5% for
1993.
OPERATING INCOME. Operating income decreased $1.0 million, or 36.6%, to
$1.8 million for 1994 from $2.8 million for 1993. The decrease in operating
income resulted from the factors described above.
INTEREST EXPENSE. Interest expense increased $.3 million, or 10.3%, to $3.2
million for 1994 from $2.9 million for 1993. This increase resulted from higher
outstanding indebtedness after the 1994 Refinancing, partially offset by lower
effective interest rates.
NET LOSS. Net loss increased $1.9 million to $2.7 million for 1994 from a
net loss of $.8 million for 1993 due to the factors described above as well as:
(i) an increase of $.4 million in foreign exchange losses incurred on contact
blanks shipped from the Company's Swiss facility; and (ii) $.3 million in
extraordinary losses resulting from the write-off of deferred financing expenses
in association with the 1994 Refinancing.
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.
26
For the nine months ended September 30, 1996 and the year ended December 31,
1995, the Company generated cash from operating activities of $3.1 million and
$1.5 million, respectively. Cash from operating activities is net of interest
payments of $1.8 million and $3.3 million for the nine months ended September
30, 1996 and year ended December 31, 1995, respectively. With the net proceeds
of the Offering, the Company estimates that it will repay a significant portion
of the debt. As a result the related interest payments will decrease
substantially. See "Use of Proceeds."
The Company generated $.3 million in cash from a decrease in working capital
for the nine months ended September 30, 1996 and used $1.3 million in cash for
the year ended December 31, 1995 to increase working capital. Trade receivables
increased $.5 million for the nine months ended September 30, 1996 and $1.6
million in the year ended December 31, 1995, respectively, due to higher sales.
Unbilled receivables on revenues recognized under the percent of completion
method increased $.5 million for the nine months ended September 30, 1996 as a
result of the systems integration program for Swissair (through IFT) that began
in mid-1996. Unbilled receivables decreased by $3.9 million in 1995 as a result
of the completion of a systems integration program for AT&T in 1995. Inventories
decreased by $1.1 million for the nine months ended September 30, 1996 as a
result of inventory reduction programs in 1996. Inventories increased by $3.0
million in 1995 in support of sales growth. Accounts payable decreased by $.5
million in the nine months ended September 30, 1996 primarily as a result of a
reduction of inventory in 1996. Accounts payable decreased by $1.0 million in
1995 due to the application of cash made available by the 1994 Refinancing.
Net cash used in investing activities was $17.4 million for the nine months
ended September 30, 1996 and $1.5 million for the year ended December 31, 1995.
Of the $17.4 million used in 1996, $16.6 million related to the Minority
Interest Acquisition in February 1996 and the acquisition of ADS in September
1996. Capital expenditures of $.7 million and $1.2 million were made in the nine
months ended September 30, 1996 and in the year ended December 31, 1995,
respectively. Capital expenditures were incurred to: (i) purchase tooling in
support of proprietary products; (ii) upgrade machinery and equipment; and (iii)
increase manufacturing capacity in support of sales growth. Major ongoing
capital expenditure projects include $.6 million for improved plating controls
and $1.0 million for a new management information system.
Net cash provided by financing activities for the nine months ended
September 30, 1996, was $14.1 million. Specifically, the Company financed the
Minority Interest Acquisition (including the related fees and expenses) in
February 1996 through the sale of its Series D Convertible Preferred Stock and
warrants to Nassau for $6.5 million. In September 1996 the Company financed the
acquisition of ADS (including the related fees and expenses) through the sale of
its Series E Convertible Preferred Stock and warrants for $3.0 million, the
issuance of the Convertible Notes and warrants for $3.0 million and an increase
and a drawdown under the Senior Revolver of $5.4 million. The Series E
Convertible Preferred Stock, Convertible Notes and related warrants were issued
to Nassau and Electra. At the time of the ADS acquisition, availability under
the Senior Revolver was increased by an additional $1.5 million to fund
potential future working capital and capital expenditure requirements. In the
year ended December 31, 1995, repayments of senior debt and capital lease
obligations were offset by increased borrowing under the Senior Revolver,
resulting in DE MINIMIS net cash provided by financing activities.
Cash decreased by $.2 million for the nine months ended September 30, 1996
and increased $.1 million for the year ended December 31, 1995 due to the
factors described above. Availability under the Senior Revolver as of September
30, 1996 was $3.4 million versus $.7 million as of December 31, 1995.
Contributing to the increase in availability was a $1.5 million increase in the
maximum borrowings permitted under the Senior Revolver, net of the financing for
the ADS acquisition, as discussed above.
In December 1996, the Company acquired Elsinore and purchased the AMP
Facility. The acquisition of Elsinore was financed by the Seller Note and $1.3
million borrowed under the Senior Revolver. The initial cash portion of the
purchase price of the AMP Facility was financed through an increase of
27
$5.0 million in the Senior Term Notes and the balance of $.4 million through a
drawdown under the Senior Revolver.
As of September 30, 1996, the maximum amount which the Company could borrow
under the Senior Revolver was $12.5 million and the principal amount outstanding
was $9.1 million. Of the amounts outstanding under the Senior Revolver, $8.0
million bear interest at the Eurodollar Rate plus 4.5% per annum (10.0% as of
September 30, 1996) with the remainder bearing interest at the lender's prime
rate plus 3.25% per annum (11.5% as of September 30, 1996). The Senior Revolver
becomes due on September 18, 1999. In September 1996, the Company borrowed $5.4
million under the Senior Revolver to fund a portion of the ADS purchase price.
The Company borrowed an additional $1.7 million under the Senior Revolver to
fund a portion of the purchase price of Elsinore and the purchase price of the
AMP Facility.
The Company is in negotiations with banks to provide the New Credit Facility
which is expected to provide for a term loan and a revolving credit facility in
an aggregate amount of $40.0 million. The New Credit Facility is expected to be
secured by substantially all the assets of the Company. It is a condition to the
consummation of the Offering that the Company obtain the New Credit Facility.
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 or properties affected by hazardous substances. 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. 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,"
"Business--Environmental Regulation" and "Business--Legal Proceedings."
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.
28
BUSINESS
GENERAL
The Company is a manufacturer of avionics components and a provider of
avionics systems integration services in certain niche markets of the commercial
aircraft industry. The products and services offered by the Company are utilized
primarily in commercial 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 and the commercial
aircraft aftermarket. 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
to the commercial aircraft industry); (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). In addition, the Company 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 industry. 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 eight acquisitions of businesses or assets. A summary of these
transactions follows:
YEAR OF
TRANSACTION TARGET PRINCIPAL PRODUCTS AND SERVICES(1)
- ------------- ------------------------- ------------------------------------------ APPROXIMATE
PURCHASE PRICE(2)
-------------------
(IN MILLIONS)
1990 Hollingsead Avionics support structures $ 9.1
1991 Tri-Star Contacts and connectors *(3)
1991 Tri-Star Europe Contact blanks *(3)
1991 TST Wire marking equipment *(3)
1991 Cory Components Connectors and harness assemblies 7.7(4)
1996 ADS Dichroic LCD devices 13.3
1996 Elsinore Engineering services 2.6
1996 AMP Facility Contact blanks 7.0
- ------------------------
(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, Tri-Star Europe and 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.
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 the Tri-Star Companies. The Company's management
has refocused and expanded the businesses which were acquired in the
29
Hollingsead and Tri-Star Companies 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 the
Tri-Star Companies.
In 1996, the Company completed: (i) the acquisitions of ADS and Elsinore;
(ii) the purchase of the AMP Facility; and (iii) the Minority Interest
Acquisition. The acquisition of ADS, a manufacturer of dichroic LCD devices,
which the Company believes is the largest supplier of such products to the
commercial aircraft industry, expanded the Company's offering of components used
in flight deck avionics systems. The Company believes that the acquisition of
ADS will allow it to capitalize on the upturn in aircraft OEM production by
increasing its revenue content per aircraft as well as enhancing the Company's
position with its major customers. 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 work 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, and the opportunity to obtain additional
customers. The Company's purchase of the AMP Facility added contact capability
and capacity which will enable 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 the Company's existing screw
machine operations. As a result of the purchase of the AMP Facility the Company
will have the opportunity to make increased sales to certain distributors that
formerly purchased contacts from other entities within AMP.
INDUSTRY OVERVIEW AND TRENDS
The Company participates in the commercial and military segments of the
aircraft industry. Within these segments, the Company sells to commercial and
military aircraft OEMs and major avionics equipment OEMs as well as to the
aircraft retrofit market and aircraft aftermarket.
On December 15, 1996, Boeing and McDonnell Douglas announced that they had
agreed to merge. The merger is subject to certain conditions, including the
receipt of regulatory approvals. Neither Boeing nor McDonnell Douglas has made
any announcements of any changes to their respective businesses following the
merger. The Company is unable to determine at this time the effect, positive or
negative, of the merger should it be consummated.
Prior to the announcement of the merger, the market for commercial aircraft
designed to carry 100 or more passengers was served principally by Boeing,
Airbus and McDonnell Douglas. 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 AlliedSignal Inc., Rockwell Collins, General Electric
Company, Honeywell, Inc. ("Honeywell"), Raytheon Co. and Sextant Avionique, Inc.
Components and sub-systems for new aircraft are provided by a much more
fragmented group of companies, consisting of numerous smaller, specialized
companies, such as the Company.
The aircraft retrofit market (the integration of new systems into existing
aircraft) and the aircraft aftermarket (the manufacture and sale of replacement
products for existing aircraft) are served by a
30
highly fragmented group of companies. Many of these companies were formed
primarily in response to increased outsourcing by airlines of internal
engineering capabilities. Products and services provided within the aircraft
aftermarket and aircraft retrofit market include aircraft replacement components
and systems and aircraft repair, maintenance, overhaul and systems integration
services.
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
aircraft industry:
INCREASED DEMAND FOR NEW AIRCRAFT. According to the Boeing Report,
expenditures on new aircraft production are expected to increase from an average
of approximately $34 billion per year for the period 1991 through 1995 to
approximately $46 billion per year for the period 1996 through 2000. These
expenditures are expected to result in the addition of nearly 3,500 new aircraft
to the worldwide fleet of 11,000 aircraft. The Company believes that the
following factors, among others, are causing this increase in new aircraft
orders: (i) projected worldwide airline traffic growth of 5.1% per year
(including growth of 7.1% per year in the Asia-Pacific region and 11.5% per year
in China); (ii) projected cargo traffic growth of 6.7% per year; (iii) projected
increase in the load factor of aircraft currently in service; (iv) increases in
the average age of commercial aircraft; (v) the cost effectiveness of using new
aircraft versus old aircraft; and (vi) a turnaround in worldwide airline
operating performance (from substantial operating losses in 1992 to
approximately $12 billion in operating profit in 1995).
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.
INDUSTRY CONSOLIDATION IN CERTAIN SEGMENTS. Certain segments of the
commercial aircraft industry, such as those that include manufacturers of
components and providers of aircraft retrofit, overhaul and repair services,
have been undergoing consolidation. The Company believes that several factors
are contributing to this consolidation, including: (i) the high level of
fragmentation within these segments; (ii) the continuing efforts by OEMs to
minimize purchasing costs, streamline operations and achieve greater control of
quality through a rationalization of their supplier bases; and (iii) the
increased demands placed on suppliers due to the just-in-time requirements of
their customers.
INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has
been an increase in demand for cabin avionics systems, which include in-flight
passenger telecommunications systems as well as in-flight entertainment systems,
such as video, video-on-demand and casino-style electronic gaming. In-flight
passenger telecommunications systems primarily are produced by major providers
of terrestrial and satellite-based communication services and in-flight
entertainment systems primarily are produced by a diverse group of companies,
ranging from small entrepreneurial start-ups to large electronics and media
companies. In-flight entertainment and passenger telecommunication systems
generally are integrated onto aircraft by third parties, such as the Company, as
well as by airlines and
31
avionics OEMs. The Company believes that the increased demand primarily has
resulted from: (i) a desire by airlines for additional revenue-producing
services; and (ii) longer flights combined with a demand by airline passengers
for more sophisticated forms of in-flight services.
PROLIFERATION OF NEW AVIONICS TECHNOLOGIES FOR FLIGHT DECKS. The prevalence
of older generation avionics equipment is a primary limiting factor in
establishing a more efficient air traffic management system. The commercial
aircraft industry, including the world's airlines, aircraft and avionics OEMs
and regulatory agencies, have organized to develop the necessary 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 and to result in significant improvements over existing systems.
Anticipated benefits of FANS include cost savings and enhanced safety. As
overall navigation system accuracy is improved, new navigation systems, such as
satellite communication ("SATCOM") systems and global positioning systems
("GPS"), will be required which the Company believes will present numerous
aircraft avionics retrofit opportunities.
There also has been a proliferation of new safety systems for flight decks
driven by the advent of new technologies and FAA mandates. For example, traffic
collision avoidance systems ("TCAS") and windshear detection systems are now
required for passenger aircraft operating in the U.S. The Company believes that
these safety systems may be mandated for all cargo carriers and flights outside
the U.S. In addition, the Company believes that the FAA will recommend or
mandate additional safety systems such as an enhanced ground proximity warning
system, a predictive (forward-looking) windshear detection system and an
enhanced digital flight data recorder.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial 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
contacts and dichroic LCD devices for use in commercial aircraft and a major
supplier of harness assemblies for use in in-flight entertainment systems. 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 eight acquisitions of businesses or assets, including, in 1996,
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 acquisition of identified targets; and (iii) increase
revenues of an acquired company, often while refocusing that company's business
strategy. For example, the Company acquired Hollingsead in 1990, which was, at
that time, solely a manufacturer of avionics support structures. From 1992
through 1995, the Company increased revenues 74.3% at Hollingsead and expanded
its operations from that of a component manufacturer to that of a full-service
systems integrator. 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.
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 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 primary supplier
32
of harness assemblies to Matsushita for its in-flight entertainment systems;
(ii) the preferred integrator for the in-flight casino-style electronic gaming
and video-on-demand systems of IFT; and (iii) a preferred systems integrator for
the passenger telecommunications systems of AT&T.
NUMEROUS INDUSTRY AND REGULATORY APPROVALS. The Company holds three PMAs
from the FAA and 64 supplements to its PMA's authorizing the Company to
manufacture and install numerous parts in many different aircraft. The Company
also has three FAA domestic repair station certificates which authorize it to
perform certain aircraft modifications. The Company employs FAA-certified
airframe and power-plant mechanics who are authorized to perform certain
aircraft modification functions. In addition, through its acquisition of
Elsinore, the Company is one of only 26 DASs worldwide (as of March 28, 1996,
the date of the most recent available data from the FAA) which are authorized by
the FAA to provide FAA approval of aircraft modifications. The DAS approval
enables the Company to act as a designee of the FAA in issuing certain STCs.
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.
ENGINEERING AND RELATED TECHNICAL CAPACITY. More than 12% of the Company's
employees are engineering professionals, providing the Company with significant
in-house engineering capability and key technical expertise. For example, 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). 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 the
commercial aircraft industry.
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"), B/E Aerospace, Inc., COMSAT Corp.,
Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc.,
Matsushita and McDonnell Douglas, providing the Company with a diversity of
commercial aircraft industry expertise. On average, the Company's executive
management has approximately 17 years of related industry experience.
GROWTH STRATEGY
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft 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 commercial aircraft industry economic cycle. Specifically,
the Company seeks to:
CAPITALIZE ON GROWTH IN COMMERCIAL AIRCRAFT PRODUCTION. 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 increase in commercial aircraft production. The Company believes that
33
every aircraft currently produced by Boeing, Airbus and McDonnell Douglas
includes components manufactured by the Company. As orders for the Company's
aircraft components have increased, the Company has worked closely with OEMs to
meet their delivery and scheduling requirements. In addition, the Company seeks
to increase its revenue content per plane by introducing new products, expanding
the use of existing products and through strategic acquisitions of companies
which supply components to the OEMs.
EXPLOIT INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. 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; and (ii)
longer flights combined with a demand by airline passengers for more
sophisticated forms of in-flights services. The Company manufactures components
(contacts, connectors, harness assemblies and avionics support structures) which
are used with cabin avionics systems, as well as provides the systems
integration services necessary to install such systems on aircraft. The Company
believes that it competes effectively in the cabin avionics market by offering
to its customers a full-service organization, capable of providing interconnect
hardware and support structures for cabin avionics systems combined with the
design and engineering, FAA certification and installation services required to
integrate 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 September 30, 1996, the
Company had contracted to provide systems integration services for SATCOM
systems (American Airlines through Rockwell Collins and TIMCO), safety systems
(a major package delivery service), and in-flight entertainment systems
(Swissair through IFT). In addition, as of September 30, 1996, the Company had
drafted proposals in response to more than 40 active requests for proposals for
these and other types of systems.
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to identify
and pursue complementary acquisitions at attractive prices in the aircraft
industry that offer strategic value, such as cost savings, product line
extensions, increased manufacturing capacity or new customer relationships. The
Company initiated discussions with all three of the sellers in its recent
transactions (ADS, Elsinore and the AMP Facility), each of which is of
significant strategic value to the Company. ADS expands the Company's presence
on the flight deck with a product that has a leading niche market position.
Elsinore provides the Company with a DAS approval, increases its engineering
expertise and expands its customer base. The AMP Facility expands the Company's
manufacturing capacity and provides it with new low-cost manufacturing
techniques. 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.
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 to
create higher value-added 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 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.
34
PRODUCTS AND SERVICES
The Company's principal products and services are: contacts; connectors;
harness assemblies; avionics support structures; dichroic LCD devices 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, Airbus and McDonnell
Douglas, the three largest commercial aircraft OEMs.
CONTACTS. The Company believes that it is the largest producer of
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 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 discreet 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:
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 was originally an application specific
product designed by the Company for use with in-flight entertainment and
cabin management systems on Boeing's 777 aircraft. The CQ connector is now
sold to other customers for other applications.
INDUSTRY STANDARD. The Company sells standard connectors, built to ARINC
specifications, 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
35
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
avionic 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 its recent 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 also manufactures avionics
electronic clocks which utilize its dichroic LCD devices. The Company is the
leading (and often sole-source) 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 customer's requirements which are subsequently incorporated into new or
modified flight decks.
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.
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. 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,
36
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 MANUFACTURE. 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
subassemblies; 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
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 certificate which covers 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.
The Company has focused its systems integration efforts on the following
four general categories of systems: (i) in-flight passenger telecommunication
systems; (ii) in-flight entertainment systems; (iii) SATCOM and navigation
systems; and (iv) safety systems. The Company has targeted these four 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 passenger
telecommunications and in-flight entertainment); (ii) satisfy increased safety
and regulatory requirements; and (iii) reduce operating expenses (SATCOM). A
summary of recent Company activity in each of these categories follows:
IN-FLIGHT PASSENGER TELECOMMUNICATIONS SYSTEMS. The Company is a systems
integrator of in-flight passenger telecommunications systems for AT&T. The
Company has provided installation kits to AT&T for telephones on over 1,000
aircraft, as well as design and engineering and certification services for
certain of these aircraft. The Company is currently involved in proposals to
other in-flight passenger telecommunication systems providers.
IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is the preferred systems
integrator for IFT. IFT is a publicly traded company which has designed a
digital interactive passenger entertainment system which provides for
video-on-demand, video games, and casino-style electronic gaming in which
the aircraft passenger can gamble using a credit card. In July 1996, the
Company entered into an agreement with IFT to fully integrate the IFT System
into 21 wide-body aircraft for Swissair. The Company expects to realize a
substantial portion of the revenues from such contract in 1997. IFT has
advised the Company that it may place additional orders with the Company for
the integration of its in-flight entertainment system for other airlines.
