AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY , 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- DECRANE AIRCRAFT HOLDINGS, INC. (Exact name of registrant as specified in its charter) (AND CERTAIN SUBSIDIARIES IDENTIFIED IN FOOTNOTE (1) BELOW) DELAWARE 3728 34-1645569 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) Identification Incorporation or Organization) No.) 2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CALIFORNIA 90245 (310) 725-9123 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) R. JACK DECRANE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER DECRANE AIRCRAFT HOLDINGS, INC. 2361 ROSECRANS AVENUE, SUITE 180 EL SEGUNDO, CALIFORNIA 90245 (310) 725-9123 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: Stephen A. Silverman, Esq. Richard D. Truesdell, Jr., Esq. James Bryce Clark, Esq. DAVIS POLK & WARDWELL SPOLIN & SILVERMAN LLP 450 Lexington Avenue 100 Wilshire Boulevard, Suite 940 New York, New York 10017 Santa Monica, California 90401 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE DATE. -------------------------- 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. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE(2) FEE(1) 12% Senior Subordinated Notes due 2008............ $100,000,000 100% $100,000,000 $27,800 Senior Subordinated Guarantees(3)................. (1) The following direct and indirect subsidiaries of DeCrane Aircraft Holdings, Inc. are Co-Registrants (the "guarantors"), incorporated in the state and with the Employer Identification Number indicated: Aerospace Display Systems, Inc. (a Pennsylvania corporation, EIN 23-2859640), Audio International, Inc. (an Arkansas corporation, EIN 71-0640962), Avtech Corporation (a Washington corporation, EIN 91-0761549), Cory Components, Inc. (a California corporation, EIN 95-3938746), Dettmers Industries, Inc. (a Delaware corporation, EIN 95-4693717), Elsinore Aerospace Services, Inc. (a California corporation, EIN 95-2585262), Elsinore Engineering, Inc. (a Delaware corporation, EIN 77-0443200), Hollingsead International, Inc. (a California corporation, EIN 95-2500766) and Tri-Star Electronics International, Inc. (a California corporation, EIN 34-1687242) (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457. (3) The 12% Series B Senior Subordinated Notes due 2008 are unconditionally (as well as jointly and severally) guaranteed by the guarantors on an unsecured, senior subordinated basis. No separate consideration will be paid in respect of the guarantees. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement covers the registration of an aggregate principal amount of $100,000,000 of 12% Series A Senior Subordinated Notes due 2008 (the "new notes") of DeCrane Aircraft Holdings, Inc. ("DeCrane Aircraft") that may be exchanged for equal principal amounts of our outstanding 12% Series A Senior Subordinated Notes due 2008 (the "old notes") (the "exchange offer"). This Registration Statement also covers the registration of the new notes for resale by Donaldson, Lufkin & Jenrette Securities Corporation in market-making transactions. The complete prospectus relating to the exchange offer follows immediately after this Explanatory Note. Following the prospectus are certain pages of the Prospectus relating solely to such market-making transactions (the "market-making prospectus"), including alternate front and back cover pages, a section entitled "Risk Factors--Trading Market for the New Notes" to be used in lieu of the section entitled "Risk Factors--No Prior Public Market for the Notes," an alternate "Use of Proceeds" section and an alternate "Plan of Distribution" section. In addition, the market-making prospectus will not include the following captions (or the information set forth under such captions) in the exchange offer Prospectus: "Summary--The Exchange Offer," "The Exchange Offer" and "Certain Federal Income Tax Consequences." All other sections of the exchange offer prospectus will be included in the market-making prospectus. PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY , 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] DeCrane Aircraft Holdings, Inc. OFFER TO EXCHANGE 12% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 FOR 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED We are offering to exchange an aggregate amount of up to $100,000,000 of our 12% Series B Senior Subordinated Notes due 2008 ("new notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for our existing 12% Series A Senior Subordinated Notes due 2008 ("old notes"). The terms of the new notes are identical in all material respects to the terms of the old notes, except that the new notes have been registered under the Securities Act, and certain transfer restrictions and registration rights relating to the old notes do not apply to the new notes. To exchange your old notes for new notes, you must complete and send the letter of transmittal that accompanies this Prospectus to the exchange agent BY 5:00 P.M. NEW YORK TIME, ON , 1999. (If your old notes are held in book-entry form at The Depository Trust Company, you must instruct DTC through your signed letter of transmittal that you wish to exchange your old notes for new notes. When the exchange offer closes, your DTC account will be changed to reflect your exchange of old notes for new notes.) We will publicly announce any extension or termination of this exchange offer through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. We will not receive any cash proceeds from the issuance of the new notes. We are not using a dealer-manager in connection with this exchange offer. See "Use of Proceeds" and "Plan of Distribution." SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT YOU SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES IN THE EXCHANGE OFFER. This Prospectus and the Letter of Transmittal are first being sent to all registered holders of the old notes as of January , 1999. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1999 SUMMARY THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY UNDERSTAND THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THEIR RELATED NOTES. THE DEBT SECURITIES REGISTERED BY THIS PROSPECTUS ARE OBLIGATIONS ISSUED BY DECRANE AIRCRAFT HOLDINGS, INC. DECRANE AIRCRAFT'S PARENT COMPANY, DECRANE HOLDINGS CO., IS A HOLDING COMPANY AND DOES NOT HAVE ANY MATERIAL OPERATIONS OR ASSETS OTHER THAN ITS OWNERSHIP OF THE CAPITAL STOCK OF DECRANE AIRCRAFT. THIS PROSPECTUS USES THE PHRASES "DECRANE AIRCRAFT" AND "DECRANE HOLDINGS" WHEN WE REFER TO THOSE COMPANIES SEPARATELY. DECRANE AIRCRAFT REPORTS ITS FINANCIAL INFORMATION ON A CONSOLIDATED BASIS WITH ITS SUBSIDIARIES. REFERENCES IN THIS DOCUMENT TO "WE" AND "US" MEAN DECRANE AIRCRAFT AND ITS SUBSIDIARIES AS A GROUP. EXCEPT FOR HISTORICAL FINANCIAL INFORMATION, AND PLACES WHERE WE INDICATE OTHERWISE, THIS PROSPECTUS PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS, GIVING EFFECT TO ALL OF THE TRANSACTIONS REFERRED TO IN "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA," INCLUDING THE DLJ ACQUISITION OF DECRANE AIRCRAFT, AND OUR ACQUISITIONS OF AUDIO INTERNATIONAL, INC., AVTECH CORPORATION AND DETTMERS INDUSTRIES, INC. OUR COMPANY We manufacture components for avionics and systems (such as aircraft navigation, communications and flight control systems) and related products, and provide systems integration services, for niche markets within the commercial, regional and high-end corporate aircraft industries. We believe that we are a leading provider of components within each niche market we serve. Since DeCrane Aircraft was founded in 1989, our strategy has been to combine complementary businesses with leading market positions. We generated revenues of $168.9 million for the twelve months ended September 30, 1998, and Adjusted EBITDA of $35.0 million for the same period, on a pro forma basis. (Adjusted EBITDA is defined in "Summary Pro Forma