Although IFT is not obligated to place such
37
additional orders and there can be no assurance that IFT will do so, the
Company believes that its relationship with IFT represents a significant
opportunity. The Swissair contract is the first large-scale commercial
application of the IFT System. Delays in installation or problems in
implementation of the IFT System may result in the deferral or loss of
potential revenues from IFT.
SATCOM AND NAVIGATION SYSTEMS. The Company presently is providing systems
integration services in support of SATCOM systems. The Company recently
completed efforts as a systems integrator for SATCOM systems on certain U.S.
Government aircraft and has subsequently been awarded another contract.
Presently, the Company is providing the systems integration services for
SATCOM systems on 10 Airbus A300 for American Airlines (through Rockwell
Collins and TIMCO). The Company also has active proposals for various GPS
programs with both avionics OEMs and airlines. The Company believes that GPS
and SATCOM 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.
SAFETY SYSTEMS. The Company is an integrator of safety systems which are
required by the FAA, or voluntarily adopted by airlines. The Company
recently was selected to integrate TCAS and heads-up guidance systems
("HGS") on aircraft for a major package delivery service. Currently, several
major carriers in Europe and Asia actively are evaluating TCAS. In addition,
the Company believes that a new "forward-looking" windshear detection system
will be available by the end of 1997. The Company believes significant
opportunity exists for the integration of these types of safety systems onto
aircraft worldwide.
OTHER. The Company has designed, developed and applied for a patent on an
electrical retract mechanism to support in-flight video systems on McDonnell
Douglas narrow-body aircraft. Due to space constraints, in-flight video systems
generally are not available on McDonnell Douglas narrow-body aircraft. The
Company's retract mechanism is configured to fit in the available space. The
Company actively is marketing the system which management believes is the only
video system available for these narrow-body aircraft. The Company believes that
there are over 500 aircraft in the market which potentially could use such a
system.
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 approvals giving 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 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. 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
38
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.
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 September 30, 1996, the Company had obtained 83 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 it requires in connection with its systems integration operations. 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
three PMAs and 64 supplements to its PMAs (as of September 30, 1996). 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
39
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 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 five 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 passenger telecommunications; (ii)
in-flight entertainment; (iii) SATCOM and navigation; or (iv) safety systems. 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 1995, the Company sold its products and services to more than 500
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 three largest customers are Boeing,
AT&T and Matsushita, which accounted for approximately 9.0%, 21.6% and 7.4%,
respectively, of the Company's consolidated revenues (pro forma for the ADS
acquisition) for the fiscal year ended December 31, 1995 and 12.8%, 8.9% and
8.5%, respectively, of the Company's consolidated revenues (pro forma for the
ADS acquisition) in the nine months ended September 30, 1996. In addition, a
significant portion of the Company's sales of components are sold to Boeing
indirectly through sales to suppliers of Boeing.
The Company is the preferred systems integrator for IFT, and it expects that
IFT will become a significant customer in 1997. The Company signed a contract
with IFT in July 1996 and the Company expects to realize a substantial portion
of the revenues from such contract in 1997. The Company will account for
revenues generated under the IFT contract using the percentage of completion
method of accounting. Pursuant to this contract, which provides for monthly
progress payments, the Company will provide systems integration services for the
IFT System on 21 Swissair wide-body aircraft. The Swissair contract is the first
large-scale commercial application of the IFT System. Any delays in installation
or problems in implementation of the IFT System may result in the deferral or a
loss of potential revenues from IFT.
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 leadtimes of like quantity of comparable items to
customers other than Boeing, then the Company must sell on the same
40
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.
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 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, which has
enabled it to realize estimated cost savings, on a comparable basis, of
approximately $.7 million in the first nine months of 1996 compared to the same
period in 1995.
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
41
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.
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. Competitors which provide systems
integration services include ECS, the engineering departments of certain
airlines and numerous independent airframe maintenance and modification
companies.
BACKLOG
As of September 30, 1996, the Company had outstanding purchase orders
representing an aggregate invoice price of approximately $38.3 million,
including $7.1 million for ADS, which was acquired on September 18, 1996. The
Company expects to ship $16.7 million of the backlog by the end of 1996. As of
September 30, 1995, the Company had outstanding purchase orders representing an
aggregate invoice price of approximately $19.8 million, of which $8.4 million
was shipped by the Company by the end of 1995.
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
September 30, 1996 is not necessarily indicative of actual shipments or sales
for any future period, and period-to-period comparisons from 1995 to 1996 may
not be meaningful.
42
EMPLOYEES
As of December 31, 1996, the Company had 982 employees (including 136
temporary employees), of whom 96 were engineers (including 3 temporary
employees), 24 were in sales, 769 were in manufacturing operations (including
130 temporary employees) and 93 were in finance and administration (including 3
temporary employees). None of the Company's employees is 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.
FACILITIES
The Company leases all of its facilities with terms ranging from one to nine
years as reflected in the following table.
APPROXIMATE
SQUARE LEASE
LOCATION DESCRIPTION FOOTAGE EXPIRATION
- ------------------------------ -------------------------------------------- ------------- ----------
El Segundo, CA Manufacturing and engineering facility 81,300 2005
Santa Fe Springs, CA Manufacturing and engineering facility 52,000 2000
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 2004
Santa Barbara, CA Engineering facility 3,500 1997
Seattle, WA Engineering facility 3,200 1999
Phoenix, AZ Engineering facility 3,000 1997
Copley, OH Executive offices 2,200 1997
Santa Ana, CA Engineering facility 1,000 1999
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
43
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," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Environmental Matters" and "Business--Legal
Proceedings."
LEGAL PROCEEDINGS
The Company's manufacturing facility in El Segundo, California, has received
several notices of violation ("NOV") 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 NOVs will result in any material sanctions.
See "Risk Factors-- Environmental Regulation," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters" and "Business--Environmental Matters."
44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive officers of the Company as of December 31, 1996:
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------------
R. Jack DeCrane 50 Chairman of the Board and Chief Executive Officer
R. G. MacDonald 66 Vice Chairman of the Board
Robert A. Rankin 44 Chief Financial Officer and Secretary
Roger L. Keller 52 Group Vice President of Systems
Charles H. Becker 50 Group Vice President of Components
James R. Bergman (a) 54 Director
Paul H. Cascio (b) 35 Director
Jonathan A. Sweemer (a)(b) 41 Director
- ------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The Company is currently 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. Upon completion of the Offering, 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 serves as a class I
director 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.
45
Robert A. Rankin has been Chief Financial Officer and Secretary 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 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 was President of Hollingsead from December 1995
until December 1996, 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. Mr. Becker was President of Tri-Star, from December 1994 to
December 1996. Prior to joining the Company, he 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 Partners IV. 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. 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 Venture Partners. 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." Prior to becoming a general partner of
Brantley Venture Partners in May 1996, 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. 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."
46
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, 1996.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
-------------------------------------------- COMPENSATION
OTHER ANNUAL --------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) OPTIONS (2) COMPENSATION
- ----------------------------- ----------- ----------- ------------------ --------------- --------------
R. Jack DeCrane $ 206,600 $ 146,000 $ 7,813 34,028 $ --
Chief Executive Officer
R. G. MacDonald 177,437 82,000 3,960 -- --
President and Vice Chairman
of the Board (3)
Robert A. Rankin 139,375 65,000 1,595 19,850 --
Chief Financial Officer and
Secretary
Roger L. Keller 150,000 -- 2,083 19,850 --
President of Hollingsead
and
Group Vice President
of Systems (4)
Charles H. Becker 148,750 65,000 1,899 19,850 30,586(6)
President of Tri-Star and
Group Vice President of
Components (5)
- ------------------------
(1) Amounts paid by the Company for premiums on life and long-term disability
insurance 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) Mr. MacDonald served as President of the Company through December 1996. Mr.
MacDonald became Vice Chairman of the Board in December 1996.
(4) Mr. Keller served as President of Hollingsead through December 1996. Mr.
Keller became Group Vice President of Systems in December 1996.
(5) Mr. Becker served as President of Tri-Star through December 1996. Mr. Becker
became Group Vice President of Components in December 1996.
(6) Relocation costs.
47
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, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ----------------------------- -------------- ----------------- ------------- ---------- --------- -----------
R. Jack DeCrane.............. 34,028 23.1% $ .14 2006 $ 78,297 $ 198,421
Robert A. Rankin............. 19,850 13.5% 2.89 2006 36,160 91,640
Roger L. Keller.............. 19,850 13.5% 2.89 2006 36,160 91,640
Charles H. Becker............ 19,850 13.5% 2.89 2006 36,160 91,640
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, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ SARS
ACQUIRED OPTIONS/SARS AT FY-END AT FY-END(1)
ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------- ---------- --------- -------------------------- --------------------------
R. Jack DeCrane................... -- -- 63,803/62,385 $ /
R. G. MacDonald................... -- -- 34,028/22,686 /
Robert A. Rankin.................. -- -- 12,832/21,197 /
Roger L. Keller................... -- -- 5,671/28,357 /
Charles H. Becker................. -- -- 8,507/25,521 /
- ------------------------
(1) Assuming an initial public offering price of $ per share as of
December 31, 1996, 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 $.529 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 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
48
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 $.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 $.53 per share.
SHARE INCENTIVE PLAN
Under 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 525,000 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.
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 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
49
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 PLANS
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. There may be employer matching
contributions made under this 401(k) which vest according to a specified
schedule, within six years of service. 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
The directors of the Company do not receive annual fees or fees for
attending meetings of the Board of Directors or committees thereof. However,
they are reimbursed for out-of-pocket expenses.
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.
50
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following chart provides information as to the beneficial ownership of
Common Stock as of December 31, 1996, as adjusted to give effect to the
Recapitalization (See "Description of Capital Stock--The Recapitalization"), by:
(i) each director and Named Executive Officer; (ii) directors and executive
officers of the Company as a group; and (iii) each person known to the Company
to be the beneficial owner of 5% or more of Common Stock.
PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT BEFORE OFFERING
- ------------------------------------------------------------------- ---------------- -----------------------
Nassau Capital Partners L.P........................................ 741,645(1) 29.3%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer................................................ 741,645(2) 29.3%
22 Chambers Street
Princeton, NJ 08542
DSV Partners, IV................................................... 495,190 19.6%
1920 Main St.
Suite 820
Irvine, CA 92614
James R. Bergman................................................... 495,190(3) 19.6%
1920 Main St.
Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P.................................. 495,188 19.6%
20600 Chagrin Blvd.,
Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio..................................................... 495,188(4) 19.6%
20600 Chagrin Blvd.
Suite 1150
Cleveland, OH 44122
Electra Investment Trust P.L.C..................................... 456,531(5) 18.0%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane.................................................... 130,506(6) 5.0%
155 Montrose West Avenue
Suite 210
Copley, Ohio 44321
R. G. MacDonald.................................................... 42,536(7) 1.7%
2201 Rosecrans Avenue
El Segundo, California 90245
Robert A. Rankin................................................... 17,085(8) *
2201 Rosecrans Avenue
El Segundo, California 90245
Charles H. Becker.................................................. 14,179(9) *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller.................................................... 7,373(10) *
2201 Rosecrans Avenue
El Segundo, California 90245
All directors and executive officers as a group (eight persons).... 1,943,702(11) 73.1%
PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER AFTER OFFERING
- ------------------------------------------------------------------- -----------------------
Nassau Capital Partners L.P........................................
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer................................................
22 Chambers Street
Princeton, NJ 08542
DSV Partners, IV...................................................
1920 Main St.
Suite 820
Irvine, CA 92614
James R. Bergman...................................................
1920 Main St.
Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P..................................
20600 Chagrin Blvd.,
Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio.....................................................
20600 Chagrin Blvd.
Suite 1150
Cleveland, OH 44122
Electra Investment Trust P.L.C.....................................
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane....................................................
155 Montrose West Avenue
Suite 210
Copley, Ohio 44321
R. G. MacDonald....................................................
2201 Rosecrans Avenue
El Segundo, California 90245
Robert A. Rankin...................................................
2201 Rosecrans Avenue
El Segundo, California 90245
Charles H. Becker..................................................
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller....................................................
2201 Rosecrans Avenue
El Segundo, California 90245
All directors and executive officers as a group (eight persons)....
- --------------------------
* Less than 1%
(1) Includes 4,638 shares held by NAS Partners I L.L.C., an affiliate of Nassau
Capital Partners, L.P. Excludes the shares underlying the Nassau Warrants.
(2) Represents 737,007 shares held by Nassau Capital Partners, L.P. and 4,638
shares held by NAS Partners I L.L.C., affiliates of Mr. Sweemer.
(3) Represents shares held by DSV of which Mr. Bergman is a general partner.
(4) Represents shares held by Brantley of which Mr. Cascio is a general partner
of the general partner.
(5) Includes 46,636 shares held by Electra Associates, Inc., an affiliate of
Electra Investment Trust P.L.C.
(6) Includes 63,803 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, 1996.
(7) Includes 34,028 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, 1996.
(8) Includes 12,832 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, 1996.
(9) Includes 8,507 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, 1996.
(10) Includes 7,373 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, 1996.
(11) Includes 126,543 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, 1996.
51
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENT
Pursuant to the Shareholders Agreement dated (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).
Following completion of the Offering, Nassau, Brantley and DSV will beneficially
own %, %, and %, respectively, of the issued and outstanding Common Stock.
The ownership percentage for Nassau includes the 152,915 shares which may be
acquired upon exercise of the Nassau Warrants. 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.
ELECTRA SECURITIES PURCHASE AGREEMENT
Pursuant to a Securities Purchase Agreement dated November 2, 1994 (the
"Electra Securities Purchase Agreement") between the Company and Electra, the
Company issued the Senior Subordinated Notes in the principal amount of $7.0
million and warrants to purchase 266,990 shares of Common Stock for $.035 per
share. Such warrants expire in December 31, 2004 and contain certain rights to
require the Company to repurchase them. Such warrants will be exercised in
connection with the Recapitalization. See "Description of Capital Stock--The
Recapitalization." In addition, the Electra Securities Purchase Agreement
provided that Electra was to receive an advisory fee of $72,000 per annum. In
February 1996 the Electra Securities Purchase Agreement was amended to, among
other things, waive certain covenants relating to the Senior Subordinated Notes,
amend certain of Electra's rights to require the Company to repurchase the
warrants held by it and increase Electra's advisory fee to $25,000 each calendar
quarter.
SALES OF SECURITIES
Pursuant to a Securities Purchase Agreement and related Warrant Agreement
dated September 18, 1996 among the Company, Nassau and Electra, the Company
issued to Nassau and Electra the Convertible Notes and warrants to purchase an
aggregate of 49,079 shares of Common Stock (the "Note Warrants") for an
aggregate purchase price of $3.0 million. The Company also sold to Nassau and
Electra an aggregate of 750,000 shares of Series E Preferred Stock and issued
warrants (the "Preferred Stock Warrants") to purchase an additional 49,079
shares of Common Stock for a purchase price of $3.0 million. Each share of
Series E Preferred Stock has a liquidation preference of $4.00, provides for
annual dividends of $.40 and is convertible into approximately .28357 shares of
Common Stock. The Note Warrants and Preferred Stock Warrants are exercisable at
$.035 per share and contain certain rights to require the Company to repurchase
such warrants. All accrued but unpaid dividends will be cancelled and eliminated
if the Offering is consummated by May 5, 1997. The Note Warrants and Preferred
Stock Warrants expire on December 31, 2006. The Series E Preferred Stock will be
exchanged for 212,678 shares of Common Stock in the Recapitalization. The
Preferred Stock Warrants will be exercised in connection with the
Recapitalization and the Note Warrants will be terminated in accordance with
their terms. See "Description of Capital Stock--The Recapitalization."
Pursuant to a Securities Purchase Agreement and related Warrant Agreements
dated February 20, 1996 between the Company and Nassau, the Company issued to
Nassau an aggregate of 2,000,000 shares of Series D Preferred Stock and the
Nassau Warrants for an aggregate purchase price of $6.5 million. Each share of
Series D Preferred Stock has a liquidation preference of $3.25, provides for
annual dividends of $.325 and is convertible into approximately .28357 shares of
Common Stock. All accrued but unpaid dividends will be cancelled and eliminated
if the Offering is consummated by May 5,
52
1997. The Series D Preferred Stock will be exchanged for 567,140 shares of
Common Stock in the Recapitalization. See "Description of Capital Stock--The
Recapitalization." See "Description of Capital Stock--Warrants" for a
description of the Nassau Warrants.
Pursuant to a Securities Purchase Agreement dated February 9, 1996 among the
Company, R.G. MacDonald, Charles H. Becker, Robert A. Rankin and another officer
of the Company, the Company sold an aggregate of 75,000 shares of Series C
Preferred Stock for a purchase price of $1.50 per share. Each share of Series C
Preferred Stock has a liquidation preference of $1.50, provides for annual
dividends of $.15 and is convertible into approximately .28357 shares of Common
Stock. All accrued but unpaid dividends will be cancelled and eliminated if the
Offering is consummated by May 5, 1997. Such Series C Preferred Stock will be
exchanged for 21,268 shares of Common Stock in the Recapitalization. See
"Description of Capital Stock--The Recapitalization."
Pursuant to a Share Purchase Agreement dated November 2, 1994 among the
Company and Electra, DSV, Brantley and certain other parties the Company issued
an aggregate of 271,471 shares of Series C Preferred Stock for $1.50 per share.
The Series C Preferred Stock will be exchanged for 76,981 shares of Common Stock
in the Recapitalization. See "Description of Capital Stock--The
Recapitalization."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35 million shares of
Common Stock, par value $.01 per share, and 10 million shares of preferred
stock, par value $.01 per share.
THE RECAPITALIZATION
On January , 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. Grants and options were exchanged
for substantially similar securities of the Delaware corporation.
As a condition to the consummation of the Offering, the Company's existing
shareholders have approved a recapitalization (the "Recapitalization") of the
Company which includes: (i) a change in the authorized capital of the Company to
consist of 35,000,000 shares of Common Stock and 10,000,000 shares of
undesignated Preferred Stock (the "Undesignated Preferred Stock"); (ii) the
conversion of 6,847,705 shares of Series A, B, C, D, and E Convertible Preferred
Stock (the "Existing Preferred Stock") into 1,941,804 shares of Common Stock;
(iii) the exercise of all warrants (the cancellation of which is not triggered
by the Offering), other than the Nassau Warrants, for 433,570 shares of Common
Stock; and (iv) a 3.53-for-1 reverse stock split. In connection with the
Recapitalization, certain of the Company's existing shareholders and the holders
of the warrants (other than Nassau) have agreed, effective immediately prior to
the effectiveness of the Offering, to waive a number of rights under the
agreements by which such shareholders and holders of the warrants acquired such
rights from the Company. The effect of such waivers would be to release the
Company from certain dividend payment requirements, voting requirements and
certain other rights granted to such shareholders and such holders of the
warrants pursuant to their respective agreements with the Company, as well as
eliminating certain negative and affirmative covenants contained therein. In
connection with the Recapitalization, the Company entered into the Registration
Rights Agreement with such shareholders and warrant holders providing such
shareholders and warrant holders with certain demand and piggyback registration
rights with respect to the Common Stock. See "Description of Capital
Stock--Registration Rights."
COMMON STOCK
As of December 31, 1996, giving effect to the Recapitalization, there were
2,460,967 shares of Common Stock outstanding and held of record by 15
stockholders. An additional 578,836 shares were reserved for issuance upon
exercise of all outstanding options and warrants. Each holder of Common
53
Stock is entitled to one vote for each share held and does not have cumulative
voting rights. The holders of the Nassau Warrants are entitled to vote together
with the holders of Common Stock. See "Description of Capital Stock--Warrants."