Consolidated Financial Data" herein.) We seek to maximize our sales by emphasizing the complementary nature of our products and services. We manufacture: - electrical contacts; - connectors (which often include our contacts); - wire harness assemblies (which often include our connectors); - structural supports for connectors and harnesses (often packaged with other products of ours and sold as "installation kits"); - dichroic liquid crystal display ("LCD") devices, which are often used as part of display panels in flight deck avionics; - cockpit audio and communications, lighting, and power and control devices for commercial aircraft; and - stereo systems, video monitors, passenger switches, cabin lighting, seating and climate controls for the high-end corporate aircraft market. Our systems integration services include design and engineering of avionics systems, certifications on behalf of the Federal Aviation Administration, the assembly of installation kits for systems to be installed ("kitting"), and installation services. Smoke detection, fire suppression and in-flight entertainment systems for aircraft are among the systems for which we supply design, certification, assembly and/or installation services. We manufacture many of the components required to complete a systems integration project. We believe that our combination of strong component manufacturing and integration capabilities gives us a critical competitive advantage, which would be difficult for competitors to duplicate. 2 By successfully combining and growing complementary businesses, we have achieved strong revenue growth. From 1993 to 1997, our revenues increased from $48.2 million to $108.9 million on a historical basis. That increase resulted in a compound annual growth rate of 22.6%. During the same period, DeCrane Aircraft's EBITDA increased from $6.0 million to $16.9 million on a historical basis, representing a combined annual growth rate of 29.5%. We have realized this growth primarily by: - obtaining new customers and additional business from existing customers; - selectively acquiring complementary avionics businesses, generally with high margins; - taking advantage of favorable trends in the aerospace industry (discussed below); - initiating cost reduction programs and productivity improvements; and - increasing the revenues of acquired businesses, by refocusing or diversifying their strategies and products. Since 1990, we have completed eleven acquisitions, most recently Avtech Corporation and Dettmers Industries, Inc. in June 1998. We believe that demand for our products and services continues to increase as a result of several favorable industry trends such as: - the general increase in new aircraft production; - the increasing demand for cabin and flight deck systems; - the increase in new safety requirements in the U.S. and the adoption by other countries of similar requirements; - the consolidation of approved suppliers and vendors; and - the increased outsourcing of products and services. We have established strong positions in several specialized niches within the commercial aircraft industry. We believe that we are: - the largest supplier of bulk contacts to commercial aircraft original equipment manufacturers (called "OEMs"); - the largest supplier of dichroic LCD devices for use by commercial aircraft OEMs; - the largest provider of aircraft entertainment and cabin management products and systems for the high-end corporate aircraft market; - a major supplier of wire harness assemblies for use in in-flight entertainment systems; and - a leading supplier of cockpit audio controls. We believe that we are well-positioned to take advantage of the foregoing trends and expected growth, as a result of the following competitive strengths: - a diversified revenue base, spanning multiple markets which typically experience different production cycles; - complementary and strategically integrated business lines; - strong customer relationships; - low-cost, high-quality operations; and - authorization to perform key regulatory certifications. 3 We intend to grow our businesses by: - capitalizing on growth in aircraft production and increased demand for cabin and flight deck systems; - emphasizing integrated product systems and complementary services; - expanding and diversifying systems integration services; and - completing additional strategic acquisitions. RECENT DEVELOPMENTS Until August 1998, we were a publicly-held company. In August 1998, a holding company organized by DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities completed a successful tender offer for all shares of our common stock. See "Recent Developments--The DLJ Acquisition." In December 1998, we signed an agreement with certain of the principal shareholders of PATS, Inc. to acquire 100% of its stock for a purchase price of approximately $41.5 million, subject to various adjustments and reserves, and contingent upon the resolution of various conditions. See "Recent Developments--PATS, Inc." RISK FACTORS Investing in the notes involves certain risks. See the section on "Risk Factors." ------------------------ 4 WHERE YOU CAN GET MORE INFORMATION Each registered purchaser of the old notes from the initial purchaser will receive a copy of this Prospectus and any related amendments or supplements. Any registered purchaser may request from us any information it wishes in order to verify the information in this Prospectus. Apart from this Prospectus and any responses we make to those requests, no-one is authorized to give information about this exchange offer or the notes on our behalf. We have filed with the Securities and Exchange Commission a registration statement on the SEC's Form S-1, to register the new notes. This Prospectus is a part of that registration statement. However, the registration statement has additional information which is not included here, in accordance with SEC rules. Our descriptions and statements about any contract or other document in this Prospectus are summaries. We are required to attach copies of most important contracts and documents as exhibits to the registration statement. Our fiscal year ends on December 31. We intend to become a reporting company as a result of the registration of the notes, and file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's reference room in Washington D.C. (Please call the SEC at (202) 942-8090 for further information on the operation of the reference rooms.) You can also request copies of these documents, upon payment of a duplicating fee, by writing to the SEC, or review our SEC filings on the SEC's EDGAR web site, which can be found at http\\www.sec.gov. If you want more information, write or call us at our corporate headquarters located at 2361 Rosecrans Avenue, Suite 180, El Segundo, California 90245. Our telephone number is (310) 725-9123. 5 THE EXCHANGE OFFER We are offering to exchange up to $100,000,000 in principal amount of the new notes for a like amount of old notes. We are making this offering in order to satisfy our obligations under the Registration Rights Agreement relating to the old notes. The terms of the new notes and the old notes are substantially the same in all material respects, except that the new notes will not be subject to liquidated damages penalties for failure to timely register the notes under the Securities Act, and will be more freely transferable by the holders thereof by reason of their registration thereunder. See "Description of Notes." Expiration Date.............. 5:00 p.m., New York City time, on , 1999, unless this exchange offer is extended by us. We will publicly announce any extension or termination of this exchange offer through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. See "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Old Notes." Certain Conditions to this Exchange Offer............... Our obligation to complete this exchange offer is subject to several conditions. We reserve the right to delay the acceptance of old notes for exchange, terminate this exchange offer, extend its expiration date and retain the old notes tendered (subject to your right to withdraw them, noted below), or amend the terms of this exchange offer in any respect. See "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Old Notes" and "--Certain Conditions to the Exchange Offer." Withdrawal Rights............ If you tender old notes, you may withdraw them at any time on or before 5:00 p.m., New York City time on the expiration date, by delivering a written notice of such withdrawal to the Exchange Agent in the manner described under "The Exchange Offer--Withdrawal Rights." Procedures for Tendering Old Notes........................ In order to tender old notes and accept this exchange offer, you must: - complete and sign a Letter of Transmittal, and comply with the instructions which it contains, - forward it (and any other required documents) using a method of delivery permitted by the Letter of Transmittal to the Exchange Agent appointed by us, whose address appears in the Letter of Transmittal, by 5:00 p.m. New York City time on the expiration date, and - either deliver your old notes in the same package, or comply with the guaranteed postponed delivery method noted below. Please note that, if your old notes are held through a broker, dealer, commercial bank, trust company or other nominee, you must contact that person promptly if you wish to tender your notes. See "The Exchange Offer--Procedures for Tendering Old Notes." Questions regarding how to tender and requests for information should be directed to the Exchange Agent. See "The Exchange Offer-- Exchange Agent." Some brokers, dealers, commercial banks, trust companies and other nominees may also tender by book-entry transfer 6 Guaranteed Delivery Procedures................... If you wish to tender your old notes, and they are not readily available, or you cannot deliver them before the expiration date for this exchange offer, you must tender them according to the guaranteed postponed delivery procedures described in "The Exchange Offer-- Guaranteed Delivery Procedures." Restrictions on Resales of New Notes.................... We believe that the new notes issued under this exchange offer, in exchange for old notes, may be offered for resale, resold and otherwise transferred by a holder (other than a broker or dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, if: - the new notes are acquired in the ordinary course of the holder's business; - the holder is able to make the representations to us about the foregoing and related matters which are described in "The Exchange Offer--Resale of New Notes" and in the Letter of Transmittal; - the holder is not participating, and has not entered into an arrangement or understanding to participate, in a distribution of the new notes (as "distribution" is understood under the Securities Act); - the holder is not our affiliate (as "affiliate" is defined in Rule 405 under the Securities Act), or a broker or dealer who purchased the old notes for resale; and - the holder is not a broker or dealer acquired for its own account. However, the foregoing view relies on statements by the staff of the Division of Corporation Finance of the Securities and Exchange Commission, in interpretive letters which discuss other transactions. We have not sought our own interpretive letter, so there is no definitive legal determination of the foregoing issue. Acceptance of Old Notes and Offer, Delivery of New Notes........................ If you tender old notes to us before 5:00 pm New York City time on the day this exchange offer expires, you have not withdrawn them, and you comply with all of the requirements described in this Prospectus, we will promptly deliver new notes to you after the expiration date. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Exchange Agent............... The exchange agent for this exchange offer is State Street Bank and Trust. Its telephone and facsimile numbers are listed in "The Exchange Offer--Exchange Agent" and in the Letter of Transmittal. Use of Proceeds.............. We will not receive any cash proceeds from the issuance of the new notes. See "Use of Proceeds." Certain United States Tax Consequences................. You should review the information under "Certain United States Tax Consequences" before you tender any old notes in this exchange offer. 7 THE NOTES Maturity Date................ September 30, 2008. Interest Payment Dates....... Each March 30 and September 30, beginning March 30, 1999. Optional Redemption.......... We can choose to redeem all or some of the Notes, in cash, - on or after September 30, 2003, for a redemption price specified herein; - on or before September 30, 2001, with the net cash proceeds of any public equity offerings, for a redemption price based on 112% of the principal amount (but we may only redeem 35% of the notes in that case); and - before September 30, 2003, if the change of control events which are described herein occur, and we redeem 100% of the notes, for a redemption price specified herein. See "Description of Notes-- Optional Redemption." Change of Control............ You can require that we repurchase your notes, in cash, if the change of control events which are described herein occur, for a redemption price based on 101% of the principal amount. See "Risk Factors-- Possible Inability to Repurchase Notes upon Change of Control" and "Description of Notes--Repurchase of the Option of Holders Upon Change of Control." Ranking; Guarantors.......... The notes rank junior to the senior indebtedness and secured debt of DeCrane Aircraft, including the debt owed under our bank credit facility. The notes rank equally with any future unsecured, senior subordinated debt of DeCrane Aircraft. The notes are unconditionally guaranteed on a senior subordinated basis by all of our existing wholly-owned domestic subsidiaries, and rank junior to such grantors' senior and unsecured debt and equally with their future unsecured, senior debt. The notes will effectively rank junior to all liabilities of our subsidiaries that are not guarantors. See "Description of Notes-- Note Guarantees." As of September 30, 1998, on a pro forma basis, DeCrane Aircraft and its subsidiary guarantors would have had approximately $89.8 million of senior indebtedness outstanding, and the non-guarantor subsidiaries would have had approximately $1.9 million of liabilities outstanding, including trade payables. Certain Covenants............ The Indenture includes covenants that, among other things, limit the ability of DeCrane Aircraft and our subsidiaries defined as "Restricted Subsidiaries" to; - incur debt; - issue preferred stock; - repurchase capital stock or subordinated debt; - enter into transactions with affiliates; - enter into sale and leaseback transactions; - incur liens, or allow them to exist; 8 - pay dividends or other distributions; - make investments; - sell assets; and - enter into mergers or consolidations. See "Description of Notes---Certain Covenants." The Warrants; the Units...... The old notes were originally sold as "units," paired with warrants for the common stock of DeCrane Aircraft's parent company, DeCrane Holdings. The warrants may trade separately from the notes on and after the effective date of the registration statement of which this Prospectus is a part. The warrants are subject to a separate "shelf" registration statement filed concurrently. See "Description of Notes" and "The Initial Offering." 9 SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA The table below presents summary unaudited pro forma consolidated financial data for DeCrane Aircraft. The summary unaudited pro forma financial data were derived from historical financial data and give pro forma effect to the transactions described in the unaudited pro forma consolidated financial statements included elsewhere in this Prospectus. The pro forma financial data do not purport to represent what the actual results of operations or actual financial position would have been if such transactions had actually occurred on such dates or to project the future results of operations or financial position. The information in this table should be read in conjunction with "Recent Developments--The DLJ Acquisition," "The Initial Offering," "Selected Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the DeCrane Aircraft consolidated financial statements and related notes included elsewhere in this Prospectus. YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) PRO FORMA STATEMENT OF OPERATIONS DATA: Revenues............................................................. $ 160,054 $ 128,953 $ 168,904 Gross profit (2)..................................................... 43,294 44,817 57,224 Operating income..................................................... 8,050 16,182 19,913 Provision for income taxes (benefit)................................. (3,174) 1,623 1,560 Loss before extraordinary item....................................... (10,000) (1,456) (2,881) OTHER PRO FORMA FINANCIAL DATA: EBITDA (3)........................................................... $ 26,678 $ 26,676 $ 33,905 EBITDA margin........................................................ 16.7% 20.7% 20.1% Adjusted EBITDA (4).................................................. $ 28,185 $ 27,089 $ 34,956 Adjusted EBITDA margin............................................... 17.6% 21.0% 20.7% Depreciation and amortization (5).................................... $ 13,992 $ 10,494 $ 13,992 Capital expenditures................................................. 7,251 3,201 4,237 Cash interest expense................................................ 19,886 14,761 19,717 Adjusted EBITDA to cash interest expense............................. 1.4x 1.8x 1.8x OTHER OPERATING DATA: Bookings (6)......................................................... $ 169,038 $ 140,574 $ 181,899 Backlog at end of period (7)......................................... 75,477 84,607 84,607 AS OF SEPTEMBER 30, 1998 (1) --------------------------- (DOLLARS IN THOUSANDS) PRO FORMA BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 4,267 Working capital....................................................................... 47,615 Total assets.......................................................................... 336,609 Total debt (8)........................................................................ 189,867 Mandatorily redeemable preferred stock................................................ -- Stockholder's equity.................................................................. 97,629 See accompanying notes to Summary Pro Forma Consolidated Financial Data. 10 NOTES TO SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA (1) Reflects the following as if each had occurred as of January 1, 1997: (i) the Audio International, Avtech and Dettmers acquisitions; (ii) the DLJ acquisition; and (iii) the Initial Offering. See "Recent Transactions--The DLJ Acquisition," "The Initial Offering" and "Unaudited Pro Forma Consolidated Financial Data." (2) Net of $4.6 million of non-cash acquisition related charges for the year ended December 31, 1997 to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (3) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 2 above. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of DeCrane Aircraft's operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. DeCrane Aircraft believes that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (4) Adjusted EBITDA equals EBITDA plus the following nonrecurring charges: YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) EBITDA (See Note 3 above)............................................ $ 26,678 $ 26,676 $ 33,905 Adjustment for nonrecurring charges: Reduction of corporate expenses.................................... 570 310 452 Consolidation of facilities........................................ 222 -- 109 Non-cash stock option compensation expense......................... 240 73 137 Charge for adverse subleases on vacated manufacturing facilities... 290 -- 290 Expiration of employment contract for a former shareholder of a previously acquired company...................................... 185 30 63 ------------- ------------- ------------- Total adjustments................................................ 1,507 413 1,051 ------------- ------------- ------------- Adjusted EBITDA...................................................... $ 28,185 $ 27,089 $ 34,956 ------------- ------------- ------------- ------------- ------------- ------------- (5) Reflects depreciation of plant and equipment and amortization of goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts, which is classified as a component of interest expense. (6) Bookings represent the total invoice value of purchase orders received during the period. See "Business--Backlog." (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. See "Business-- Backlog." (8) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 11 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA DECRANE AIRCRAFT The table below presents summary historical consolidated financial data for DeCrane Aircraft. The summary historical financial data for the three years ended December 31, 1995, 1996 and 1997 were derived from audited financial statements of DeCrane Aircraft. The summary historical financial data as of and for the nine, eight and one month periods ended September 30, 1997, August 31, 1998 and September 30, 1998, respectively, were derived from the unaudited historical financial statements of DeCrane Aircraft for such periods, which, in the opinion of management of DeCrane Aircraft, reflect normal and recurring adjustments necessary to present fairly the financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The information in this table should be read in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and DeCrane Aircraft's consolidated financial statements and related notes included elsewhere in this Prospectus. (PREDECESSOR) (SUCCESSOR) --------------------------------------------------------- ----------- EIGHT NINE MONTHS MONTHS ONE MONTH YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ------------------------------- SEPTEMBER AUGUST 31, SEPTEMBER 1995 1996(1) 1997(2) 30, 1997(3) 1998(4) 30, 1998(4) --------- --------- --------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues.................... $ 55,839 $ 65,099 $ 108,903 $ 80,887 $ 90,077 $ 16,012 Gross profit(5)............. 12,376 15,707 28,656 20,223 29,976 4,932 Operating income............ 1,835 4,251 11,995 8,595 9,278 960 Interest expense............ 3,821 4,248 3,154 2,598 2,350 1,765 Provision for income taxes(6).................. 1,078 712 3,344 2,191 2,892 (506) Income (loss) before extraordinary item........ (3,446) (817) 5,254 3,564 3,189 (480) Extraordinary loss from debt refinancing(7)............ -- -- (2,078) (2,078) -- (296) Net income (loss)........... (3,446) (817) 3,176 1,486 3,189 (776) OTHER FINANCIAL DATA: EBITDA(8)................... $ 5,471 $ 7,602 $ 16,915 $ 12,022 $ 13,636 $ 3,285 EBITDA margin............... 9.8% 11.7% 15.5% 14.9% 15.1% 20.5% Depreciation and amortization(9)........... $ 3,636 $ 3,351 $ 4,920 $ 3,427 $ 4,358 $ 1,166 Capital expenditures(10).... 1,203 5,821 3,842 2,842 1,745 307 OTHER OPERATING DATA: Bookings(11)................ $ 50,785 $ 81,914 $ 112,082 $ 93,911 $ 94,439 $ 16,890 Backlog at end of period(12)................ 19,761 44,433 49,005 44,791 89,184 84,607 AS OF SEPTEMBER 30, BALANCE SHEET DATA: 1998(13) ------------- Cash and cash equivalents..................................................... $ 4,267 Working capital............................................................... 46,683 Total assets.................................................................. 