The holders of the Common Stock and the Nassau Warrants are entitled to
elect all of the directors, subject to the rights of certain stockholders and
lenders under the Shareholders Agreement to nominate candidates and subject to
relevant rights (if any) of the holders of any outstanding Undesignated
Preferred Stock. The Common Stock is not convertible into any other security.
See "Certain Transactions--Shareholders Agreement."
Subject to preferences that may be applicable to any then outstanding
Preferred Stock and 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 million shares of Undesignated
Preferred Stock, none of which was issued as of December 31, 1996. 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.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement certain stockholders may,
following the expiration of a 180-day lock-up period, require the Company to use
its best efforts to register such holders' Company securities (including the
Common Stock and the Nassau Warrants) under the Securities Act, in each case
pursuant to the procedures and subject to restrictions specified in the
Registration Rights Agreement.
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 12 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, following the
expiration of the 180-day lock-up period, 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,
54
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.
WARRANTS
Pursuant to Warrant Agreements dated February 20, 1996 between the Company
and Nassau the Company issued the Nassau Warrants. The Nassau Warrants entitle
the holders to purchase for $.035 per share (i) up to 55,605 shares of Common
Stock commencing December 31, 1997, (ii) an additional 55,605 shares of Common
Stock commencing December 31, 1998, and (iii) an additional 83,408 shares of
Common Stock commencing December 31, 1999; provided, however, that if the
Company consummates a registered underwritten public offering pursuant to which
the fully diluted common equity of the Company has a value in excess of certain
specified amounts (the "Minimum Equity Targets"), the Nassau Warrants which are
to become exercisable after the consummation of such public offering will
terminate. The Minimum Equity Target for offerings consummated prior to December
31, 1997 is $ . The Minimum Equity Target for offerings consummated on or
after December 31, 1997 and prior to December 31, 1998 is $ . The Minimum
Equity Target for offerings consummated on or after December 31, 1998 is
$ . There can be no assurance that the Company will be able to consummate
a registered underwritten public offering meeting the Minimum Equity Targets.
The Nassau Warrants expire on December 31, 2003. Holders of the Nassau Warrants
are entitled to vote with the holders of Common Stock the number of votes equal
to the number of shares of Common Stock which may be acquired upon exercise of
the Nassau Warrants. The Nassau Warrants further provide that commencing on
December 31, 2000 the holders may require the Company to repurchase the Nassau
Warrants for a per share amount equal to (i) the greater of (a) the fair market
value of the common equity of the Company on a fully diluted basis, (b) the net
book value of the Company, and (c) an amount equal to 6.0 times the Company's
EBITDA, less outstanding indebtedness of the Company, and plus cash and cash
equivalents of the Company, in each case divided by (ii) the number of shares of
Common Stock then outstanding on a fully diluted basis. If the Company does not
have a legal source of funds to repurchase the Nassau Warrants the Company would
be required to deliver a promissory note for the purchase price. Such promissory
note will bear interest at a rate of 14.0% per annum. If the Company were to be
required to repurchase the Nassau Warrants the Company is unable to predict the
effect of such a repurchase on its liquidity. Also, there can be no assurance
that the terms of its existing debt instruments would permit the Company to
repurchase the Nassau Warrants or issue any promissory note therefor. See "Risk
Factors--Repurchase of Warrants."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is State Street Bank
and Trust Company.
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.
55
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 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 stockholders 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. 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).
56
In general, the Company is prohibited from engaging in business combinations
with an interested 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, 1996 options to purchase an aggregate of 214,575 shares of Common
Stock were unvested and subject to vesting upon a Change of Control, including
options to purchase 62,385, 22,686, 21,197, 28,357 and 25,521 shares of Common
Stock, by Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively.
57
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of Common Stock to be outstanding after the
Offering, 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). 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 180-day lock-up
period following the Offering pursuant to agreements with the Underwriters, (i)
all 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 180-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 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).
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market will develop, or if
developed, will be sustained after the completion of the Offering. 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.
58
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters") have severally agreed to purchase and the
Company has agreed to sell to them, severally, the aggregate number of shares of
Common Stock set forth opposite their respective names.
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ -----------
Schroder Wertheim & Co. Incorporated........................
Dean Witter Reynolds Inc....................................
-----------
Total...................................................
-----------
-----------
The Underwriting Agreement provides that the several Underwriters are
obligated, subject to the approval of certain legal matters by their counsel and
certain other conditions, to purchase all the shares of Common Stock offered
hereby (other than those covered by the Underwriters' over-allotment option
described below), if any are purchased. Schroder Wertheim & Co. Incorporated and
Dean Witter Reynolds Inc., as representatives of the several Underwriters (the
"Representatives"), have advised the Company that the Underwriters propose to
offer the shares to the public at the initial public offering price set forth on
the cover page of this Prospectus; that the Underwriters propose initially to
allow a concession not in excess of $ per share to certain dealers,
including the Underwriters; that the Underwriters and such dealers may initially
allow a discount of not in excess of $ per share to other dealers;
and that the initial public offering price and the concession and discount to
dealers may be changed by the Representatives after the initial public offering.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of the Underwriting Agreement, to
purchase up to an additional shares of Common Stock, at the initial
public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise the option
only to cover over-allotments, if any, in the sale of shares of Common Stock in
the Offering. To the extent that the Underwriters exercise this option, each
Underwriter shall be committed, subject to certain conditions, to purchase a
number of additional shares proportionate to such Underwriter's initial
commitment.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, certain management stockholders, directors and certain other
stockholders have agreed not to offer to sell, sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock, subject to certain
exceptions, for a period of 180 days after the date of this Prospectus without
the prior written consent of Schroder Wertheim & Co. Incorporated.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in such negotiations are the Company's results of
operations and financial condition, the prospects for the Company and for the
59
industry in which the Company operates, the Company's capital structure and
prevailing conditions in the securities market.
The Representatives have informed the Company that the Underwriters do not
intend to confirm shares to accounts over which they exercise discretionary
authority in excess of 5% of the total number of shares offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered by this Prospectus is being passed
on for the Company by Spolin & Silverman, Santa Monica, California. Certain
legal matters will be passed upon for the Underwriters by Milbank, Tweed, Hadley
& McCloy, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company and the financial
statements of Aerospace Display Systems as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 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.
ADDITIONAL INFORMATION
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited interim financial information for the
first three quarters of each year.
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 in its entirety 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
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 Web site (http:// www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
60
INDEX TO FINANCIAL STATEMENTS
PAGE
----
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996 (Unaudited)........................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995 and
1996 (Unaudited)...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1996 (Unaudited)........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995 and
1996 (Unaudited)...................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
AEROSPACE DISPLAY SYSTEMS (A DIVISION OF ALLARD INDUSTRIES, INC.)
Report of Independent Accountants....................................... F-47
Balance Sheets as of December 31, 1994 and 1995 and September 18, 1996
(Unaudited)........................................................... F-48
Statements of Income for the years ended December 31, 1993, 1994 and
1995, the nine months ended September 30, 1995 (Unaudited) and the
period from January 1 to September 18, 1996 (Unaudited)............... F-49
Statements of Changes in Owner's Net Investment for the years ended
December 31, 1993, 1994 and 1995 and the period from January 1 to
September 18, 1996 (Unaudited)........................................ F-50
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995, the nine months ended September 30, 1995 (Unaudited), and the
period from January 1 to September 18, 1996 (Unaudited)............... F-51
Notes to Financial Statements........................................... F-52
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
The reverse stock split, a part of the Recapitalization described in Note 1
to the consolidated financial statements, has not been consummated at January
16, 1997. When it has been consummated, we will be in a position to furnish the
following report:
"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, 1994
and 1995 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995,
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.
As discussed in Note 1, during 1993, the Company changed its
method of accounting for income taxes."
PRICE WATERHOUSE LLP
Cleveland, Ohio
April 9, 1996
F-2
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1996
DECEMBER 31, -----------------------------
-------------------- PRO FORMA FOR
1994 1995 HISTORICAL RECAPITALIZATION
--------- --------- ----------- ----------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 236 $ 305 $ 81 $ 81
Accounts receivable, net.................................. 10,810 8,792 10,750 10,750
Inventories............................................... 11,066 14,116 15,801 15,801
Prepaid expenses and other current assets................. 207 362 602 602
--------- --------- ----------- --------
Total current assets.................................... 22,319 23,575 27,234 27,234
Property and equipment, net................................. 8,349 7,387 9,092 9,092
Other assets, principally intangibles, net.................. 7,017 5,367 17,902 17,902
--------- --------- ----------- --------
Total assets............................................ $ 37,685 $ 36,329 $ 54,228 $ 54,228
--------- --------- ----------- --------
--------- --------- ----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Short-term borrowings..................................... $ 835 $ 911 $ 530 $ 530
Current portion of long-term obligations to unaffiliated
lenders................................................. 1,608 1,612 2,891 2,891
Convertible subordinated notes payable to related
parties................................................. -- -- 2,882 2,882
Accounts payable.......................................... 5,939 5,079 5,118 5,118
Accrued expenses.......................................... 2,313 3,046 4,105 4,105
Income taxes payable...................................... 165 344 517 517
--------- --------- ----------- --------
Total current liabilities............................... 10,860 10,992 16,043 16,043
--------- --------- ----------- --------
Long-term liabilities
Long-term obligations
Unaffiliated lenders.................................... 15,793 16,316 21,264 21,264
Related parties......................................... 5,638 5,833 5,979 5,979
Deferred income taxes..................................... 2,175 3,110 3,109 3,109
Minority interests........................................ 124 142 43 43
--------- --------- ----------- --------
Total long-term liabilities............................. 23,730 25,401 30,395 30,395
--------- --------- ----------- --------
Commitments and contingencies (Note 17)
Mandatorily redeemable common stock warrants................ 2,329 1,633 2,054 1,020
--------- --------- ----------- --------
Stockholders' equity (deficit)
Cumulative convertible preferred stock, no par value;
4,804,018 shares authorized as of December 31, 1994 and
1995 and 8,304,018 shares as of September 30, 1996;
4,022,705 shares issued and outstanding as of December
31, 1994 and 1995 and 6,847,705 shares as of September
30, 1996 (none on a pro forma basis).................... 5,549 5,549 13,850 --
Common stock, no par value; 2,268,560 shares authorized as
of December 31, 1994 and 1995 and 4,253,550 shares as of
September 30, 1996; 85,593 shares issued and outstanding
as of December 31, 1994 and 1995 and September 30, 1996
(none on a pro forma basis)............................. 58 58 62 --
Common stock, $.01 par value; 4,253,550 shares authorized
as of January , 1997; 2,460,967 shares issued and
outstanding............................................. -- -- -- 25
Additional paid-in capital................................ -- -- -- 14,921
Accumulated deficit....................................... (5,057) (7,807) (8,406) (8,406)
Foreign currency translation adjustment................... 216 503 230 230
--------- --------- ----------- --------
Total stockholders' equity (deficit).................... 766 (1,697) 5,736 6,770
--------- --------- ----------- --------
Total liabilities and stockholders' equity
(deficit)........................................... $ 37,685 $ 36,329 $ 54,228 $ 54,228
--------- --------- ----------- --------
--------- --------- ----------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Revenues............................................... $ 48,197 $ 47,092 $ 55,839 $ 42,274 $ 43,059
Cost of sales.......................................... 36,258 36,407 43,463 32,378 33,277
--------- --------- --------- --------- ---------
Gross profit....................................... 11,939 10,685 12,376 9,896 9,782
--------- --------- --------- --------- ---------
Operating expenses
Selling, general and administrative expenses......... 7,953 7,716 9,426 6,764 7,229
Amortization of intangible assets.................... 1,210 1,209 1,115 902 538
Gain on litigation settlement, net................... -- -- -- -- (157)
--------- --------- --------- --------- ---------
Total operating expenses........................... 9,163 8,925 10,541 7,666 7,610
--------- --------- --------- --------- ---------
Income from operations................................. 2,776 1,760 1,835 2,230 2,172
Other expenses (income)
Interest expense
Unaffiliated lenders............................... 2,805 2,966 2,822 2,107 2,024
Related parties.................................... 135 278 999 749 797
Other (income) expenses.............................. (161) 324 297 250 33
Minority interests................................... 13 8 85 54 150
--------- --------- --------- --------- ---------
Loss before provision for income taxes, cumulative
effect of change in accounting principle and
extraordinary item................................... (16) (1,816) (2,368) (930) (832)
Provision for income taxes............................. (620) (613) (1,078) (642) (265)
--------- --------- --------- --------- ---------
Loss before cumulative effect of change in accounting
principle and extraordinary item..................... (636) (2,429) (3,446) (1,572) (1,097)
Cumulative effect on prior years of change in
accounting for income taxes.......................... (121) -- -- -- --
Extraordinary loss from debt refinancing............... -- (264) -- -- --
--------- --------- --------- --------- ---------
Net loss............................................... (757) (2,693) (3,446) (1,572) (1,097)
Cumulative convertible preferred stock dividends....... (108) (387) (557) (417) (844)
--------- --------- --------- --------- ---------
Net loss applicable to common stockholders............. $ (865) $ (3,080) $ (4,003) $ (1,989) $ (1,941)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per common share (Unaudited)........ $ (1.47) $ (.71)
--------- ---------
--------- ---------
Pro forma weighted average number of common shares
outstanding (Unaudited).............................. 2,728 2,728
--------- ---------
--------- ---------
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 SHARE DATA)
CUMULATIVE COMMON STOCK FOREIGN
CONVERTIBLE ------------------------ CURRENCY
PREFERRED NUMBER OF ACCUMULATED TRANSLATION
STOCK SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
----------- ----------- ----------- ------------- ------------- ---------
Balance, December 31, 1992........................ $ -- 83,324 $ 57 $ (1,656) $ (80) $ (1,679)
Net loss.......................................... -- -- -- (757) -- (757)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- (107) -- (107)
Translation adjustment............................ -- -- -- -- (75) (75)
----------- ----------- --- ------------- ------ ---------
Balance, December 31, 1993........................ -- 83,324 57 (2,520) (155) (2,618)
Reclassification of mandatorily redeemable
cumulative convertible preferred stock.......... 5,168 -- -- -- -- 5,168
Net loss.......................................... -- -- -- (2,693) -- (2,693)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- 189 -- 189
Issuance of cumulative convertible preferred
stock, net...................................... 381 -- -- -- -- 381
Mandatorily redeemable common stock warrants
issued pursuant to anti-dilution provisions..... -- -- -- (33) -- (33)
Stock option exercised............................ -- 2,269 1 -- -- 1
Translation adjustment............................ -- -- -- -- 371 371
----------- ----------- --- ------------- ------ ---------
Balance, December 31, 1994........................ 5,549 85,593 58 (5,057) 216 766
Net loss.......................................... -- -- -- (3,446) -- (3,446)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- 696 -- 696
Translation adjustment............................ -- -- -- -- 287 287
----------- ----------- --- ------------- ------ ---------
Balance, December 31, 1995........................ 5,549 85,593 58 (7,807) 503 (1,697)
Net loss.......................................... -- -- -- (1,097) -- (1,097)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- 505 -- 505
Issuance of cumulative convertible preferred
stock, net...................................... 8,301 -- -- -- -- 8,301
Mandatorily redeemable common stock warrants
issued pursuant to anti-dilution provisions..... -- -- -- (7) -- (7)
Stock option compensation expense................. -- -- 4 -- -- 4
Translation adjustment............................ -- -- -- -- (273) (273)
----------- ----------- --- ------------- ------ ---------
Balance, September 30, 1996 (Unaudited)........... $ 13,850 85,593 $ 62 $ (8,406) $ 230 $ 5,736
----------- ----------- --- ------------- ------ ---------
----------- ----------- --- ------------- ------ ---------
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)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Cash flows from operating activities
Net loss............................................................... $ (757) $ (2,693) $ (3,446) $ (1,572) $ (1,097)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities
Depreciation and amortization........................................ 3,553 3,868 4,244 3,241 2,806
Amortization of debt discount...................................... 89 121 298 224 259
Deferred income taxes.............................................. 540 521 867 571 33
Minority interests in earnings of subsidiaries..................... 13 8 85 54 150
Cumulative effect of change in accounting for income taxes......... 121 -- -- -- --
Extraordinary loss from debt refinancing........................... -- 264 -- -- --
Gain on sale of equipment.......................................... (109) (37) (15) (20) --
Changes in assets and liabilities
Accounts receivable.............................................. (2,270) (1,549) 2,256 1,844 (949)
Inventories...................................................... (539) (1,381) (2,962) (2,474) 1,149
Prepaid expenses and other assets................................ 238 390 274 (296) 207
Accounts payable................................................. 908 (973) (1,004) (205) (536)
Accrued expenses................................................. 667 (920) 682 702 880
Income taxes payable............................................. 20 59 178 43 184
--------- --------- --------- --------- ---------
Net cash provided by (used for) operating activities........... 2,474 (2,322) 1,457 2,112 3,086
--------- --------- --------- --------- ---------
Cash flows from investing activities
Purchase of net assets of Aerospace Display Systems.................... -- -- -- -- (11,401)
Purchase of minority stockholder's interest............................ -- -- -- -- (5,207)
Capital expenditures................................................... (666) (1,016) (1,203) (1,133) (748)
Other, net............................................................. 37 23 (259) 35 (29)
--------- --------- --------- --------- ---------
Net cash used for investing activities......................... (629) (993) (1,462) (1,098) (17,385)
--------- --------- --------- --------- ---------
Cash flows from financing activities
Financing of acquisitions
Proceeds from issuance of cumulative convertible preferred stock,
net................................................................ -- -- -- -- 8,806
Revolving line of credit borrowings.................................. -- -- -- -- 5,000
Convertible subordinated note borrowings from related parties........ -- -- -- -- 3,000
Senior and senior subordinated term loan borrowings (including amounts
allocated to mandatorily redeemable common stock warrants)........... 750 23,000 -- -- --
Senior, senior subordinated and related party debt repaid.............. -- (19,769) -- -- --
Net borrowings (payments) under revolving line of credit agreements.... (880) 3,167 1,972 (472) (481)
Principal payments on capitalized lease and other long-term
obligations.......................................................... (1,389) (1,024) (1,665) (634) (1,416)
Proceeds from issuance of cumulative convertible preferred stock,
net.................................................................. -- 381 -- -- 112
Payment of deferred financing costs.................................... (119) (2,670) -- -- (648)
Other, net............................................................. 180 (57) (266) (53) (249)
--------- --------- --------- --------- ---------
Net cash (used for) provided by financing activities........... (1,458) 3,028 41 (1,159) 14,124
--------- --------- --------- --------- ---------
Effect of foreign currency translation on cash........................... (33) 82 33 26 (49)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... 354 (205) 69 (119) (224)
Cash and cash equivalents at beginning of period......................... 87 441 236 236 305
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............................... $ 441 $ 236 $ 305 $ 117 $ 81
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company") is a
manufacturer of avionics components and a provider of avionics systems
integration services in certain niche markets of the commercial aircraft
industry.
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.
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 on the consolidated balance
sheets, 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.
The consolidated financial information as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996 is unaudited. In the opinion of
the Company, the unaudited financial information is presented on a basis
consistent with the audited financial statements and contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for such interim periods. The results of operations for interim
periods are not necessarily indicative of results of operations for the full
year.
RECAPITALIZATION
In January 1997, the holders of certain securities agreed, subject to board
of director and stockholder approval, to a plan for the recapitalization of the
Company (the "Recapitalization"). The Recapitalization is a condition to the
consummation of the anticipated initial public offering (the "Offering") and
would be effective concurrent therewith.