333,300 Total debt(14)................................................................ 184,893 Stockholders' equity.......................................................... 98,362 See accompanying notes to Summary Historical Consolidated Financial Data. 12 NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (1) Includes the effect of the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred, and the results of Aerospace Display Systems and Elsinore Aerospace Services, Inc. and Elsinore Engineering, Inc. (collectively, "Elsinore") beginning September 18, 1996 and December 5, 1996, respectively, the dates on which they were acquired. (2) Includes the effect of the acquisition of Audio International beginning November 14, 1997, the date on which it was acquired. (3) Excludes the effect of the acquisition of Audio International, which was not acquired until November 14, 1997. (4) The results of operations of Avtech and Dettmers, which were acquired on June 26, 1998 and June 30, 1998, respectively, have been included in DeCrane Aircraft's results of operations for the eight months ended August 31, 1998 (Predecessor) and one month ended September 30, 1998 (Successor). The results of operations for the one month ended September 30, 1998 also reflect the DLJ acquisition. (5) Net of $1.2 million of non-cash charges for the one month ended September 30, 1998 to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (6) Prior to the acquisition of the remaining 25% minority interest in Cory Components in 1996, DeCrane Aircraft did not consolidate the earnings of Cory Components for tax purposes. As such, despite a consolidated pre-tax loss in each of the years, DeCrane Aircraft recorded a provision for income taxes up to the date of the acquisition in February 1996 which primarily relates to Cory Components. (7) Represents: (i) the write-off, net of an income tax benefit, of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by the Company with the net proceeds from its initial public offering in April 1997; and (ii) the write-off, net of income tax benefit, of deferred financing costs as a result of the repayment of DeCrane Aircraft's existing indebtedness in connection with the DLJ acquisition. (8) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 5 above. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of DeCrane Aircraft's operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. DeCrane Aircraft believes that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (9) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts which is classified as a component of interest expense. (10) Includes $4.4 million for the year ended December 31, 1996 related to the acquisition of a manufacturing facility. See "Business--Acquisition History." (11) Bookings represent the total invoice value of purchase orders received during the period. See "Business--Backlog." 13 (12) Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of DeCrane Aircraft's receipt of orders and the speed with which those orders are filled. See "Business--Backlog." (13) Reflects the DLJ acquisition. (14) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 14 EARNINGS TO FIXED CHARGES RATIO The DeCrane Aircraft historical and pro forma earnings to fixed charges ratio for the periods indicated are presented in the tables below. For purposes of calculating the ratio, earnings represents net income before income taxes, minority interest in the income of majority-owned subsidiaries, extraordinary items and fixed charges. Fixed charges consist of: (i) interest, whether expensed or capitalized; (ii) amortization of debt expense and discount relating to any indebtedness, whether expensed or capitalized; and (iii) one-third of rental expense under operating leases which is deemed to be representative of the interest factor. The information in these tables should be read in conjunction with "Recent Developments--The DLJ Acquisition," the "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Consolidated Financial Data" and the financial statements and related notes included elsewhere in this Prospectus. (PREDECESSOR) ------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NINE MONTHS ENDED EIGHT MONTHS ----------------------------------------------------------- SEPTEMBER 30, ENDED AUGUST 31, 1993 1994 1995 1996 1997 1997 1998 ----- --------- --------- ----- ----- ----------------- ----------------- (DOLLARS IN THOUSANDS) HISTORICAL: Earnings to fixed charges ratio: Ratio...................... -- -- -- 1.0x 3.3x 2.9x 3.2x Deficiency................. $ 3 $ 1,808 $ 2,283 $ -- $ -- $ -- $ -- (SUCCESSOR) ----------------- ONE MONTH ENDED SEPTEMBER 30, 1998 ----------------- HISTORICAL: Earnings to fixed charges ratio: Ratio...................... -- Deficiency................. $ 980 YEAR ENDED NINE MONTHS ENDED TWELVE MONTHS DECEMBER 31, SEPTEMBER 30, ENDED SEPTEMBER 1997 1998 30, 1998 ------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) PRO FORMA: Earnings to fixed charges ratio: Ratio............................................ -- 1.0x -- Deficiency....................................... $ 13,062 $ -- $ 1,236 15 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION AS PART OF YOUR EVALUATION OF OUR COMPANY AND ITS BUSINESS BEFORE TENDERING YOUR OLD NOTES IN EXCHANGE FOR THE NEW NOTES. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Prospectus discuss future expectations, beliefs or strategies, projections or other "forward-looking" information. These statements are subject to both known and unknown risks. Many factors could cause actual company results, performance or achievements, or industry results, to be materially different from the projections expressed or implied by this Prospectus. Some of those risks are specifically described below, but we are also vulnerable to a variety of elements which affect many businesses, such as: - - fuel prices and general economic conditions in our market areas, which affect demand for aircraft and air travel, which in turn affect demand for our products and services; - - changes in prevailing interest rates and the availability of financing to fund our plans for continued growth; - - inflation, and other general changes in costs of goods and services; - - liability and other claims asserted against us; - - labor disturbances; and - - changes in operating strategy, or our acquisition and capital expenditure plans. We cannot predict any of the foregoing with certainty, so our forward-looking statements are not necessarily accurate predictions. Also, we are not obligated to update any of these statements, to reflect actual results or report later developments. You should not rely on our forward-looking statements as if they were certainties. SUBSTANTIAL LEVERAGE We incurred significant debt as part of the DLJ acquisition transaction. As of September 30, 1998, on a pro forma basis, we would have had total consolidated indebtedness of approximately $189.9 million, and would have available $41.2 million of additional revolving borrowings under our bank credit facility. (In order to borrow those funds, we will have to satisfy funding conditions of the kind usually imposed in similar agreements.) The bank credit facility, and the Indenture under which the notes are issued, each also permit us to incur significant amounts of additional debt, and to secure that debt with some of our assets. The amount of debt we carry could have important consequences: - it may limit the cash flow available for general corporate purposes, and acquisitions, because a substantial portion of our cash flow must be dedicated to repay the debt; - it may limit our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions; - it may limit our flexibility in reacting to competitive and other changes in the industry and economic conditions generally; and - it may expose us to increased interest expenses, when interest rates fluctuate, because some of our borrowing may be at variable "floating" rates. Our ability to satisfy all of our debt obligations will depend upon our future operating performance and the cash flow it generates. We anticipate that our operating cash flow, together with borrowings under our bank credit facility, will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due. However, if our cash flow is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets or reduce 16 operating expenses, in order to make all required loan payments. For example, a reduction in our operating expenses might reduce important efforts such as selling and marketing programs, management information system upgrades and new product development. If we were unable to service the debt, we could attempt to restructure or refinance our indebtedness or seek additional equity capital. However, we cannot assure you that we will be able to accomplish any of the foregoing on satisfactory terms, or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." RESTRICTIONS AND FINANCIAL COVENANTS IN OUR DEBT AGREEMENTS The Indenture for the notes and our bank credit facility each impose various contractual restrictions on our operations and businesses. Both restrict our ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, enter into certain types of transactions with affiliates, limit the ability of certain of our subsidiaries to pay dividends or make certain payments to DeCrane Aircraft, merge or consolidate with any other person, or transfer, lease or otherwise dispose of substantially all of our assets. Our bank credit facility contains additional restrictions, and prohibits us from prepaying our other indebtedness (including the notes). See "Description of Bank Credit Facility" and "Description of Notes--Certain Covenants." Our bank credit facility requires that we maintain specified financial ratios and satisfy several tests of financial condition. Our ability to do so can be affected by events beyond our control, and we cannot assure you that we will meet those tests. Our failure to do so could result in a default under our bank credit facility or the notes. SUBORDINATION OF THE NOTES TO SENIOR DEBT; POSSIBLE ADDITIONAL SUBORDINATED DEBT The notes are general unsecured obligations of DeCrane Aircraft and of those of its subsidiaries which have provided note guarantees. The notes rank lower in right of payment than most of the debt of those companies (including the amounts owed under the bank credit facility). The senior creditors have rights which might reduce the payments made to you as a holder of the notes. Among other things: - As of September 30, 1998, on a pro forma basis, DeCrane Aircraft and the guarantor subsidiaries would have had outstanding about $89.8 million of senior debt. We would be required to pay all of this senior debt in full, before paying the holders of the notes, if DeCrane Aircraft or one of the guarantor subsidiaries suffers a bankruptcy filing, insolvency, liquidation or similar event; or if our senior debt is accelerated. - Also, we are blocked from paying holders of the notes whenever there is a payment default on senior debt, and principal and premium payments may also be blocked for up to 179 days while there is a non-payment default on senior debt. See "Description of Notes--Subordination" for the terms of this subordination. - The bank credit facility is secured by our key assets (excluding assets of our foreign subsidiaries). If the senior debt defaults, the lenders could choose to declare all outstanding amounts immediately due and payable, and seek foreclosure of the property we granted to them as collateral. We cannot assure you that, if our bank credit facility were accelerated, our assets would be sufficient to repay all of our debt (including the notes) in full. - Holders of debt and other liabilities of our subsidiaries that are not guarantors will also have claims that are effectively senior to the notes. As of September 30, 1998, on a pro forma basis, our non-guarantor subsidiaries would have had $1.9 million of outstanding liabilities, including trade payables. We are also allowed to incur additional debt with the same payment priority ("PARI PASSU") as the notes. In that case, its holders would be entitled to share with you in any proceeds paid from our assets. 17 HOLDING COMPANY STRUCTURE; RELIANCE ON CASH FLOW FROM SUBSIDIARIES We conduct all of our operations through subsidiaries. DeCrane Aircraft's ability to meet its debt service obligations will depend upon it receiving dividends from those operations. The Indenture may allow our subsidiaries to enter into future loan agreements which restrict or prohibit them from paying dividends to DeCrane Aircraft. See "Description of Notes--Certain Covenants." State law may also limit the amount of the dividends that our subsidiaries are permitted to pay to DeCrane Aircraft. HISTORICAL NET LOSSES On a pro forma basis, taking into account the DLJ acquisition transactions, we would have had a $10.0 million loss before extraordinary items for the twelve months ended December 31, 1997. See "Unaudited Pro Forma Consolidated Financial Data." In the past, our acquisitions resulted in increased interest and amortization expenses. As a result we incurred historical net losses in each year from our inception through 1996, despite positive operating income. The first historical net profit we reported occurred in 1997, in part because of the repayment of a significant part of our outstanding debt with the net proceeds of our initial public offering. We cannot assure you that our future operations will generate sufficient earnings to pay our obligations. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH ACQUISITIONS Our ability to grow by acquisition depends on the availability of suitable acquisition candidates and capital, and by restrictions contained in our bank credit facility and the Indenture. We are continually engaged in discussions with potential acquisition candidates. However, it is not certain that we will complete any potential acquisition. It is also not certain whether we will be able to identify suitable acquisition candidates, complete acquisitions or obtain satisfactory financing for them. Also, we may have difficulty integrating the operations and personnel of acquired companies, or amortizing acquired intangible assets. We may not always be able to retain the key employees of acquired companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Acquisition History" and "Business--Growth Strategy." AIRCRAFT INDUSTRY RISKS Our principal customers include the world's OEMs in the commercial, regional, corporate and military aircraft markets. - COMMERCIAL AIRCRAFT. The principal market for OEMs of commercial aircraft (100 seats and over) is the commercial airline industry, which is cyclical and has been adversely affected by a number of factors, including increased fuel and labor costs and intense price competition. For example, new commercial aircraft deliveries declined from a peak of approximately 767 aircraft in 1991 to approximately 367 aircraft in 1995, according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by Standard and Poor's Industry Surveys (the "S&P Report"); and Boeing has also recently announced production line cutbacks for 1999 and 2000. - REGIONAL AIRCRAFT. The principal markets for regional OEMs are the commercial and commuter airline industry. Commuter airlines, like commercial airlines, operate in a cyclical industry subject to the adverse factors noted above. We cannot assure you that this market will continue to grow. - CORPORATE AIRCRAFT. The principal markets for such OEMs are corporations and wealthy individuals. The corporate aircraft market is also cyclical and has been adversely affected by a number of factors, including the general state of the U.S. economy, corporate profits, interest rates and commercial airline fares. A downturn in any of these factors could depress the demand for corporate aircraft. 