The Recapitalization provides for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock into
1,941,804 shares of common stock; (ii) the exercise and conversion of all 52,784
and 9,355 issued and outstanding Series B preferred stock warrants and common
stock warrants, respectively, into a total of 24,323 shares of common stock;
(iii) the exercise of 409,247 mandatorily redeemable common stock warrants (the
"Redeemable Warrants") for the purchase of common stock; and (iv) 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.
Redeemable Warrants exercisable into 403,586 common shares would remain
after the Recapitalization. Of this amount, 138,076 Redeemable Warrants would be
cancelled upon the consummation of the Offering and repayment of the Company's
senior subordinated debt and convertible notes in accordance with the terms of
the respective warrant agreements.
The Company intends to reorganize as a Delaware corporation. In conjunction
with the reorganization, the Company will establish a $.01 par value for its
common stock.
F-7
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, as determined under
the first-in, first-out ("FIFO") method. 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. 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
cost of improvements are capitalized. Upon retirement or disposal, the cost and
accumulated depreciation of property and equipment are reduced and any gain or
loss is recorded in income or expense.
OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 26
to 30 years. The covenants not to compete are amortized on a straight-line basis
over five 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.
The Company periodically evaluates goodwill to assess recoverability based
upon expectations of future non-discounted operating cash flows related to the
acquired businesses. Based upon the most recent analysis, the Company believes
that no impairment of goodwill existed at December 31, 1995 or September 30,
1996.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires the Company to review 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. SFAS 121
also requires that long-lived assets and certain intangible assets to be
disposed of be recorded at the lower of carrying value or fair value less
disposal costs.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995, and must be adopted on a prospective basis.
The Company adopted SFAS 121 prospectively in the first quarter of 1996, the
adoption of which had no impact on the consolidated financial statements.
F-8
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
The premium paid for an interest rate cap agreement is amortized to interest
expense using the interest method of amortization over the term of the cap
assurance period. The unamortized premium is classified as other current and
long-term assets in the consolidated financial statements. Amounts receivable
under the cap agreement are accrued as a reduction of interest expense.
Market value gains and losses on forward foreign exchange contracts are
recognized in the consolidated statements of operations and aggregated a net
loss of $161,000 for the nine months ended September 30, 1996 (none in prior
periods).
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
the liability method specified in SFAS 109, 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 liability for deferred taxes.
The deferred method used in years prior to 1993 required the Company to
provide for deferred tax expense based on certain items of income and expense
which were reported in different years in the consolidated financial statements
and tax returns as measured by the tax rate in effect for the year the
difference originated.
The cumulative effect on prior years of adopting SFAS 109 in 1993 was to
decrease net income by $121,000, which is reported in the consolidated
statements of operations as the effect of the change in accounting for income
taxes.
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 $43,000, $(361,000)
and $(314,000) for the years ended December 31, 1993, 1994 and 1995,
respectively.
STOCK OPTION PLAN
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123"). SFAS 123 establishes a "fair value" method of
accounting for the value of grants under stock based compensation plans. As
permitted under SFAS 123, the Company will elect to continue to measure
compensation expense
F-9
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related to the employee stock option plan utilizing the intrinsic value method
as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
However, beginning in 1996, the Company will present in the notes to its
consolidated financial statements the pro forma effect on its results of
operations as if 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
$3,938,000, $81,000 and $710,000 at December 31, 1994 and 1995 and September 30,
1996, respectively. Unbilled accounts receivable are expected to be billed
during the succeeding twelve month period.
PRO FORMA LOSS PER COMMON SHARE (UNAUDITED)
The Company's historical capital structure is not indicative of its
prospective structure due to the Recapitalization that will occur concurrent
with the closing of the Offering. Accordingly, historical loss per common share
is not considered meaningful and has not been presented herein.
Pro forma loss per common share reflects the Recapitalization and is
computed using the weighted average number of common shares assumed to have been
outstanding during the periods. The dilutive effect of common equivalent shares,
other than for certain stock options granted in 1996 and Redeemable Warrants and
preferred stock sold in 1996, has not been included because their inclusion
would have decreased the loss per share. Shares issuable for options granted in
1996 and Redeemable Warrants and preferred stock sold in 1996 at prices less
than the anticipated initial public offering price have been included for all
periods presented using the treasury stock method. In addition, the weighted
average number of shares assumes that Redeemable Warrants and preferred stock
which will be converted into common stock pursuant to the Recapitalization had
been converted and thus outstanding since the dates of issuance.
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 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities ("SFAS 125"). SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and
F-10
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
extinguishments of liabilities. The Company does not expect adoption of SFAS 125
will have a material effect on the consolidated financial statements.
NOTE 2--ACQUISITIONS
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 (Note 10). The cash portion of the purchase price
was funded with the proceeds from the sale of Series D preferred stock and
Redeemable Warrants (Notes 14 and 15).
The acquisition was accounted for as a purchase and the $5,333,000
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 (Note 6).
The consolidated results of operations for the nine months ended September
30, 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. Compensation was the greater of $130,000 per year or 25% of the
subsidiary's earnings before interest, taxes and certain expenses. Compensation
was payable on or before April 15th of each year, although the Minority
Stockholder received a bi-monthly draw amounting to $185,000 per year, plus
additional periodic payments, which were offset against the compensation
payable. The employment agreement was cancelled as of February 20, 1996. For the
years ended December 31, 1993, 1994 and 1995, the Minority Stockholder earned
compensation of $669,000, $619,000 and $851,000, respectively. Accrued
compensation payable of $652,000 as of December 31, 1995 was paid to the
Minority Stockholder on February 20, 1996. No accrued compensation was payable
as of December 31, 1994.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased 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 and an
estimated $292,000 of additional consideration payable pursuant to working
capital adjustment provisions contained in the purchase agreement. ADS develops
and manufactures dichroic liquid crystal displays and modules for commercial and
military avionics systems.
F-11
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 2--ACQUISITIONS (CONTINUED)
The acquisition was funded with the proceeds from the sale of Series E
preferred stock, convertible subordinated notes and Redeemable Warrants (Notes
8, 14 and 15), borrowings under the Company's revolving line of credit and a
$2,000,000 non-interest bearing obligation payable to certain Allard
stockholders (Note 10).
The acquisition was accounted for as a purchase and the $7,691,000
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 (Note 6).
The consolidated results of operations for the nine months ended September
30, 1996 include the operating results of ADS subsequent to September 18, 1996.
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division (collectively, "Elsinore") of
Elsinore, L.P.. Elsinore provides engineering services to the commercial
aircraft industry. The total purchase price was $2,550,000, including $300,000
of estimated acquisition related costs. The purchase price consisted of
$1,300,000 paid in cash at closing and a $1,250,000 15% promissory note payable
to the sellers, due on the earlier of February 15, 1997 or three days following
the closing of the Offering. The purchase agreement provides for an adjustment
of the purchase price should the amount of working capital decline as of the
closing date. The purchase price will be allocated to the assets acquired and
liabilities assumed using estimated fair values and it is anticipated that
approximately $1,800,000 will be assigned to goodwill and other intangibles,
subject to final determination of the purchase price.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS
Unaudited pro forma consolidated results, assuming the Minority Interest and
ADS acquisitions had been consummated on January 1, 1995, are as follows
(amounts in thousands):
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
-------------- --------- ---------
Revenues.............................................. $ 65,791 $ 49,923 $ 50,765
Net loss.............................................. (3,225) (1,403) (526)
Net loss applicable to common stockholders............ (3,782) (1,820) (1,370)
The above information reflects adjustments for depreciation, amortization,
minority interest and interest expense based on the new cost basis and debt
structure of the Company. The pro forma effect of the Elsinore Acquisition is
not material and, accordingly, is not reflected in the above information. In
addition, pro forma per share information is not considered meaningful and has
not been presented above due to the Recapitalization that will occur concurrent
with the closing of the Offering.
F-12
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 3--ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of
$243,000, $259,000 and $362,000 at December 31, 1994 and 1995 and September 30,
1996, 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 aircraft industry. Generally, the Company does not require collateral
or other security to support accounts receivable subject to credit risk. Under
certain circumstances, deposits or cash on delivery terms are required. The
Company maintains reserves for potential credit losses and generally, such
losses have been within management's expectations.
SIGNIFICANT CUSTOMERS
Two customers each accounted for more than 10% of the Company's consolidated
revenues, as follows:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Customer A................................... 12.9% 11.9% 8.9% 9.0% 13.9%
Customer B................................... 11.1% 13.7% 25.4% 30.6% 10.5%
--- --- --- --- ---
Total...................................... 24.0% 25.6% 34.3% 39.6% 24.4%
--- --- --- --- ---
--- --- --- --- ---
Complete loss of either customer could have a significant adverse impact on
the results of operations expected in future periods. The Company anticipates
that sales to Customer B will further decrease subsequent to September 30, 1996.
However, the Company believes this decrease will be offset by sales to other
customers.
NOTE 4--INVENTORIES
Inventories are comprised of the following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
Raw material.......................................... $ 6,460 $ 7,857 $ 8,703
Work-in process....................................... 1,253 1,732 2,616
Finished goods........................................ 3,353 4,527 4,482
--------- --------- --------------
Total inventories................................... $ 11,066 $ 14,116 $ 15,801
--------- --------- --------------
--------- --------- --------------
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $1,927,000 and $175,000 at December 31, 1995
and September 30, 1996, respectively (none in 1994). At December 31, 1995, costs
incurred included $1,457,000 pertaining to a contract which was partially
terminated and settled. The settlement was received in March 1996 with no
resulting loss.
F-13
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
Machinery and equipment............................... $ 10,761 $ 11,634 $ 13,515
Tooling............................................... 2,290 2,557 3,120
Computer equipment, furniture and fixtures............ 1,338 1,639 2,198
Leasehold improvements................................ 1,007 1,057 1,306
--------- --------- --------------
Total cost.......................................... 15,396 16,887 20,139
Accumulated depreciation and amortization........... (7,047) (9,500) (11,047)
--------- --------- --------------
Net property and equipment........................ $ 8,349 $ 7,387 $ 9,092
--------- --------- --------------
--------- --------- --------------
Machinery and equipment under capital leases included above consists of the
following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(UNAUDITED)
Total cost................................................ $ 1,008 $ 864 $ 1,084
Accumulated depreciation and amortization................. (128) (237) (508)
--------- --------- -------
Net machinery and equipment............................. $ 880 $ 627 $ 576
--------- --------- -------
--------- --------- -------
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
relating to the cold-heading manufacturing facility of the Qualitronix Division
of AMP, Inc. (the "AMP Facility"). The purchase price of $7,000,000 (subject to
adjustment) consisted of $5,399,000 paid in cash at closing with the balance
payable in early 1997.
F-14
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 6--OTHER ASSETS
Other assets includes the following and is net of accumulated amortization
for the respective periods as parenthetically noted (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
Goodwill (net of $359, $445 and $647).................... $ 2,226 $ 2,140 $ 14,962
Deferred financing costs (net of $100, $708 and $1,174)
(Notes 10 and 21)...................................... 2,534 1,926 2,287
Covenants not to compete (net of $3,958 and $2,350)...... 1,434 442 --
Other intangibles (net of $136, $173 and $155)........... 357 322 284
Other assets............................................. 466 537 369
--------- --------- --------------
Other assets, net...................................... $ 7,017 $ 5,367 $ 17,902
--------- --------- --------------
--------- --------- --------------
As of December 31, 1995, fully amortized covenants not to compete and
goodwill aggregating $2,600,000 were eliminated against the related accumulated
amortization. As of June 25, 1996, the remaining net unamortized balance of
covenants not to compete aggregating $163,000 ($2,792,000 cost and $2,629,000
accumulated amortization) were written off pursuant to the litigation settlement
with the former owner of acquired businesses (Note 17). As of September 30,
1996, goodwill included $13,024,000, resulting from the Minority Interest
Acquisition and ADS acquisition.
NOTE 7--SHORT-TERM BORROWINGS
The Company's Swiss subsidiary has a short term revolving line of credit
with a Swiss bank under which borrowings of $835,000, $911,000 and $530,000 were
outstanding at December 31, 1994 and 1995 and September 30, 1996, respectively.
Interest on the line accrues at the bank's prime rate (6.25% at December 31,
1995) plus 0.25%. The line of credit is secured by inventory and accounts
receivable, and is guaranteed by the Company.
NOTE 8--CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
Convertible subordinated notes payable (the "Convertible Notes") are as
follows (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(UNAUDITED)
Convertible Notes, 15% interest and principal payable as
described below........................................ $ -- $ -- $ 3,000
Unamortized original issue discount...................... -- -- (118)
--------- --------- -------
Convertible Notes, net................................. $ -- $ -- $ 2,882
--------- --------- -------
--------- --------- -------
In conjunction with the ADS acquisition, the Company sold Convertible Notes
and Redeemable Warrants to a group of investors, who are also related parties
(Note 21). As described in Note 14,
F-15
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 8--CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
$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 is treated as debt discount and is
being amortized as interest expense over the life of the notes resulting in a
20.5% effective interest rate.
The Convertible Notes mature on the earlier of June 30, 1997 or the
occurrence of an initial public offering ("IPO"), as defined. If an IPO does not
occur by June 30, 1997, the $3,000,000 outstanding principal balance will
convert into 750,000 shares of Series E preferred stock at a $4.00 per share
conversion price.
Interest is payable quarterly commencing December 31, 1996. On each
quarterly interest payment date, the Company may elect to either pay the
interest in cash or defer the interest payment until the principal portion of
the Convertible Notes is due and payable (the "Deferred Interest"). The Deferred
Interest is added to the principal balance of the Convertible Notes for the
purpose of computing the interest payable for subsequent quarters. The Company's
senior debt agreements, as described in Note 10, prohibit the Company from
making interest payments in cash until the senior debt is repaid in full.
When the Deferred Interest is payable, each note holder may elect to receive
the amount payable in either cash, in Series E preferred stock at a $4.00 per
share conversion price if an IPO has not occurred or if an IPO has occured in
shares of common stock, the number of which is calculated using the per share
price at which such shares were offered in the IPO.
The Convertible Notes are subordinate in right of payment to the senior and
senior subordinated obligations described in Note 10, pari passu with the
acquisition financing payable to sellers described in Note 10 and senior to all
capital shares of the Company.
NOTE 9--ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------------
(UNAUDITED)
Salaries, wages, compensated absences and payroll related
taxes.................................................. $ 1,167 $ 1,413 $ 2,120
Compensation payable to Minority Stockholder (Note 17)... -- 652 --
Due to former owner of acquired businesses (Note 17)..... -- 242 --
Acquisition and related financing costs (Note 21)........ -- 9 520
Interest payable to related parties (Notes 10 and 21).... 379 19 251
Other accrued expenses................................... 767 711 1,214
--------- --------- -------
Total accrued expenses................................. $ 2,313 $ 3,046 $ 4,105
--------- --------- -------
--------- --------- -------
F-16
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 10--LONG-TERM OBLIGATIONS
Long-term obligations outstanding includes the following (amounts in
thousands):
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- --------------
(UNAUDITED)
SENIOR DEBT
Senior revolving line of credit......................................... $ 2,282 $ 4,304 $ 9,143
Senior term notes payable, due in quarterly installments through
September 30, 2001 plus interest...................................... 14,575 13,178 12,122
SENIOR SUBORDINATED DEBT PAYABLE TO RELATED PARTIES
Senior subordinated notes payable, due on December 31, 2001 plus 12%
interest payable semi-annually........................................ 5,638 5,833 5,979
OTHER SECURED DEBT
Capital lease obligations, with interest at 8.63% to 16.47%, secured by
leased equipment (Note 5)............................................. 544 446 526
Equipment financing facility, due in quarterly installments of $17,000
through December 31, 2000 plus accrued interest at 6.25%.............. -- -- 240
ACQUISITION FINANCING PAYABLE TO SELLERS
Payable to Allard Stockholders, due in monthly installments of $56,000
through August 18, 1999............................................... -- -- 1,651
Payable to Minority Stockholder, due in monthly installments of $33,000
through December 15, 1997............................................. -- -- 473
--------- --------- --------------
Total long-term obligations........................................... 23,039 23,761 30,134
Less current portion payable to unaffiliated lenders.................. (1,608) (1,612) (2,891)
--------- --------- --------------
Long-term obligations, less current portion......................... $ 21,431 $ 22,149 $ 27,243
--------- --------- --------------
--------- --------- --------------
1994 DEBT REFINANCING
In November 1994, the Company refinanced substantially all of its debt. A
maximum $5,000,000 senior revolving line of credit and $15,000,000 of senior
term notes (collectively "Senior Debt") were provided by two banks (the "Senior
Lenders"). Senior subordinated notes aggregating $7,000,000 were provided by two
institutional lenders (the "Senior Subordinated Lenders"). Fees and expenses
associated with obtaining the financing aggregated $2,634,000 and are
capitalized as deferred financing costs. As described in Note 14, $1,835,000 of
the proceeds were allocated to Redeemable Warrants issued to the lenders.
Proceeds from the refinancing were used to repay existing debt outstanding of
$19,769,000, including $960,000 of notes payable to related parties, and costs
incurred in connection with the refinancing.
The Company incurred a $264,000 extraordinary loss in connection with the
debt refinancing related to the write-off of unamortized deferred financing
costs, a charge for unamortized debt discounts and a prepayment penalty.
F-17
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
SENIOR DEBT
The Senior Debt is secured by the Company's assets of $34,755,000 at
December 31, 1995 ($52,402,000 at September 30, 1996), which excludes equipment
under capital lease obligations (Note 5) and certain accounts receivable and
inventory of the Company's Swiss subsidiary.
In September 1996, the Senior Debt agreement was amended to provide for a
portion of the funds for the ADS acquisition. The terms of the amendment are
described below under "ADS Acquisition Amendment."
SENIOR REVOLVING LINE OF CREDIT
At December 31, 1995, the Company had a $5,000,000 senior revolving line of
credit, subject to a defined borrowing base, expiring on November 2, 1997. The
Company is required to pay an annual commitment fee of 0.5% on the unused
portion. At December 31, 1995, additional borrowings of $696,000 were available
under the agreement. In February 1996, the Senior Debt agreement was amended to
permit the sale of Series D Preferred Stock (Note 15) in conjunction with the
Minority Interest Acquisition. The amendment temporarily reduced the $5,000,000
maximum availability under the agreement to $4,400,000 until such time the
$33,000 monthly installments due to the Minority Stockholder for the acquisition
financing are paid.
At the Company's option, borrowings under the revolving line of credit bear
interest at either the Base Rate plus 1.25% or the Eurodollar Rate plus 2.5% per
annum. The Base Rate is the higher of the Federal Funds rate plus 1.5% or the
prime rate. The Eurodollar Rate is the London Interbank Offered Rate ("LIBOR").
At December 31, 1995, the Company had selected the Base Rate interest option
(Base Rate was 8.5% at December 31, 1995).
SENIOR TERM NOTES
The senior term notes are due in quarterly installments as follows (amounts
in thousands):
March 31, 1996 through and including December 31, 1996............. $ 375
March 31, 1997 through and including December 31, 1997............. 469
March 31, 1998 through and including December 31, 1998............. 563
March 31, 1999 through and including June 30, 2001................. 656
September 30, 2001................................................. 1,312
At the Company's option, the senior term notes bear interest at either the
Base Rate plus 1.5% or the Eurodollar Rate plus 3.0% per annum. The Base Rate
and Eurodollar Rate are the same rates as under the senior revolving line of
credit. On December 29, 1995, the Company elected to fix the interest rate
charged on the term notes at the Eurodollar Rate of 5.6875% until April 1, 1996.
On March 29, 1996, the Company elected to fix the interest rate at the
Eurodollar Rate of 5.48% until June 28, 1996. During 1995, the Company entered
into an interest rate cap agreement to reduce the potential impact of increases
in interest rates on the senior term notes (Note 12).
As described in Note 14, $442,000 of the proceeds of the senior term notes
were allocated to Redeemable Warrants in the consolidated financial statements.
The corresponding reduction in the
F-18
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
recorded principal amounts of the notes is treated as debt discount and is being
amortized as interest expense over the life of the notes resulting in a 10.31%
effective interest rate based on the interest rates in effect at December 31,
1995 (9.30% at September 30, 1996). Unamortized debt discount was $425,000,
$322,000 and $253,000 at December 31, 1994 and 1995 and September 30, 1996,
respectively.
ADMINISTRATIVE FEES
The Senior Lenders receive various administrative fees during the term of
the Senior Debt agreement, payable on a monthly and quarterly basis. These fees
aggregated $49,000 for the year ended December 31, 1995. Administrative fees for
the two month period from the inception of the debt agreement to December 31,
1994 were not significant. On February 20, 1996, the administrative fees were
increased to $112,000 per year commencing January 1, 1996.
ADS ACQUISITION AMENDMENT
In September 1996, the Senior Debt agreement was amended to provide a
portion of the funds for the ADS acquisition. Maximum borrowings permitted under
the senior revolving line of credit were increased from $7,500,000 to
$12,500,000, subject to a defined borrowing base, and the expiration date was
extended from November 2, 1997 to September 18, 1999. The interest rates charged
on senior revolving line of credit borrowings were increased to either the Base
Rate plus 3.25% or the Eurodollar Rate plus 4.5% per annum. The interest rates
charged on the senior term notes were increased to either the Base Rate plus
3.5% or the Eurodollar Rate plus 5.0% per annum.
Fees and expenses associated with obtaining the amendment aggregated
$512,000 and are capitalized as deferred financing costs. Fees and expenses
includes $179,000 ascribed to the value of Redeemable Warrants issued to the
Senior Lenders in conjunction with obtaining the amendment (Note 14).
INTEREST RATES AS OF SEPTEMBER 30, 1996
On September 30, 1996, the Company elected to fix the interest rate charged
on $8,000,000 of the senior revolving line of credit borrowings at the
Eurodollar Rate of 5.5% until December 9, 1996; the remaining borrowings are at
the Base Rate (Base Rate was 8.25% at September 30, 1996). On September 26,
1996, the Company elected to fix the interest rate charged on the senior term
notes at the Eurodollar Rate of 5.5% until December 9, 1996.
AMP FACILITY PURCHASE AMENDMENT
On December 12, 1996, the Senior Debt agreement was amended to provide the
funds for the AMP Facility purchase. The Company issued an additional $5,000,000
of senior term notes, and maximum borrowings permitted under the senior
revolving line of credit were increased from $12,500,000 to $15,750,000 under
the same terms and interest rates described above. The $5,000,000 additional
senior term notes are due in varying quarterly installments beginning March 31,
1998 through September 30, 2001.
F-19
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
The Company was charged an initial $250,000 fee for the financing and agreed
to pay additional semi-annual fees on May 15 and November 15 each year
commencing May 15, 1997 and continuing until the Company receives a firm
commitment for an underwritten public offering with at least $20,000,000 of net
cash proceeds to the Company. The semi-annual fee payable on May 15, 1997 is
$67,000 and each succeeding such semi-annual fee payment increases by $67,000
over the previous payment amount.
SENIOR SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
The Senior Subordinated Lenders, who are also related parties (Note 21),
provided the Company with unsecured senior subordinated (to Senior Debt) term
loans aggregating $7,000,000 (collectively referred to as "Senior Subordinated
Debt") in conjunction with the Company's 1994 debt refinancing.
As described in Note 14, $1,393,000 of the proceeds of the senior
subordinated notes were allocated to Redeemable Warrants in the consolidated
financial statements. The corresponding reduction in the recorded principal
amounts of the notes is treated as debt discount and is being amortized as
interest expense over the life of the notes resulting in a 14.78% effective
interest rate. Unamortized debt discount was $1,362,000, $1,167,000 and
$1,021,000 at December 31, 1994 and 1995 and September 30, 1996, respectively.
One of the Senior Subordinated Lenders receives an advisory fee for as long
as the Senior Subordinated Debt is outstanding. During the years ended December
31, 1994 and 1995, the Company paid advisory fees of $12,000 and $72,000,
respectively. On February 20, 1996, the advisory fee was increased to $100,000
per year, payable quarterly.
SENIOR AND SENIOR SUBORDINATED DEBT RESTRICTIVE COVENANTS
The Senior and Senior Subordinated Debt agreements contain certain
restrictive covenants which require the Company to maintain certain defined
financial ratios such as leverage, EBITDA, fixed charges, interest coverage,
selling, general and administrative expense, accounts payable and current
ratios, establish minimum levels of net worth, limit capital expenditures,
including capital lease obligations, and limit additional indebtedness which may
be incurred. The debt agreements also prohibit the Company from making any
dividend payments on its preferred or common stock.
At December 31, 1995, the Company was in default of the leverage, EBITDA,
fixed charges, interest coverage and net worth restrictive covenants. On
February 20, 1996, the Company received waivers of the defaults from its Senior
and Senior Subordinated Lenders. Since March 31, 1996, the Company has been in
compliance with the restrictive covenants.
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
F-20
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
terms. Unamortized debt discounts were $27,000 and $293,000 as of September 30,
1996 for the Minority Stockholder and ADS payment obligations, respectively.
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1995 (amounts in thousands):
Year ending December 31,
1996............................................................ $ 1,648
1997............................................................ 6,338
1998............................................................ 2,375
1999............................................................ 2,641
2000............................................................ 2,624
2001 and thereafter............................................. 9,624
---------
Total aggregate maturities.................................... 25,250
Less unamortized debt discounts............................... (1,489)
---------
Total long-term obligations................................. $ 23,761
---------
---------
The aggregate maturities of long-term obligations are as follows as of
September 30, 1996 (amounts in thousands):
Twelve months ending September 30,
1997............................................................ $ 3,018
1998............................................................ 3,182
1999............................................................ 12,505
2000............................................................ 2,720
2001............................................................ 3,303
2002 and thereafter............................................. 7,000
---------
Total aggregate maturities.................................... 31,728
Less unamortized debt discounts............................... (1,594)
---------
Total long-term obligations................................. $ 30,134
---------
---------
F-21
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 11--INCOME TAXES
Loss before income taxes, cumulative effect of change in accounting
principle and extraordinary item was taxed under the following jurisdictions
(amounts in thousands):
YEAR ENDED
DECEMBER 31,
----------------------------------
1993 1994 1995
--------- --------- ------------
Domestic................................................... $ (332) $ (1,605) $ (2,534)
Foreign.................................................... 316 (211) 166
--------- --------- ------------
Total.................................................... $ (16) $ (1,816) $ (2,368)
--------- --------- ------------
--------- --------- ------------
The provisions for income taxes are as follows (amounts in thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Current
U.S. federal................................................. $ 28 $ 10 $ 60
State and local.............................................. 47 42 24
Foreign...................................................... 5 40 127
--------- --------- ---------
Total current.............................................. 80 92 211
--------- --------- ---------
Deferred
U.S. federal................................................. 466 456 751
State and local.............................................. 141 137 226
Foreign...................................................... (67) (72) (110)
--------- --------- ---------
Total deferred............................................. 540 521 867
--------- --------- ---------
Total provision
U.S. federal................................................. 494 466 811
State and local.............................................. 188 179 250
Foreign...................................................... (62) (32) 17
--------- --------- ---------
Total provision............................................ $ 620 $ 613 $ 1,078
--------- --------- ---------
--------- --------- ---------
F-22
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Gross deferred tax liabilities
Tax effect on earnings of subsidiary not consolidated for
income tax purposes..................................... $ 861 $ 1,454 $ 2,431
Depreciable assets........................................ 753 1,072 781
Other..................................................... 200 298 367
--------- --------- ---------
Gross deferred tax liabilities.......................... 1,814 2,824 3,579
--------- --------- ---------
Gross deferred tax (assets)
Loss carryforwards........................................ (413) (1,226) (1,391)
Inventory................................................. (506) (959) (1,376)
Accrued expenses.......................................... (215) (145) (220)
Allowance for doubtful accounts........................... (43) (39) (41)
Other..................................................... (33) (51) (122)
--------- --------- ---------
Gross deferred tax (assets)............................. (1,210) (2,420) (3,150)
--------- --------- ---------
Deferred tax assets valuation allowance..................... 984 1,771 2,681
--------- --------- ---------
Net deferred tax liability................................ $ 1,588 $ 2,175 $ 3,110
--------- --------- ---------
--------- --------- ---------
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the loss
before income taxes, change in accounting principle and extraordinary item as a
result of the following differences (amounts in thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Income tax (benefit) at U.S. statutory rates................... $ (5) $ (617) $ (805)
Increase (decrease) resulting from
Tax on earnings of subsidiary not consolidated for tax
purposes................................................... 607 593 977
Book benefit (provided) not provided for net operating loss
carryforwards.............................................. (40) 530 773
Amortization of assets not deductible for income tax
purposes................................................... 83 68 45
State income taxes, net of federal benefit................... 31 27 16
Lower tax rates on earnings of foreign subsidiaries.......... (86) (2) (11)
Other, net................................................... 30 14 83
--------- --------- ---------
Income tax at effective rates.............................. $ 620 $ 613 $ 1,078
--------- --------- ---------
--------- --------- ---------
F-23
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 11--INCOME TAXES (CONTINUED)
Approximately $4,100,000 and $2,000,000 of the Company's loss carryforwards
remained at December 31, 1995 for federal and state income tax purposes,
respectively. The carryforwards expire in varying amounts through 2010. 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 potential limitations upon the occurrence
of a change in control of the Company, as defined in the Internal Revenue Code.
A change in control may have occurred during 1996 as a result of certain equity
transactions and/or may occur upon the Offering.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 12--DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well defined interest and foreign exchange rate
risks.
INTEREST RATE RISK MANAGEMENT
In January 1995, the Company entered into an interest rate cap agreement to
reduce the potential impact of increases in interest rates on the Company's
floating-rate senior term notes. The agreement, with one of the Senior Lenders
(Note 21), provides for a three month LIBOR interest rate cap of 9.375% during
the period December 29, 1995 through December 31, 1998 and entitles the Company
to receive from the Senior Lender on a quarterly basis the amounts, if any, by
which interest payments on its senior term debt, computed using the actual three
month LIBOR rate, exceed the interest payment that would be due if the rate were
fixed at 9.375%. Unamortized premiums were $141,000 as of December 31, 1995
($99,000 as of September 30, 1996) and are classified as other current and
long-term assets in the consolidated financial statements.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general hedge against foreign inventory procurement
and manufacturing costs. At December 31, 1995, the Company had entered into two
forward exchange contracts aggregating $180,000 (CHF 206,000) at rates of 1.147
and 1.148 CHF per U.S. dollar. Settlement of both contracts occurred on January
3, 1996 at the contractual rates recorded as of December 31, 1995.
On March 15, 1996, the Company entered into nine forward exchange contracts,
with one of its Senior Lenders (Note 21), to purchase a total of CHF 5,265,000
for $4,525,000 at rates ranging between 1.1495 and 1.1826 CHF per U.S. dollar.
Settlement of the contracts is to occur in nine equal monthly amounts of CHF
585,000 from April 15, 1996 through December 15, 1996.
CREDIT RISK
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the Senior Lenders because any amounts due, but not
paid, to the Company by the Senior Lenders could be offset against the Company's
principal and interest payments to the Senior Lenders.
F-24
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the recorded amounts of financial assets and
liabilities approximates fair values as of December 31, 1994 and 1995, except as
described below (amounts in thousands):
DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------- ----------------------
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
Financial assets
Other current and long-term assets (interest
rate cap, Note 12)......................... $ -- $ -- $ 141 $ 20
Financial liabilities
Long-term obligations........................ 23,039 22,987 23,761 24,176
The fair value of the interest rate cap is estimated by obtaining current
quotes as of the balance sheet date for a cap agreement of similar terms. The
fair values of financial liabilities are estimated by discounting future cash
flows at rates currently available to the Company for debt with the same
remaining maturities, as advised by the Company's investment bankers.
The recorded amounts shown in the table are included in the consolidated
financial statements under the indicated captions.
F-25
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
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 the
three years ended December 31, 1995 and the nine months ended September 30, 1996
and are summarized in the table below (amounts in thousands):
VALUE OF REDEEMABLE WARRANTS ISSUED IN CONJUNCTION WITH
-------------------------------------------------------------------------------------
SENIOR TOTAL
SENIOR DEBT SENIOR FORMER CONVERTIBLE SERIES D SERIES E REDEEM-
TERM AMEND- SUBORDINATED LENDER SUBORDINATED PREFERRED PREFERRED ABLE
NOTES MENT NOTES DEBT NOTES STOCK STOCK WARRANTS
--------- --------- ----------- --------- ----------- --------- --------- ---------
Balance, December 31, 1992.... $ -- $ -- $ -- $ 543 $ -- $ -- $ -- $ 543
Adjustment to redemption
value....................... -- -- -- 107 -- -- -- 107
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1993.... -- -- -- 650 -- -- -- 650
Redeemable Warrants issued
pursuant to anti-dilution
provisions upon the sale of
Preferred Stock............. -- -- -- 33 -- -- -- 33
Redeemable Warrants issued in
conjunction with debt
refinancing................. 442 -- 1,393 -- -- -- -- 1,835
Adjustment to redemption
value....................... -- -- -- (189) -- -- -- (189)
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1994.... 442 -- 1,393 494 -- -- -- 2,329
Adjustment to redemption
value....................... (132) -- (416) (148) -- -- -- (696)
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1995.... 310 -- 977 346 -- -- -- 1,633
Redeemable Warrants issued in
conjunction with sale of
Convertible Notes and
Preferred Stock............. -- -- -- -- 124 492 124 740
Redeemable Warrants issued
pursuant to anti-dilution
provisions upon the sale of
Preferred Stock............. -- -- -- 7 -- -- -- 7
Redeemable Warrants issued in
conjunction with Senior Debt
agreement amendment......... -- 179 -- -- -- -- -- 179
Adjustment to redemption
value....................... (96) -- (302) (107) -- -- -- (505)
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, September 30, 1996
(Unaudited)................. $ 214 $ 179 $ 675 $ 246 $ 124 $ 492 $ 124 $ 2,054
--------- --------- ----------- --------- ----- --------- --------- ---------
--------- --------- ----------- --------- ----- --------- --------- ---------
F-26
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
All Redeemable Warrants are subject to adjustment for anti-dilution, have
certain demand registration rights and, in certain instances, are cancellable
upon the occurrence of certain defined events. The table below summarizes the
number of the Company's common shares subject to Redeemable Warrants, the number
of Redeemable Warrants subject to cancellation, Redeemable Warrants exercisable
and other information as of December 31, 1994 and 1995 and September 30, 1996:
REDEEMABLE WARRANTS ISSUED IN CONJUNCTION WITH
-----------------------------------------------------------------------------------------
SENIOR
SENIOR DEBT SENIOR FORMER CONVERTIBLE SERIES D SERIES E
TERM AMEND- SUBORDINATED LENDER SUBORDINATED PREFERRED PREFERRED
NOTES MENT NOTES DEBT NOTES STOCK STOCK
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total number of the Company's
common shares subject to
Redeemable Warrants at
December 31, 1994......... 84,748 -- 266,990 94,558 -- -- --
December 31, 1995......... 84,748 -- 266,990 94,558 -- -- --
September 30, 1996 84,748 70,893 266,990 97,426 49,079 194,618 49,079
(Unaudited).............
Redeemable Warrants subject to
cancellation at
December 31, 1995......... -- -- 124,595 -- -- -- --
September 30, 1996 -- -- 124,595 -- 49,079 194,618 --
(Unaudited).............
Redeemable Warrants not
subject to cancellation and
exercisable at
December 31, 1995......... 84,748 -- 142,395 94,558 -- -- --
September 30, 1996 84,748 70,893 142,395 97,426 -- -- 49,079
(Unaudited).............
Other information
Exercise price per share.. $ .035 $ 14.11 $ .035 $ .0004 $ .035 $ .035 $ .035
Expiration date........... Nov. 2, Sep. 18, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2006 2004 2004 2006 2003 2006
TOTAL
REDEEM-
ABLE
WARRANTS
-----------
Total number of the Company's
common shares subject to
Redeemable Warrants at
December 31, 1994......... 446,296
December 31, 1995......... 446,296
September 30, 1996 812,833
(Unaudited).............
Redeemable Warrants subject to
cancellation at
December 31, 1995......... 124,595
September 30, 1996 368,292
(Unaudited).............
Redeemable Warrants not
subject to cancellation and
exercisable at
December 31, 1995......... 321,701
September 30, 1996 444,541
(Unaudited).............
Other information
Exercise price per share..
Expiration date...........
The warrant holders have the right ("Put Option"), 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, shall be equal
to the greater of either fair market value, book value or, a value based upon a
defined formula which includes, in part, an earnings multiple. During the years
ended December 31, 1993, 1994 and 1995 and the nine months ended September 30,
1996, the Company increased (decreased) by $107,000, $(189,000), $(696,000) and
$(505,000), respectively, the amount ascribed to the Redeemable Warrants to
reflect estimated redemption value. The increase (decrease) was charged
(credited) to stockholders' accumulated deficit.
F-27
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
Each warrants' terms and provisions and related Put Options are described
below.
SENIOR TERM NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Term Note warrants are held by the Senior Lenders. All of
the warrants issued and outstanding are exercisable as of December 31, 1995 and
September 30, 1996 and are not subject to cancellation. The warrant holders are
entitled to receive any common stock dividends, when and if declared, which
would have been paid upon the exercise in full of the warrants immediately prior
to the record date for such dividend. The warrants do not have voting rights.
PUT OPTION
The Senior Lenders have the right, if certain "Senior Term Note Put Events",
as defined below, occur prior to November 2, 1999 to require the Company to
redeem all (but not less than all), of the warrants or the stock issued upon
exercise of the warrants. After November 2, 1999, the Senior Lenders have the
unrestricted right to require the Company to redeem all (but not less than all),
of the warrants or the shares issued upon exercise of the warrants.
DEFINITIONS
The following terms are defined in the warrant agreements:
SENIOR TERM NOTE PUT EVENTS--Defined as the occurrence of any of the
following: 1) a defined change in control of the Company; 2) certain
consolidations or mergers or the sale of substantially all of the assets of the
Company; 3) repayment in full of all Senior Debt; or 4) the filing of a
registration statement which relates to a "Qualified Public Offering."
QUALIFIED PUBLIC OFFERING--Defined as a public offering of common stock with
net proceeds of at least $25,000,000 and valuing the total common stock equity
of the Company at $55,000,000 or more at closing.
SENIOR DEBT AMENDMENT WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Debt Amendment warrants are held by the Senior Lenders.
All of the warrants issued and outstanding are exercisable as of September 30,
1996 and, under certain circumstances, the number issued may be reduced. The
warrant holders are entitled to receive any common stock dividends, when and if
declared, which would have been paid upon the exercise in full of the warrants
immediately prior to the record date for such dividend. The warrants do not have
voting rights.
PUT OPTION
The Senior Lenders have the right, if certain put events occur prior to
September 18, 2001 to require the Company to redeem all (but not less than all),
of the warrants or the stock issued upon exercise of the
F-28
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
warrants. The put events are the same as the Senior Term Notes Put Events
described above. After September 18, 2001, the Senior Lenders have the
unrestricted right to require the Company to redeem all (but not less than all)
of the warrants or the stock issued upon exercise of the warrants.
SENIOR SUBORDINATED NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Subordinated Note warrants are held by the Senior
Subordinated Lenders and were issued in several series. The following table
summarizes the warrants issued and outstanding as of December 31, 1995 and
September 30, 1996:
NUMBER OF
COMMON
SHARES
SUBJECT TO DATE WARRANTS
WARRANTS BECOME EXERCISABLE
----------- -----------------------
Series of Redeemable Warrants
Series 1.............................................. 142,395 November 2, 1994
Series 2.............................................. 35,599 December 31, 1996
Series 3.............................................. 35,599 December 31, 1997
Series 4.............................................. 53,397 December 31, 1998
-----------
Total issued and outstanding........................ 266,990
-----------
-----------
The Series 2, Series 3 and Series 4 Redeemable Warrants are cancellable if
certain "Triggering Events", as defined below, occur prior to the warrants
becoming exercisable. The Series 1 Redeemable Warrants to purchase 142,395
common shares are not cancellable and are exercisable at December 31, 1995 and
September 30, 1996.
The warrant holders are not entitled to receive any common stock cash
dividends. When and if cash dividends are declared, the number of common shares
subject to warrants and the per share exercise price is subject to adjustment.
The warrants have voting rights unless cancelled in accordance with the terms of
the warrant agreements.
PUT OPTION
Until December 31, 2000, the Senior Subordinated Lenders have the right, if
a Triggering Event occurs and if the warrants are then exercisable, to require
the Company to redeem all (or any portion) of the warrants issued and
outstanding. If a Triggering Event does not occur, the Senior Subordinated
Lenders have the right, only if the Senior Lenders elect (and are able) to
exercise their respective Put Options, to require the Company to redeem all (or
any portion) of their warrants as are issued and outstanding. After December 31,
2000, the Senior Subordinated Lenders have the unrestricted right to require the
Company to redeem all (or any portion) of the warrants issued and outstanding.
F-29
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
DEFINITIONS
The following terms are defined in the warrant agreements:
TRIGGERING EVENTS--Defined as payment in full of the Senior Subordinated
Debt and either of the following: 1) the sale of all or substantially all of the
Company's assets or stock for cash in an amount equivalent to a common
stockholder equity valuation of $30,000,000 or more; or 2) an "Initial Public
Offering."
INITIAL PUBLIC OFFERING--Defined as a public offering of common stock with
net proceeds of at least $25,000,000 and valuing the total common stock equity
of the Company at $55,000,000 or more at closing.
FORMER LENDER DEBT WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
In 1991, warrants were issued to a former senior subordinated lender (the
"Former Lender") to purchase 18% of a subsidiary's common stock. The warrants
were exchangeable at the option of the Former Lender for warrants to purchase
that number of the Company's common shares which have an equivalent fair market
value on the exchange date to the number of the subsidiary's common shares
subject to the original warrants (subject to adjustment for anti-dilution). The
warrants were recorded at $380,000, the estimated fair market value on the date
of issuance.
On November 2, 1994, the Former Lender exchanged its warrants for Redeemable
Warrants to purchase 88,339 shares of the Company's common stock. In conjunction
with the sales of Preferred Stock during 1994 and 1996 discussed in Note 15, the
Former Lender was issued an additional 6,219 and 2,868 Redeemable Warrants,
respectively, pursuant to the warrant agreement anti-dilution provisions.
The Redeemable Warrants were exercisable as of their respective issuance
dates and are not subject to cancellation. The Former Lender is entitled to
receive common stock dividends, if declared, except such dividends are payable
only upon exercise of the warrants and only with respect to number of shares
exercised. The warrants do not have voting rights.
PUT OPTION
Until December 30, 2000, the Former Lender has the right, only if the Senior
or Senior Subordinated Lenders or Series D Investors elect (and are able) to
exercise their respective Put Options or if a Qualified Public Offering (as
defined in the Senior Lenders' warrant agreements) has occurred, to require the
Company to redeem all (or any portion) of the warrants or the shares issued upon
exercise of the warrants. On December 31, 2000 and thereafter, the Former Lender
has the unrestricted right to require the Company to redeem all (or any portion)
of the warrants or the shares issued upon exercise of the warrants issued and
outstanding.
F-30
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
CONVERTIBLE SUBORDINATED NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
The Convertible Subordinated Note warrants to purchase 49,079 common shares
are held by the Series D Investors and one of the Senior Subordinated Lenders
(67% and 33%, respectively, and collectively referred to as Convertible Note
Warrant Holders). The warrants were issued on September 18, 1996 in conjunction
with the Company's sale of Convertible Notes and become exercisable on June 30,
1997 provided a "Convertible Notes IPO" (as defined below) shall not have
occurred or the Convertible Notes shall not have been repaid in full. None were
exercisable as of September 30, 1996. The warrants are cancelled upon repayment
of the Convertible Notes with the proceeds from a "Registered Public Offering"
(as defined below) or expire on December 31, 2006. The Convertible Note Warrant
Holders are not entitled to receive any common stock cash dividends. When and if
cash dividends are declared, the number of common shares subject to warrants and
the per share exercise price is subject to adjustment. The warrants have voting
rights unless cancelled in accordance with the terms of the warrant agreements.
The warrant agreements provide for an increase in the number of common
shares subject to the warrants if: 1) certain "Private Financing" (as defined
below) or Registered Public Offering transactions, occur after June 30, 1997 but
prior to the exercise date; or 2) interest on the Convertible Notes is deferred.
The amount of the increase is a formula determined value based on the per share
price of the financing transactions. No increase in the number of common shares
is required provided the financing transactions result in a price in excess of
$14.32 per share.
PUT OPTION
Until December 31, 2000, the Convertible Note Warrant Holders have the
right, if a Registered Public Offering occurs and if the warrants are then
exercisable, to require the Company to redeem all (or any portion) of the
warrants issued and outstanding. If a Registered Public Offering does not occur,
the warrant holders have the right, only if the Senior Lenders elect (and are
able) to exercise their respective Put Options, to require the Company to redeem
all (or any portion) of their warrants as are issued and outstanding. After
December 31, 2000, warrant holders have the unrestricted right to require the
Company to redeem all (or any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
CONVERTIBLE NOTES IPO--Defined as receipt by the Company from an
underwriter, on or prior to June 30, 1997, of a firm commitment to underwrite a
public offering for shares of the Company's common stock, which underwritten
public offering shall close on or before July 11, 1997.
PRIVATE FINANCING--Defined as any disposition by the Company or any selling
stockholder of any equity security or convertible security of the Company other
than pursuant to a Registered Public Offering.
F-31
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
REGISTERED PUBLIC OFFERING--Defined as the closing of an underwritten public
offering for the common stock of the Company.
SERIES D PREFERRED STOCK WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Series D preferred stock warrants are held by the Series D
Investors. The warrants were issued in several series on February 20, 1996 in
conjunction with the Company's sale of Series D preferred shares. The following
table summarizes the warrants issued and outstanding as of September 30, 1996:
NUMBER OF
COMMON
SHARES
SUBJECT TO DATE WARRANTS
WARRANTS BECOME EXERCISABLE
----------- -----------------------
Series of Redeemable Warrants
Series 1.............................................. 55,605 December 31, 1997
Series 2.............................................. 55,605 December 31, 1998
Series 3.............................................. 83,408 December 31, 1999
-----------
Total issued and outstanding........................ 194,618
-----------
-----------
All series of Redeemable Warrants are cancellable if certain "Triggering
Events", as defined below, occur prior to the warrants becoming exercisable. In
addition, a portion of the Series 1 warrants are cancellable if one or more
"Registered Public Offerings", as defined below, occurs prior to December 31,
1997 as summarized in the table below.
NUMBER OF
COMMON SHARES
SUBJECT TO WARRANTS
-------------------------
CANCELLABLE REMAINING
------------ -----------
Provided that before December 31, 1997 no Triggering Events occur and:
No Registered Public Offerings occur................................................. -- 55,605
A Registered Public Offering occurs with a fully diluted common stock equity value of
(amounts subject to adjustment in certain circumstances)
Greater than or equal to $60,000,000 but less than $65,000,000................... 13,901 41,704
Greater than or equal to $65,000,000 but less than $70,000,000................... 27,802 27,803
Greater than or equal to $70,000,000............................................. 41,704 13,901
The number of common shares subject to warrants is subject to further
reduction when, and if, any portion of the Senior Subordinated Note warrants is
cancelled pursuant to the terms of those warrant agreements. The warrant holders
are not entitled to receive any common stock cash dividends. When and if cash
dividends are declared, the number of common shares subject to warrants and the
per share exercise price is subject to adjustment. The warrants have voting
rights unless cancelled in accordance with the terms of the warrant agreements.
F-32
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
PUT OPTION
Until December 31, 2000, the Series D Investors have the right, only if any
of the other Redeemable Warrant holders elect (and are able) to exercise their
respective Put Options, to require the Company to redeem all (or any portion) of
the warrants issued and outstanding. After December 31, 2000, the Series D
Investors have the unrestricted right to require the Company to redeem all (or
any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
TRIGGERING EVENTS--Defined as either of the following: 1) the sale of all or
substantially all of the Company's assets or stock for cash in an amount
equivalent to a common stockholder equity valuation of $60,000,000 or more; or
2) a Qualified (Series D Investors) Public Offering.
REGISTERED PUBLIC OFFERINGS--Defined as the closing of underwritten public
offerings with gross proceeds of at least $25,000,000 and valuing the fully
diluted total common stock equity at an amount greater than or equal to
$60,000,000 but less than $75,000,000.
QUALIFIED (SERIES D INVESTORS) PUBLIC OFFERING--Defined as the closing of
underwritten public offerings with gross proceeds of at least $25,000,000 and
valuing the fully diluted total common stock equity at an amount equal to or
greater than the "Minimum Equity Market Value", as defined below.
MINIMUM EQUITY MARKET VALUE--Defined as: 1) for the period from February 20,
1996 through December 30, 1997--$75,000,000; 2) for the period from December 31,
1997 through December 30, 1998--$95,000,000; 3) for the period from December 31,
1998 through December 30, 1999-- $120,000,000. Antidilution provisions set forth
in the warrant agreements require adjustment of the foregoing amounts. Through
December 30, 1997, the adjusted Minimum Equity Market Value is approximately
$86,000,000 to $93,000,000, depending on the impact of certain transactions.
SERIES E PREFERRED STOCK WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
The Series E Preferred Stock warrants to purchase 49,079 common shares are
held by the Series D Investors and one of the Senior Subordinated Lenders (67%
and 33%, respectively, and collectively referred to as Series E Warrant
Holders). The warrants were issued on September 18, 1996 in conjunction with the
Company's sale of Series E Preferred Stock and are exercisable as of September
30, 1996. The Series E Warrant Holders are not entitled to receive any common
stock cash dividends. When and if cash dividends are declared, the number of
common shares subject to warrants and the per share exercise price is subject to
adjustment. The warrants have voting rights.
The warrant agreements provide for an increase in the number of common
shares subject to the warrants if certain "Private Financing" or "Registered
Public Offering" transactions, as defined below, occur prior to the exercise
date. The amount of the increase is a formula determined value based on the
F-33
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
per share price of the financing transactions. No increase in the number of
common shares is required provided the financing transactions result in a price
in excess of $14.32 per share.
PUT OPTION
Until December 31, 2000, the Series E Warrant Holders have the right, if a
Registered Public Offering occurs and if the warrants are then exercisable, to
require the Company to redeem all (or any portion) of the warrants issued and
outstanding. If a Registered Public Offering does not occur, the warrant holders
have the right, only if the Senior Lenders elect (and are able) to exercise
their respective Put Options, to require the Company to redeem all (or any
portion) of their warrants as are issued and outstanding. After December 31,
2000, warrant holders have the unrestricted right to require the Company to
redeem all (or any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
PRIVATE FINANCING--Defined as any disposition by the Company or any selling
stockholder of any equity security or convertible security of the Company other
than pursuant to a Registered Public Offering.
REGISTERED PUBLIC OFFERING--Defined as the closing of an underwritten public
offering for the common stock of the Company.
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK
At December 31, 1993, the Company's preferred shares were mandatorily
redeemable at the option of the holders. In conjunction with the 1994 debt
refinancing the Company's Articles of Incorporation were amended and the
preferred stockholders' mandatory redemption rights were terminated. As a
result, the Company's mandatorily redeemable preferred shares were reclassified
in the consolidated financial statements to stockholders' equity (deficit).
As of December 31, 1995, the number of preferred shares authorized to be
issued included 167,702 Series A shares, 1,636,316 Series B shares, and
3,000,000 Series C shares. On January 31, 1996 and September 15, 1996, the
Company's Articles of Incorporation were further amended to authorize the
issuance of 2,000,000 Series D shares and 1,500,000 Series E shares,
respectively. All preferred shares are without par value and each share is
entitled to one vote for each common share which would be issuable upon
conversion.
F-34
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The table below summarizes preferred stock issued during the three year
period ended December 31, 1995 and the nine month period ended September 30,
1996 (amounts in thousands):
SERIES A SERIES B SERIES C SERIES D SERIES E TOTAL
----------- ----------- ----------- ----------- ----------- ---------
Balance, December 31, 1992 and December 31,
1993....................................... $ 168 $ 2,000 $ 3,000 $ -- $ -- $ 5,168
Issuance of 271,471 Series C preferred shares
at $1.50 per share, net of issuance costs
of $26,000................................. -- -- 381 -- -- 381
----- ----------- ----------- ----------- ----------- ---------
Balance, December 31, 1994 and December 31,
1995....................................... 168 2,000 3,381 -- -- 5,549
Issuance of 75,000 Series C preferred shares
at $1.50 per share......................... -- -- 112 -- -- 112
Issuance of 2,000,000 Series D preferred
shares as described below, net of issuance
costs of $558,000.......................... -- -- -- 5,450 -- 5,450
Issuance of 750,000 Series E preferred shares
as described below, net of issuance costs
of $137,000................................ -- -- -- -- 2,739 2,739
----- ----------- ----------- ----------- ----------- ---------
Balance, September 30, 1996 (Unaudited)...... $ 168 $ 2,000 $ 3,493 $ 5,450 $ 2,739 $ 13,850
----- ----------- ----------- ----------- ----------- ---------
----- ----------- ----------- ----------- ----------- ---------
The following table summarizes the number of preferred shares outstanding as
of the dates indicated:
SERIES A SERIES B SERIES C SERIES D SERIES E TOTAL
--------- ----------- ----------- ----------- --------- -----------
Number of shares outstanding as of
December 31, 1992....................... 167,702 1,583,532 2,000,000 -- -- 3,751,234
December 31, 1993....................... 167,702 1,583,532 2,000,000 -- -- 3,751,234
December 31, 1994....................... 167,702 1,583,532 2,271,471 -- -- 4,022,705
December 31, 1995....................... 167,702 1,583,532 2,271,471 -- -- 4,022,705
September 30, 1996 (Unaudited).......... 167,702 1,583,532 2,346,471 2,000,000 750,000 6,847,705
Concurrent with the 1994 debt refinancing, 271,471 Series C preferred shares
were issued to related parties consisting of 138,995 shares issued to certain
common stockholders ("Investors") and 132,476 shares issued to the Senior
Subordinated Debt Lenders.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 Series C preferred shares. On February 20, 1996,
the Company sold 2,000,000 Series D preferred shares at $3.25 per share and
issued Redeemable Warrants to purchase 194,618 common shares to the Series D
Investors. 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 were used to fund the Minority Interest
Acquisition.
F-35
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
On September 18, 1996, the Company sold 750,000 Series E preferred shares at
$4.00 per share and issued Redeemable Warrants to purchase 49,079 common shares
to the Series D Investors and the Senior Subordinated Lenders. Proceeds from the
sale aggregating $124,000 were ascribed to the Redeemable Warrants to reflect
their estimated fair market value on the issuance date. The proceeds from the
sale were used to fund the ADS Acquisition.
Dividends are payable quarterly to the holders of preferred stock, when and
if declared by the Board of Directors. Cash dividends at the annual rate of
$.10, $.1263, $.15, $.325 and $.40 per share related to the Series A, Series B,
Series C, Series D and Series E shares, respectively, accumulate from July 1,
1993 for the Series A and Series B shares, from July 1, 1994 for the Series C
shares, from February 15, 1996 for the Series D shares and from September 15,
1996 for the Series E shares. All cumulative, unpaid dividends on the stock are
to be cancelled and eliminated if the Company's common stock becomes registered
in a public offering of common stock with gross proceeds of at least $10,000,000
at a per share price of not less than $15.87 on or before December 31, 1996. In
January 1997, the holders of the preferred stock agreed to extend the
cancellation date to May 5, 1997 and further, agreed to waive their right to
receive all cumulative unpaid dividends, contingent on the consummation of the
Offering. The Senior and Senior Subordinated Debt agreements prohibit the
Company from paying dividends and, as a result, no dividend payments have been
declared since issuance. Series A, Series B and Series C accumulated dividends
in arrears aggregate $42,000 ($.249 per share), $499,000 ($.315 per share) and
$511,000 ($.225 per share), respectively, as of December 31, 1995. Series A,
Series B, Series C, Series D and Series E accumulated dividends in arrears
aggregate $54,000 ($.324 per share), $648,000 ($.41 per share), $774,000 ($.341
per share), $407,000 ($.203 per share) and $12,000 ($.017 per share),
respectively, as of September 30, 1996.
Each share of preferred stock is convertible into .28357 of a share of
common stock, subject to adjustment in certain circumstances. All cumulative
unpaid dividends, if any, are payable upon conversion. Liquidation preference is
equal to $1.00, $1.263, $1.50, $3.25 and $4.00 per share for the Series A,
Series B, Series C, Series D and Series E shares, respectively, plus declared
but unpaid dividends. The aggregate liquidation preference for all preferred
stock, excluding accumulated dividends in arrears, is $5,575,000 and $15,187,000
as of December 31, 1995 and September 30, 1996, respectively. Payment of the
Series D and Series E preferred stock per share liquidation preference, plus
declared but unpaid dividends, is senior to the Series A, Series B and Series C
preferred stock. Payment of the Series A, Series B and Series C preferred stock
per share liquidation preference is pari passu to the Series A, Series B and
Series C stockholders as a group; payment of declared but unpaid dividends are
pro rata based on the relative proportion of the amounts accumulated but unpaid.
Payment of the Series D and Series E preferred stock per share liquidation
preference, plus declared but unpaid dividends, is pari passu to the Series D
and Series E stockholders as a group.
At December 31, 1995 and September 30, 1996, the Company had warrants
outstanding to purchase a total of 52,784 Series B shares at an exercise price
of $1.263 per share. The warrants were issued in 1990 and expire on April 15,
2001. At December 31, 1995 and September 30, 1996, a total of 52,787 authorized
and unissued Series B shares were reserved for issuance upon exercise of the
warrants.
F-36
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 16--COMMON STOCK
At December 31, 1994 and 1995, the Company was authorized to issue 2,268,560
common shares without par value (4,253,550 common shares at September 30, 1996).
As of December 31, 1995, a total of 1,854,924 common shares were reserved for
issuance upon exercise of all warrants and stock options and the conversion of
the preferred stock (3,291,938 common shares at September 30, 1996, including
common shares reserved for the conversion of Convertible Notes).
At December 31, 1995 and September 30, 1996, in addition to the Redeemable
Warrants, the Company had issued non-redeemable warrants to purchase a total of
9,355 common shares at an exercise price of $4.454 per share expiring on
February 20, 2001.
During 1993, the Company adopted a qualified stock option plan for key
employees under which options to purchase 213,386 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 stock option plan activity from inception of
the plan through September 30, 1996 (the grant date and per share exercise price
is parenthetically noted):
NUMBER OF OPTIONS
------------------------
AVAILABLE
FOR GRANT OUTSTANDING
---------- ------------
Inception of plan...................................................................... 213,386 --
Granted (March 1993 at $.529 per share)................................................ (76,847) 76,847
Expired or cancelled................................................................... 8,932 (8,932)
---------- ------------
Options available for grant and outstanding, December 31, 1993......................... 145,471 67,915
Granted (February and November 1994 at $.529 per share)................................ (123,211) 123,211
Exercised.............................................................................. -- (2,269)
Expired or cancelled................................................................... 3,828 (3,828)
---------- ------------
Options available for grant and outstanding, December 31, 1994......................... 26,088 185,029
Increase in number of shares authorized................................................ 32,469 --
Granted (February and March 1995 at $.529 per share)................................... (37,573) 37,573
Expired or cancelled................................................................... 14,179 (14,179)
---------- ------------
Options available for grant and outstanding, December 31, 1995......................... 35,163 208,423
Increase in number of shares authorized................................................ 141,785 --
Granted (4,254 shares in February 1996 at $.529 per share and 87,198 and 14,887 shares
in September 1996 at $1.234 and $7.053 per share, respectively)...................... (106,339) 106,339
---------- ------------
Options available for grant and outstanding, September 30, 1996 (Unaudited)............ 70,609 314,762
---------- ------------
---------- ------------
Options for 85,581 and 136,258 shares were exercisable as of December 31,
1995 and September 30, 1996, respectively.
F-37
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 16--COMMON STOCK (CONTINUED)
The Company believes the per share exercise price of options granted prior
to September 1996 approximated the fair market value of the underlying common
stock on the grant date. The exercise price of options granted in September 1996
was 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 $4,000 for the nine months ended September 30, 1996. The options
vest each year on December 31st as follows: 1996--14,025 shares; 1997--15,954
shares; 1998--18,846 shares; 1999--18,988 shares; 2000--31,720 shares;
2001--2,552 shares.
NOTE 17--COMMITMENTS AND CONTINGENCIES
FORMER OWNER OF ACQUIRED BUSINESSES
In October 1991, a subsidiary of the Company acquired, in a purchase
transaction, the net assets and stock of several companies under common control
for $13,192,000 in cash, including five year covenants not to compete entered
into with the former owner (the "Former Owner"). The purchase agreements also
provided for purchase price adjustments based on changes in working capital, a
consulting services agreement and $15,000,000 of contingent consideration
payable to the Former Owner based upon the acquired businesses' future
attainment of defined performance criteria.
Amounts due to (from) the Former Owner as of December 31, 1994 and 1995
included the following (amounts in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Accrued consulting services due to the Former Owner........................ $ 650 $ 1,138
Receivables collected on behalf of the Former Owner........................ 777 783
Former Owner advances to an acquired business, prior to acquisition........ 135 153
Working capital adjustment................................................. (856) (856)
Claims for breaches of representations and warranties...................... (976) (976)
--------- ---------
Due (from) to Former Owner, net.......................................... $ (270) $ 242
--------- ---------
--------- ---------
The net amount due (from) to Former Owner is classified in the consolidated
balance sheets as an other asset (non-current) as of December 31, 1994 and as an
accrued liability as of December 31, 1995.
Pursuant to the terms of the purchase agreements, the purchase price was
subject to adjustment based on the change in working capital, as defined, from
June 30, 1991 through October 15, 1991. As of December 31, 1994 and 1995, the
Company had recorded $856,000 as receivable from the Former Owner pursuant to
such working capital adjustment provisions.
During the year ended December 31, 1993, the Company asserted claims
aggregating $185,000 against the Former Owner for breach of representation and
warranty provisions set forth in the purchase agreements. The Former Owner did
not contest the claims and, as specified in the purchase agreements, the
Company's claims were deemed accepted. The Company also reduced the amount due
to
F-38
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Former Owner by $791,000 representing additional claims for breaches of
representations and warranties of which $677,000 related to excess and obsolete
inventory on hand at the date of acquisition. The purchase agreements provided
that the Company may offset its contingent consideration payable, if any, and
consulting services payments against amounts receivable from the Former Owner
for working capital adjustments and claims under the purchase agreements for
breach of the representation and warranty provisions.
The purchase agreements provided for a maximum of $15,000,000 in contingent
consideration to be paid to the Former Owner by the Company based on future
attainment of defined performance criteria over a five year period ending
December 31, 1996. For each of the years in the four year period ended December
31, 1995, the Company did not meet the performance criteria and, as a result, no
additional consideration was due the Former Owner under this provision of the
agreement. The remaining maximum amount of contingent consideration payable was
$4,500,000 as of December 31, 1995.
The Former Owner's consulting services agreement provided for advisory and
consulting services, on an as needed basis, for a period of five years at an
annual cost of $260,000. During the period from October 15, 1991 (acquisition
date) through December 31, 1991, the Company paid $54,000 under the agreement.
During the year ended December 31, 1992, the Company paid $130,000 to the Former
Owner and withheld payment of the remaining $130,000 payable under the
consulting agreement for 1992 and the entire amount payable for 1993, 1994 and
1995. Amounts so withheld are recorded as a reduction of amounts receivable from
the Former Owner discussed above. As of December 31, 1995, the Company accrued
the remaining $228,000 payable to the Former Owner under the agreement as no
significant future services were anticipated and the Company did not believe it
would derive any significant future benefit from the advisory and consulting
services.
In December 1994, the Company commenced two actions against the Former
Owner. The first pertained to the Company's claims for breach of representation
and warranty provisions of the purchase agreements. With this claim, the Company
commenced arbitration proceedings, as provided for in the purchase agreements,
seeking recovery of approximately $3,000,000 for breaches of various
representations and warranty provisions. The Former Owner counterclaimed in the
arbitration for an unspecified amount of damages for alleged breaches of the
purchase agreements by the Company. Pursuant to the purchase agreements, the
arbitration was to be conducted before a three-arbitrator panel. The panel had
been selected and a hearing was scheduled for the second quarter of 1996.
The second action, in which the Company filed a California Superior Court
lawsuit, sought both damages and injunctive relief from the Former Owner related
to violation of various covenants contained in the purchase agreements
pertaining to non-compete and disclosure of confidential information. A hearing
on the injunctive relief portion of this matter was scheduled for the second
quarter of 1996. The damages portion of this matter was referred to the same
arbitration panel hearing the representations and warranty claims.
On June 25, 1996, the Company and the Former Owner settled substantially all
claims which were the subject of the above pending arbitration and litigation.
Under the terms of the settlement, the Former Owner paid $190,000 to the Company
as consideration for both parties agreeing to release each other from all
monetary claims and terminating all agreements and pending arbitration and
litigation proceedings. The consolidated results of operations for the nine
months ended September 30, 1996 include a
F-39
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
net gain of $157,000 recorded pursuant to the settlement agreement. The net gain
reflects the write off of the net amount due to the Former Owner of $242,000 and
the $190,000 received in cash, reduced by the write off of the remaining
unamortized balances of non-compete agreements, which were terminated, and a
litigation claim.
Both parties also agreed that the Company's claim for injunctive relief from
the Former Owner's alleged violation of various covenants contained in the
purchase agreements related to non-compete and disclosure of confidential
information would be decided by binding arbitration before a single arbitrator.
The arbitrator is empowered to decide only the matter of injunctive relief;
monetary claims for damages were resolved pursuant to the aforementioned
settlement agreement. Management believes the ultimate disposition of the
arbitration will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
MINORITY STOCKHOLDER
In connection with the Company's 1991 acquisition of a subsidiary, put
option and stock purchase agreements (collectively, the "Put Option Agreement")
were entered into between the Company and the acquired company's 25% minority
stockholder granting the Minority Stockholder the option of requiring the
Company to purchase all minority shares. The Put Option Agreement expired
unexercised on June 1, 1994.
In December 1993, the Minority Stockholder filed a stockholders' derivative
suit against the Company, certain wholly owned subsidiaries of the Company, a
75% owned subsidiary of the Company (the "Majority Owned Subsidiary") and
certain current and former officers and directors of the wholly owned and
Majority Owned subsidiaries. The derivative suit was dismissed in conjunction
with the Company's acquisition of the Minority Stockholder's 25% interest on
February 20, 1996 (Note 2).
OTHER LITIGATION
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 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
F-40
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
capital and operating lease commitments under non-cancelable leases are as
follows as of December 31, 1995 (amounts in thousands):
CAPITAL OPERATING
LEASES LEASES
----------- -----------
Year ending December 31,
1996.................................................................. $ 181 $ 1,254
1997.................................................................. 181 1,192
1998.................................................................. 136 1,142
1999.................................................................. 20 1,085
2000.................................................................. -- 1,030
2001 and thereafter................................................... -- 2,927
----- -----------
Total minimum payments required....................................... 518 $ 8,630
-----------
-----------
Less: Amount representing future interest cost........................ (72)
-----
Recorded obligation under capital leases............................ $ 446
-----
-----
Total rental expense charged to operations for the years ended December 31,
1993, 1994 and 1995 was $1,357,000, $1,373,000 and $1,531,000, respectively.
During the nine months ended September 30, 1996, the Company leased
additional equipment under capital and operating leases and assumed operating
leases for facilities and equipment in conjunction with the ADS Acquisition. The
lease terms range from one to five years and future minimum capital and
operating lease commitments aggregate $264,000 and $880,000, respectively, over
the lease terms.
NOTE 18--CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
During the periods presented, the Company paid the following amounts in cash
(amounts in thousands):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Interest.................................. $ 2,477 $ 3,049 $ 3,275 $ 2,082 $ 1,840
Income taxes (refunded ) paid............. (64) 33 33 28 47
F-41
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 18--CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred during the
periods presented, as follows (amounts in thousands):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- ----- ----- ---------
(UNAUDITED)
Debt incurred for the acquisition of machinery and
equipment......................................... $ 494 $ 276 $ 33 $ 33 $ 484
Financing provided by sellers in connection with
acquisitions...................................... -- -- -- -- 2,242
Liabilities assumed in ADS Acquisition.............. -- -- -- -- 750
F-42
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 19--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):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
Revenues
Gross revenues
United States...................................... $ 47,230 $ 46,207 $ 54,394 $ 41,299 $ 41,972
Western Europe..................................... 6,909 7,309 9,388 6,445 7,914
--------- --------- --------- --------- ---------
Total gross revenues............................. 54,139 53,516 63,782 47,744 49,886
--------- --------- --------- --------- ---------
Less interarea transfers
United States...................................... (1,032) (721) (814) (671) (752)
Western Europe..................................... (4,910) (5,703) (7,129) (4,799) (6,075)
--------- --------- --------- --------- ---------
Total interarea transfers........................ (5,942) (6,424) (7,943) (5,470) (6,827)
--------- --------- --------- --------- ---------
Net revenues
United States...................................... 46,198 45,486 53,580 40,628 41,220
Western Europe..................................... 1,999 1,606 2,259 1,646 1,839
--------- --------- --------- --------- ---------
Total net revenues............................... $ 48,197 $ 47,092 $ 55,839 $ 42,274 $ 43,059
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income from operations
United States........................................ $ 2,497 $ 1,494 $ 1,354 $ 1,894 $ 1,555
Western Europe....................................... 256 266 501 336 700
Interarea eliminations............................... 23 -- (20) -- (83)
--------- --------- --------- --------- ---------
Total income from operations....................... $ 2,776 $ 1,760 $ 1,835 $ 2,230 $ 2,172
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Consolidated assets
United States........................................ $ 33,221 $ 36,008 $ 34,449 $ 35,184 $ 52,727
Western Europe....................................... 5,741 5,713 6,490 6,529 5,641
Interarea eliminations............................... (4,309) (4,036) (4,610) (4,636) (4,140)
--------- --------- --------- --------- ---------
Total consolidated assets.......................... $ 34,653 $ 37,685 $ 36,329 $ 37,077 $ 54,228
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interarea sales are accounted for at prices which 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 which are directly attributable to the related operations.
Corporate assets are included with United States assets.
F-43
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 19--FOREIGN OPERATIONS AND EXPORT REVENUES (CONTINUED)
EXPORT REVENUES
Consolidated revenues include export revenues of $7,655,000, $2,890,000 and
$5,161,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
and $3,425,000 and $4,373,000 for the nine months ended September 30, 1995 and
1996, respectively. Export revenues are primarily derived from sales to
customers located in Western Europe, the Far East and Canada.
NOTE 20--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 $105,000, $100,000
and $148,000 for the years ended December 31, 1993, 1994 and 1995, 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 make a contribution up
to a maximum amount defined in the Plan. The Company and its subsidiaries may
make periodic discretionary matching contributions to the Plan. No matching
contributions were made to the plan during the years ended December 31, 1993,
1994 and 1995. The costs associated with administering the plan were not
significant for any period presented.
F-44
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 21--RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below (amounts in thousands):
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
INVESTORS
14% demand notes
Interest earned during the period................................. $ 135 $ 113 $ -- $ -- $ --
Amount repaid, including accrued interest, with proceeds from the
1994 debt refinancing........................................... -- 1,281 -- -- --
Purchase of 39,415 shares of Series C preferred stock at $5.29 per
share............................................................. -- 208 -- -- --
SENIOR SUBORDINATED LENDERS
Interest and advisory fees
Earned during the period.......................................... -- 165 949 749 792
Accrued and payable as of period end.............................. -- 137 -- 210 210
Purchase of Convertible Notes, Series E preferred stock and
Redeemable Warrants in conjunction with the ADS Acquisition....... -- -- -- -- 2,000
Fees and expenses earned --
Capitalized as deferred financing costs........................... -- 140 -- -- 18
Recorded as a reduction of gross proceeds from the sale of
preferred shares................................................ -- -- -- -- 18
SERIES D INVESTORS
Purchases of debt and equity securities
Series D preferred stock and Redeemable Warrants in conjunction
with Minority Interest Acquisition.............................. -- -- -- -- 6,500
Convertible Notes, Series E preferred stock and Redeemable
Warrants in conjunction with the ADS Acquisition................ -- -- -- -- 4,000
Fees and expenses earned --
Capitalized as deferred financing costs........................... -- -- -- -- 37
Recorded as a reduction of gross proceeds from the sale of
preferred shares................................................ -- -- -- -- 37
Convertible Notes interest earned................................... -- -- -- -- 16
F-45
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED.)
NOTE 21--RELATED PARTY TRANSACTIONS (CONTINUED)
Each related party is described below and their fully diluted equity
securities ownership percentage of the Company, as of December 31, 1995 and
September 30, 1996, respectively, is computed based upon the issued and
outstanding Convertible Notes (Note 8), Redeemable Warrants (Note 14), preferred
stock and warrants (Note 15) and common stock and warrants (Note 16):
INVESTORS--Own 58.4% and 32.2% of the Company's issued and outstanding
equity securities at the respective dates and are represented on the
Company's Board of Directors (Notes 14, 15 and 16).
SENIOR SUBORDINATED LENDERS--Own 27.0% and 20.6% of the Company's issued and
outstanding equity securities (including 8.1% acquired from an Investor in a
private transaction in 1994) at the respective dates, are represented on the
Company's Board of Directors, and provide a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 8, 10, 14, 15
and 16).
SERIES D INVESTORS--Own 0% and 36.1% of the Company's issued and outstanding
equity securities at the respective dates, are represented on the Company's
Board of Directors, and provide a portion of the Company's Convertible Notes
financing (Notes 8, 14, 15 and 16).
F-46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Allard Industries, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income and changes in owner's net investment and of cash flows present
fairly, in all material respects, the financial position of Aerospace Display
Systems, a division of Allard Industries, Inc., at December 31, 1994 and 1995
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
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
Philadelphia, Pennsylvania
August 2, 1996
F-47
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------- SEPTEMBER
1994 1995 18, 1996
---------- ----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 1 $ 1 $ 1
Accounts receivable, net.................................. 1,347 1,339 1,292
Inventories............................................... 2,520 2,961 3,273
Prepaid expenses.......................................... 15 27 47
---------- ----------- -----------
Total current assets.................................... 3,883 4,328 4,613
Property and equipment, net................................. 221 328 319
Other assets................................................ 27 45 40
---------- ----------- -----------
Total assets............................................ $ 4,131 $ 4,701 $ 4,972
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND OWNER'S NET INVESTMENT
Current liabilities
Accounts payable.......................................... $ 409 $ 597 $ 405
Accrued expenses.......................................... 278 281 246
---------- ----------- -----------
Total current liabilities............................... 687 878 651
Commitments and contingencies (Note 9)
Owner's net investment...................................... 3,444 3,823 4,321
---------- ----------- -----------
Total liabilities and owner's net investment............ $ 4,131 $ 4,701 $ 4,972
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
F-48
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF INCOME
(IN THOUSANDS)
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
--------- --------- --------- --------------- ---------------
(UNAUDITED)
Revenues......................................... $ 8,859 $ 8,259 $ 9,952 $ 7,649 $ 7,706
Cost of sales.................................... 6,483 6,192 6,594 5,154 4,855
--------- --------- --------- ------- -------
Gross profit................................... 2,376 2,067 3,358 2,495 2,851
Selling, general and administrative expenses..... 1,642 1,516 1,991 1,454 1,286
--------- --------- --------- ------- -------
Income from operations......................... 734 551 1,367 1,041 1,565
Interest expense................................. 209 204 150 122 52
--------- --------- --------- ------- -------
Income before provision for income taxes....... 525 347 1,217 919 1,513
Provision for income taxes....................... 207 141 495 374 615
--------- --------- --------- ------- -------
Net income..................................... $ 318 $ 206 $ 722 $ 545 $ 898
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
The accompanying notes are an integral part of the financial statements.
F-49
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF CHANGES IN OWNER'S NET INVESTMENT
(IN THOUSANDS)
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1
------------------------------- TO
1993 1994 1995 SEPTEMBER 18,
--------- --------- --------- 1996
---------------
(UNAUDITED)
Owner's net investment at beginning of period..................... $ 3,438 $ 3,189 $ 3,444 $ 3,823
Net income........................................................ 318 206 722 898
Net change in interdivision payables and other borrowings......... (567) 49 (343) (400)
--------- --------- --------- -------
Owner's net investment at end of period........................... $ 3,189 $ 3,444 $ 3,823 $ 4,321
--------- --------- --------- -------
--------- --------- --------- -------
The accompanying notes are an integral part of the financial statements.
F-50
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
--------- --------- --------- ----------------- ---------------
(UNAUDITED)
Cash flows from operating activities
Net income......................................... $ 318 $ 206 $ 722 $ 545 $ 898
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation..................................... 16 33 49 35 51
Changes in assets and liabilities
Accounts receivable............................ 277 (71) 8 (177) 47
Inventories.................................... 200 (201) (441) (86) (312)
Prepaid expenses............................... 7 16 (12) (12) (20)
Other assets................................... 15 -- (18) (4) 5
Accounts payable and accrued expenses.......... (193) 86 191 111 (227)
--------- --------- --------- --- ------
Net cash provided by operating activities.... 640 69 499 412 442
--------- --------- --------- --- ------
Cash flows from investing activities
Capital expenditures............................... (72) (118) (156) (115) (42)
--------- --------- --------- --- ------
Net cash used in investing activities........ (72) (118) (156) (115) (42)
--------- --------- --------- --- ------
Cash flows from financing activities
(Decrease) increase in interdivision payables and
other borrowings................................... (567) 49 (343) (297) (400)
--------- --------- --------- --- ------
Net cash (used in) provided by financing
activities................................. (567) 49 (343) (297) (400)
--------- --------- --------- --- ------
Net increase in cash and cash equivalents............ 1 -- -- -- --
Cash and cash equivalents at beginning of the
period............................................. -- 1 1 1 1
--------- --------- --------- --- ------
Cash and cash equivalents at end of period........... $ 1 $ 1 $ 1 $ 1 $ 1
--------- --------- --------- --- ------
--------- --------- --------- --- ------
Supplemental disclosure of cash flow information--
Cash paid during the period for interest........... $ 209 $ 199 $ 157 $ 127 $ 60
--------- --------- --------- --- ------
--------- --------- --------- --- ------
The accompanying notes are an integral part of the financial statements.
F-51
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Aerospace Display Systems ("ADS" or the "Division") located in Hatfield,
Pennsylvania is a division of Allard Industries, Inc. ("Allard") and was
acquired from the BF Goodrich Company ("BF Goodrich") in a purchase transaction
in December 1992. ADS designs and manufactures dichroic liquid crystal displays
("LCDs") and modules for both military and commercial aerospace applications for
the domestic and foreign aircraft industry, principally in North America and
Europe.
On July 26, 1996 Allard entered into an agreement to sell certain assets and
the business of the Division to a subsidiary of DeCrane Aircraft Holdings, Inc.
(Note 10).
BASIS OF PRESENTATION
Preparation of these financial statements in conformity with generally
accepted accounting principles requires the Division to make estimates and
assumptions that affect the reported amounts on the balance sheets, at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
The statements of income and changes in owner's net investment includes all
charges applicable to the Division. Allard provides certain services to, and
incurs costs on behalf of, the Division. All of the allocations and estimates in
the financial statements are based on assumptions that the Division and Allard
believe are reasonable.
The financial information as of September 18, 1996 and for the nine months
ended September 30, 1995 and for the period from January 1 to September 18, 1996
is unaudited. In the opinion of the Division, the unaudited financial
information is presented on a basis consistent with the audited financial
statements and contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for such interim
periods presented. The results of operations for interim periods are not
necessarily indicative of results of operations for the full year.
INVENTORIES
Inventories are stated principally at the lower of cost or market, as
determined under the last-in, first-out ("LIFO") method. Costs include
materials, labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using
straight-line and accelerated methods over their estimated useful lives, ranging
from four to fifteen 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 cost of 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-52
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The taxable income of the Division is included in the consolidated tax
return of Allard. As such, separate income tax returns were not prepared or
filed by the Division. The provision for income taxes included in these
financial statements has been calculated as if the Division was a tax paying
entity, using Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under the liability method specified in SFAS
109, 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 liability for
deferred taxes.
REVENUE RECOGNITION
Revenues from the sale of manufactured products are recorded when products
are shipped.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $28,000
at December 31, 1994 and 1995 (none at September 18, 1996).
NOTE 2--INVENTORIES
Inventories are comprised of the following (amounts in thousands):
DECEMBER 31,
----------------------------- SEPTEMBER 18,
1994 1995 1996
------------ -------------- --------------
(UNAUDITED)
Raw material................................. $ 832 $ 977 $ 1,260
Work-in process.............................. 655 533 560
Finished goods............................... 1,033 1,451 1,453
------------ ------- -------
Total inventories.......................... $ 2,520 $ 2,961 $ 3,273
------------ ------- -------
------------ ------- -------
The division uses the last-in, first-out method ("LIFO") for valuing its
inventory. If the first-in, first-out ("FIFO") method had been used, inventories
would have been higher than reported by $33,000, $29,000 and $29,000 at December
31, 1994 and 1995 and September 18, 1996, respectively.
F-53
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 18,
1994 1995 1996
--------- --------- ---------------
(UNAUDITED)
Machinery and equipment...................................... $ 214 $ 354 $ 380
Computer equipment, furniture and fixtures................... 45 45 61
Leasehold improvements....................................... 12 26 26
--------- --------- ------
Total cost................................................. 271 425 467
Accumulated depreciation................................... (50) (97) (148)
--------- --------- ------
Net property and equipment............................... $ 221 $ 328 $ 319
--------- --------- ------
--------- --------- ------
The acquisition of the Division in December 1992 from BF Goodrich was a
bargain purchase transaction and as a result, all property and equipment was
recorded at $0 at the date of the acquisition. Depreciation expense related to
capital expenditures subsequent to the purchase transaction amounted to $16,000,
$33,000 and $49,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $35,000 and $51,000 for the nine months ended September 30,
1995 and the period from January 1 to September 18, 1996, respectively.
NOTE 4--RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Division's cash requirements were met by funds generated from
operations, supplemented as necessary by advances or borrowings from Allard.
Borrowings from Allard were made pursuant to unwritten, informal arrangements.
Interest was charged to the Division as the Division's share of Allard interest
expense based on the Division's proportionate share of total Allard borrowings.
Interest expense was $209,000, $204,000 and $150,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $122,000 and $52,000 for the
nine months ended September 30, 1995 and the period from January 1 to September
18, 1996, respectively. Amounts payable to Allard are classified with owner's
net investment in the accompanying balance sheets.
CORPORATE EXPENSES
The results of operations include significant transactions with Allard
business units that are outside of the Division's operations. These transactions
involve functions and services (such as executive management, cash management,
tax administration and strategic planning) that were provided to the Division by
these other Allard units. The payroll cost of these functions and services has
been allocated to the Division based on Allard management's estimated
proportionate level of effort in servicing the Division. Other costs of these
functions and services have been allocated to the Division based on its revenues
in proportion to other Allard divisions. Allard and the Division's management
believe this allocation methodology is reasonable. Corporate charges were
$345,000, $264,000 and $360,000 for the years ended December 31, 1993, 1994, and
1995, respectively, and $240,000 and $301,000 for the
F-54
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
nine months ended September 30, 1995 and the period from January 1 to September
18, 1996, respectively.
PURCHASES
Purchases by the Division from other divisions of Allard were $347,000,
$468,000 and $440,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $307,000 and $227,000 for the nine months ended September 30,
1995 and the period from January 1 to September 18, 1996, respectively.
NOTE 5--PENSION PLAN
Allard has a defined contribution 401(k) plan in which substantially all
employees of the Division may participate. Under this plan, employees may make
voluntary contributions of their compensation. The Division may make periodic
discretionary matching contributions to the plan. No matching contributions were
made to the plan during the years ended December 31, 1993, 1994 and 1995.
NOTE 6--CONCENTRATION OF CREDIT RISK AND OTHER INFORMATION
The Division's sales are made principally to commercial OEM customers,
airlines and U.S. government subcontractors. Sales to U.S. government
subcontractors amounted to approximately $4,291,000, $3,869,000 and $3,454,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$2,962,000 and $2,917,000 for the nine months ended September 30, 1995 and the
period from January 1 to September 18, 1996, respectively.
The Division is potentially subject to concentrations of credit risk as the
Division relies heavily on customers operating in the domestic and foreign
commercial aircraft industry. Generally, the Division 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 Division maintains reserves for potential credit losses.
Certain customers each accounted for more than 10% of the Division's
revenues, as follows:
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
----- ----- ----- ------------------- -------------------
(UNAUDITED)
Customer A........................... 16% 12% 10% 11% 7%
Customer B........................... 13% 10% 8% 9% 9%
Customer C........................... 18% 3% 10% 10% 13%
Customer D........................... 6% 10% 9% 9% 6%
-- -- -- -- --
Total.............................. 53% 35% 37% 39% 35%
-- -- -- -- --
-- -- -- -- --
F-55
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 6--CONCENTRATION OF CREDIT RISK AND OTHER INFORMATION (CONTINUED)
Complete loss of any of these customers could have an adverse impact on the
future results of operations.
Revenues include export revenues, principally to Western Europe, of
$1,030,000, $1,930,000 and $1,623,000 for the years ended December 31, 1993,
1994 and 1995, respectively, and $1,513,000 and $1,289,000 for the nine months
ended September 30, 1995 and the period from January 1 to September 18, 1996,
respectively.
NOTE 7--ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
DECEMBER 31,
-------------------- SEPTEMBER 18,
1994 1995 1996
--------- --------- -----------------
(UNAUDITED)
Salaries, wages and compensated absences and payroll related
taxes...................................................... $ 113 $ 116 $ 171
Commissions.................................................. 43 40 34
Warranty..................................................... 70 82 15
Other accrued expenses....................................... 52 43 26
--------- --------- -----
Total accrued expenses..................................... $ 278 $ 281 $ 246
--------- --------- -----
--------- --------- -----
NOTE 8--INCOME TAXES
The provisions for income taxes are as follows (amounts in thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Current
U.S. federal....................................................... $ 119 $ 16 $ 355
State.............................................................. 31 5 116
--------- --------- ---------
Total current.................................................... 150 21 471
--------- --------- ---------
Deferred
U.S. federal....................................................... 43 90 18
State.............................................................. 14 30 6
--------- --------- ---------
Total deferred................................................... 57 120 24
--------- --------- ---------
Total provision................................................ $ 207 $ 141 $ 495
--------- --------- ---------
--------- --------- ---------
F-56
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 8--INCOME TAXES (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Gross deferred tax liabilities
Inventory........................................................ $ 341 $ 341 $ 341
Other............................................................ 18 18 18
--------- --------- ---------
Gross deferred tax liabilities................................. 359 359 359
--------- --------- ---------
Gross deferred tax (assets)
Fixed assets..................................................... (233) (127) (59)
Accrued expenses................................................. (63) (55) (59)
Other............................................................ (22) (16) (56)
--------- --------- ---------
Gross deferred tax (assets).................................... (318) (198) (174)
--------- --------- ---------
Net deferred tax liability................................... $ 41 $ 161 $ 185
--------- --------- ---------
--------- --------- ---------
The net deferred tax liability has been included in owner's net investment
in each period. Income taxes currently payable, and deemed remitted by the
Division to Allard, amounted to $150,000, $22,000 and $471,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
The provision for income tax differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
before income taxes as a result of the following differences (amounts in
thousands):
YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Income tax at U.S. statutory rates................................... $ 179 $ 118 $ 414
State income taxes, net of federal benefit........................... 28 23 80
Other, net........................................................... -- -- 1
--------- --------- ---------
Income tax at effective rates...................................... $ 207 $ 141 $ 495
--------- --------- ---------
--------- --------- ---------
F-57
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Division has entered into certain operating leases which require minimum
annual payments as follows: 1996--$193,000; 1997--$194,000; 1998--$184,000;
1999--$139,000, and 2000--$15,000. The total rental expense for all operating
leases was $238,000, $166,000 and $181,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
The Division is also subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Division.
NOTE 10--EVENT SUBSEQUENT TO REPORT OF INDEPENDENT ACCOUNTANTS (UNAUDITED)
On September 18, 1996, a subsidiary of DeCrane Aircraft Holdings, Inc.
consummated the purchase from Allard of the assets, subject to the liabilities,
of the Division.
F-58
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING. IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM 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 THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 12
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Unaudited Pro Forma Consolidated Financial Data........................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 29
Management................................................................ 45
Principal Stockholders.................................................... 51
Certain Transactions...................................................... 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 58
Underwriting.............................................................. 59
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Index to Financial Statements............................................. F-1
--------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH THIS RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO]
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
SCHRODER WERTHEIM & CO.
DEAN WITTER REYNOLDS INC.
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
ITEM AMOUNT
- --------------------------------------------------------------------------------- -----------
SEC Registration Fee............................................................. $ 13,068
NASD Filing Fee..................................................................
Nasdaq National Marketing Listing Fee............................................
Blue Sky Filing Fees and Expenses................................................
Printing and Engraving Costs.....................................................
Transfer Agent Fees..............................................................
Legal Fees and Expenses..........................................................
Accounting Fees and Expenses.....................................................
Miscellaneous....................................................................
-----------
Total........................................................................ $
-----------
-----------
- ------------------------
* To be filed by amendment.
All amounts are estimated except for the SEC Registration Fee, the NASD
Filing Fee and the NASDAQ National Market Listing 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.
II-1
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) Pursuant to a Securities Purchase Agreement dated November 2, 1994 and
Electra Investment Trust P.L.C. and Electra Associates, Inc (collectively,
"Electra") and DSV Partners, the Company sold 271,471 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 an Amended and Restated Credit Agreement dated as of
November 2, 1994 among the Company, Provident Bank ("Provident") and
Internationale Nederlanden (U.S.) Capital Corporation ("ING), the Company issued
warrants to purchase an aggregate of 84,748 shares of Common Stock in connection
with the amendment and restatement of the Company's credit agreement. Also in
connection with the Amended and Restated Credit Agreement the Company issued
warrants to purchase an aggregate of 94,558 shares of Common Stock to a former
lender to the Company. 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 as of November 2,
1994 among the Company and Electra, the Company issued for a purchase price of
$7.0 million (i) 12% Senior Subordinated Notes due December 31, 2001 having an
aggregate principal amount of $7.0 million, and (ii) warrants to purchase
266,990 shares of Common Stock. The issuance of these securities was exempt from
registration pursuant to Section 4(2) of the Act.
(4) Pursuant to a Securities Purchase Agreement dated as of February 20,
1996 among the Company, Nassau Capital Partners, L.P. and NAS Partners I,
L.L.C., the Company issued 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.
(5) On January , 1994 the Company sold 2,269 shares of Common Stock for
$.53 per share to John Schnepf. Such securities were sold pursuant to the
exercise of stock options.
(6) Pursuant to a Securities Purchase Agreement dated February 9, 1996
among the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John Hinson
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.
(7) Pursuant to a Securities Purchase Agreement dated September 18, 1996
among the Company, Nassau 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.
(8) Pursuant to an Amended and Restated Credit Agreement dated as of
September 18, 1996 among the Company, Provident and Internationale Nederlanden
(U.S.) Capital Corporation., ING and Provident Bank, the Company issued 70,892
warrants to purchase Common Stock as additional consideration for amendments to
documents governing certain indebtedness of the Company. The issuance of these
securities was exempt from registration pursuant to Section 4(2) of the Act.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Specimen Certificate*
5.1 Opinion of Spolin & Silverman (re legality)*
10.1 1993 Share Incentive Plan
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the
Allard Children's Trust f/b/o John R. Allard
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the
Allard Children's Trust f/b/o Michael E. Allard
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David
and Angela Nazarian, Trustees of the Nazarian Family Trust
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
10.10 Registration Rights Agreement dated January , 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., NAS Partner I L.L.C.*
10.11 Shareholders Agreement dated January , 1997 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., NAS Partner I L.L.C.*
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
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Comapny,
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.
II-3
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0002
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and
Cory Components, Number 6-5752-0004
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory
Components, January 1, 1995 through December 31, 1999
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993
between Boeing Commercial Airplane Group and Tri-Star Electronics International
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.
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE
Acquisition, Inc., William Lyon, and Elsinore LP
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated,
the Whitaker Corporation and DeCrane Aircraft Holdings, Inc.
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory
Components, Inc.
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.
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau
Capital Partners L.P. and NAS Partners I L.L.C.
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.
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker
10.26 Warrant Agreement dated November 2, 1994 between the Company and Internationale
Nederlanden (U.S.) Capital Corporation
10.27 Form of Warrant Agreement relating to the Company's Series E Warrants
10.28 Form of Warrant Agreement relating to the Company's Series F Warrants
10.29 Form of Warrant Agreement relating to the Company's Series G Warrants
10.30 Form of Warrant Agreement relating to the Company's Series H Warrants
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald,
Charles Becker, Robert Rankin
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)*
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.
II-4
(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-5
SIGNATURES
This Registration Statement and Power of Attorney, pursuant to the
requirements of the Securities Act of 1933, as amended, have been signed on its
behalf by the undersigned, thereunto duly authorized, in the State of
California, on this 16th day of January, 1997.
DECRANE AIRCRAFT HOLDINGS, INC.
By: /s/ R. JACK DECRANE
------------------------------------------
Name: R. Jack DeCrane
Title: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 ever act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents or any of them, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof and the
registrant hereby confers like authority on its behalf. This Registration
Statement and Power of Attorney, pursuant to the requirement of the Securities
Act of 1933, as amended, have been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ----------------------------------- ------------------------- --------------------
/s/ R. JACK DECRANE Chairman of the Board,
- ----------------------------------- Chief Executive Officer January 16, 1997
R. Jack DeCrane and Director
/s/ R. G. MACDONALD Vice Chairman of the
- ----------------------------------- Board and Director January 16, 1997
R. G. MacDonald
Chief Financial Officer
/s/ ROBERT A. RANKIN and Secretary
- ----------------------------------- (principal accounting January 16, 1997
Robert A. Rankin officer)
/s/ JAMES R. BERGMAN
- ----------------------------------- Director January 16, 1997
James R. Bergman
II-6
SIGNATURE CAPACITY DATE
- ----------------------------------- ------------------------- --------------------
/s/ PAUL H. CASCIO
- ----------------------------------- Director January 16, 1997
Paul H. Cascio
/s/ JONATHAN A. SWEEMER
- ----------------------------------- Director January 16, 1997
Jonathan A. Sweemer
II-7
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO BALANCE AT
CLASSIFICATIONS PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- --------------------------------------- ------------- ----------- --------------- ----------- -------------
YEAR ENDED DECEMBER 31, 1993
Allowance for Doubtful Accounts........ $ 475,000 -- -- $ 155,000 $ 320,000
Reserve for excess, slow moving and
potentially obsolete material........ $ 466,000 $ 127,000 -- -- $ 593,000
YEAR ENDED DECEMBER 31, 1994
Allowance for Doubtful Accounts........ $ 320,000 $ 51,000 $ 3,000(A) $ 131,000 $ 243,000
Reserve for excess, slow moving and
potentially obsolete material........ $ 593,000 $ 300,000 -- -- $ 893,000
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts........ $ 243,000 $ 66,000 $ 62,000(B) $ 112,000 $ 259,000
Reserve for excess, slow moving and
potentially obsolete material........ $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000
- ------------------------
(A) Effect of foreign currency translation.
(B) Comprised of the following:
$ 3,000 Effect of foreign currency translation;
$59,000 Recovery of amounts previously written off.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Specimen Certificate*
5.1 Opinion of Spolin & Silverman (re legality)*
10.1 1993 Share Incentive Plan
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o John R. Allard
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o Michael E. Allard
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes Nazarian
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela
Nazarian, Trustees of the Nazarian Family Trust
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
10.10 Registration Rights Agreement dated January , 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., NAS Partner I
L.L.C.*
10.11 Shareholders Agreement dated January , 1997 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., NAS Partner I L.L.C.*
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
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Comapny, 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.
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0002
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0004
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory Components,
January 1, 1995 through December 31, 1999
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing
Commercial Airplane Group and Tri-Star Electronics International
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.
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition,
Inc., William Lyon, and Elsinore LP
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker
Corporation and DeCrane Aircraft Holdings, Inc.
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components, Inc.
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.
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital
Partners L.P. and NAS Partners I L.L.C.
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.
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker
10.26 Warrant Agreement dated November 2, 1994 between the Company and Internationale Nederlanden
(U.S.) Capital Corporation
10.27 Form of Warrant Agreement relating to the Company's Series E Warrants
10.28 Form of Warrant Agreement relating to the Company's Series F Warrants
10.29 Form of Warrant Agreement relating to the Company's Series G Warrants
10.30 Form of Warrant Agreement relating to the Company's Series H Warrants
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles
Becker, Robert Rankin
11.1 Statement regarding computation of per share earnings of the Company
21.1 List of Subsidiaries of Registrant
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Spolin & Silverman (included in Exhibit 5.1)*
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.