18 - MILITARY AIRCRAFT. The military aircraft industry is dependent upon the level of equipment expenditures by the armed forces of countries throughout the world, and especially those of the United States. In recent years, this industry has been adversely affected by a number of factors, including the reduction in military spending since the end of the Cold War. Further decreases in military spending could further depress demand for military aircraft. A downturn in any of the foregoing markets could adversely affect our business. See "Business-- Industry Overview and Trends." DEPENDENCE ON KEY CUSTOMERS Our two largest customers for the fiscal year ended December 31, 1997, were Boeing (including McDonnell Douglas) and Matsushita Avionics Systems ("Matsushita"). Boeing accounted for 22.1% of our consolidated revenues for that year, and Matsushita for 7.6%, on a pro forma basis. In addition, a significant part of our sales of components are sold to Boeing indirectly, through sales to suppliers of Boeing. Most of our sales contracts with Boeing allow Boeing to stop purchasing or terminate the contract at any time. In addition, under certain circumstances, those contracts may allow Boeing to enforce alternative economic terms, which would make the contracts less commercially favorable to us. During October 1997, Boeing announced that parts shortages adversely affected its production and delivery rates. Boeing shut down its 737 and 747 production lines for approximately one month and did not resume normal production rates until late November 1997. In late 1998, among other things, Boeing announced reductions in its previously scheduled production for the 747, 757, 767 and 777 programs in 1999 and 2000. (See "--Instability in Asian Markets," below.) Boeing might suffer further production schedule disruptions. We generally sell components and services to Matsushita pursuant to purchase orders. However, we do have a supply agreement for connectors through September 1999. On a pro forma basis, in the first nine months of 1998 as compared to the same period in 1997, our sales to Boeing increased $0.2 million while our sales to Matsushita declined by $2.3 million. A significant decline in business from any one of our key customers could have a material adverse effect on our business. See "Business--Customers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INSTABILITY IN ASIAN MARKETS The Asian markets are important for commercial aircraft and avionics OEMs. Boeing has a large backlog of aircraft sales to customers in Asia, and some deliveries have been deferred or cancelled. Among other things, in recent press releases, Boeing projects that its 747 production rates will be reduced by approximately 42% in late 1999 and by 71% in early 2000 if market conditions fail to improve. That situation could, if it continues or worsens, result in additional significant cancellations or deferrals of deliveries for new aircraft. Those events would adversely affect the OEMs, which could have a material adverse effect on our business. PRODUCTS INSURANCE AND RISKS OF EXCESS LOSSES We currently carry aviation products insurance. However, we cannot assure you that our existing insurance coverage will be adequate to cover claims, or that such coverage can be renewed. REGULATION BY THE FAA The Federal Aviation Administration prescribes standards and licensing requirements for aircraft components, licenses private repair stations and issues Designated Air Station approvals, which give the holder the right to certify certain aircraft design modifications on behalf of the FAA. Our ability to arrange for rapid government certification of systems integration services is important to our business. It depends on our continuing access to, or use of, these FAA certifications and approvals, and our employment of, or access to, FAA-certified individual engineering professionals. We cannot assure you that we will continue to have adequate access to those certifications, approvals and certified 19 professionals. The FAA curtailed our subsidiary's use of a Designated Air Station certification for new projects for several months during 1997, until the facility was brought into compliance with the FAA's regulations governing FAA-certified repair stations. See "Business--Industry Regulation." The loss of a required license or certificate, or its unavailability, could adversely affect our operations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business. See "Business--Industry Regulation." FLUCTUATIONS IN GOLD AND COPPER PRICES A significant portion of the cost of the materials used in our contacts is comprised of the cost of gold, and to a lesser extent, the cost of copper. Accordingly, a significant increase in the price of gold or copper could adversely affect our results of operations. We have not purchased commodities contracts for gold or copper and do not anticipate doing so. See "Business--Raw Materials and Component Parts." LIMITED SUPPLY OF QUALIFIED ENGINEERING PERSONNEL Our ability to attract and retain a high-quality engineering staff is important to our business. Competition for qualified avionics engineers is intense. We cannot assure you that we will be able to retain our existing engineering staff or fill new positions or vacancies created by expansion or turnover. See "Business--Products and Services" and "Business--Employees." ENVIRONMENTAL RISKS AND REGULATIONS We are subject to various local and foreign environmental laws and regulations. Certain laws, particularly the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of certain such sites. Given the retroactive nature of CERCLA liability, it is possible that we will receive additional notices of potential liability relating to current or former activities. See "Business-- Environmental Matters." We may incur costs in the future for prior waste disposal by us or former owners of our subsidiaries or our facilities. Some of our operations are located on properties which are contaminated to varying degrees. Some of our manufacturing processes create wastewater which requires chemical treatment, and one of our facilities has been cited for failure to adequately treat that water. See "Business--Legal Proceedings." We may incur costs in the future to address existing or future contamination. EXPOSURE TO FOREIGN CURRENCY FLUCTUATIONS We have a manufacturing facility in Switzerland, and incur in Swiss Francs a significant percentage of the cost of the contact blanks we manufacture there. As a result our financial results are subject to fluctuations of the Swiss Franc in relation to the U.S. Dollar. From 1996 through 1998, in order to reduce the risks of currency fluctuations, we have entered into forward exchange contracts to purchase Swiss Francs. We expect to continue to hedge our foreign exchange risk as appropriate. We do not invest in foreign currency for speculative purposes. However, we cannot assure you that our hedging activities will prevent currency fluctuations from adversely affecting our results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS We are dependent in part on computer- and date-controlled systems for some internal functions, particularly inventory control, purchasing, customer billing and payroll. Similarly, suppliers of 20 components and services on which we rely, and our customers, may have Year 2000 compliance risks which would affect their operations and their transactions with us. Our review of these third-party compliance risks from our key vendors and customers is not yet complete. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Compliance of Key Systems With Year 2000 Performance Standards." Although we are not aware of any material customer- or vendor-related Year 2000 issues, we can not currently evaluate the magnitude of our exposure. Because of the complexity of these issues and the interdependence of many companies using computer- and date-controlled systems, our assessment of the risks may be incorrect. Additionally, in view of the mixed results achieved by software vendors in correcting these problems, we cannot assure you that new systems we obtain to replace noncompliant systems will themselves prove to be fully compliant. Based on current information, we expect that our costs to remediate and test our systems, and evaluate the risks of our key customers and vendors, will not be material. Our management does not anticipate encountering any significant failures of Year 2000 compliance in our systems, products or supply chain that would materially disrupt our operations. However, we may experience cost overruns and delays as we replace or modify our systems, or address our third-party exposures, which could have a material adverse effect on our consolidated financial position, results of operations or cash flow. We cannot assure you that our assessment of the foregoing risks from our own systems and products, or those of our customers or vendors, is or will be correct. We have not yet determined the extent of contingency planning that may be required if we have incorrectly assessed the foregoing Year 2000 risks. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Compliance of Key Systems With Year 2000 Performance Standards." POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL If we experience a change of control (of the types defined in the Indenture), you will have the right to require us to repurchase all or any part of your notes at an offer price in cash equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, if any, thereon to the date of repurchase. We cannot assure you that we will have sufficient resources to satisfy our repurchase obligation to every Note holder following a change of control. See "Description of Notes--Repurchase at the Option of Holders-- Change of Control." Our bank credit facility prohibits us from purchasing the notes, and makes certain change of control events a default. The terms of any other future senior debt may contain similar restrictions. If a change of control occurs while any senior debt prohibits us from purchasing the notes, we could seek the consent of the senior lenders to the purchase, or attempt to refinance the debt which prohibits it. However, we can not assure you that those attempts would be successful. If they are not, we would still be prohibited from repurchasing the notes. Our failure to do so would result in a default under the Indenture (which would probably also result in a default in the senior debt, and therefore block any payments to you). See "--Subordination of the Notes to Senior Debt; Possible Additional Subordinated Debt" and "Description of Notes." CONTROL OF DECRANE AIRCRAFT BY PRINCIPAL SHAREHOLDERS DeCrane Aircraft is wholly owned by DeCrane Holdings, and all of the outstanding shares of common stock of DeCrane Holdings are held by the DLJMB Funds. (The DLJMB Funds own approximately 94% of the common stock of DeCrane Holdings, on a fully diluted basis assuming exercise of all outstanding warrants.) As a result of their stock ownership, the DLJMB Funds control DeCrane Holdings and DeCrane Aircraft, and have (among other things) the power to elect all of their directors, appoint new management, approve sales of all or substantially all of the assets of the companies, issue additional capital stock, establish stock purchase programs and declare dividends. The general partners of each of the DLJMB Funds are affiliates or employees of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc."). DLJ Capital Funding, Inc., which is an agent and lender under our bank credit facility, DLJ Bridge Finance, Inc., which purchased the original bridge notes refinanced 21 by the old notes, and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), which was the initial purchaser of the old notes, are also affiliates of DLJ, Inc. The interests of those principal shareholders could conflict with your interests as a holder of the notes. Those shareholders may also have an interest in pursuing transactions that they believe enhance the value of their equity investment in DeCrane Aircraft or DeCrane Holdings, even though the transactions involve risks to your investment in the notes. FRAUDULENT TRANSFER STATUTES Federal and state "fraudulent transfer" laws permit certain obligations to be undone or rescinded if certain tests having to do with the obligation, the person's intent and the person's financial condition are satisfied. Our repayment obligations to you under the notes could be impaired by those laws is a court determined that, when entering into or exchanging the notes, either: - we had the actual intent to hinder, delay or defraud current or future creditors, or - we received less than fair consideration or reasonably equivalent value for incurring the debt represented by the notes, AND we were: - insolvent or were rendered insolvent by reason of the issuance of the notes, or - were engaged, or about to engage, in a business or transaction for which our assets were unreasonably small, or - intended to incur, or believed (or should have believed) we would incur, debts beyond our ability to pay as such debts mature. Based on such a finding, a court could avoid all or a portion of our obligations to you, subordinate your right to repayment to our other existing and future senior debt (in which case those other creditors would be paid in full before any payment could be made on the notes), and take other action detrimental to your rights, including invalidating the notes. We cannot assure you that, if that occurred, you would ever recover any repayment on your notes. The definition of insolvency used in the foregoing tests varies among jurisdictions, depending upon the court and the law that is being applied. It is not certain what standard a given court would apply, in determining whether we were insolvent on a particular date, or regarding other grounds that might lead it to take the actions noted above. NO PRIOR PUBLIC MARKET FOR THE NOTES Prior to the registration of the new notes, there was no public market for the notes. In addition, the liquidity of the trading market in the notes, and the market price quoted for the notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, you cannot be sure that an active trading market will develop for these notes. 22 RECENT DEVELOPMENTS THE DLJ ACQUISITION In August 1998, DeCrane Holdings and two other holding companies organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") completed a successful tender offer for all shares of our common stock (including options to purchase shares, net of the exercise proceeds) for $23.00 per share, resulting in a net price of approximately $182.0 million. At the completion of the tender offer, the two other holding companies merged with DeCrane Aircraft. All of our old outstanding shares were cancelled, non-tendering shareholders were paid out, and as a result DeCrane Aircraft became a wholly-owned subsidiary of DeCrane Holdings. Prior to the tender offer, one of the merging holding companies entered into a $130.0 million syndicated bank credit facility, with a group of lenders led by DLJ Capital Funding, Inc. That syndicated facility is now our bank credit facility. For its principal terms, see "Description of Bank Credit Facility." The initial borrowings from that facility totalled $80.0 million of term loans and $5.4 million of revolving loans, and were used to fund the purchase of shares in the tender offer, as well as to refinance existing debt of DeCrane Aircraft. That same merging company also issued $100.0 million of senior subordinated increasing rate notes to DLJ Bridge Finance, Inc., before merging into DeCrane Aircraft, making the bridge notes our obligation. The proceeds from those bridge notes were used to fund the tender offer purchases. The bridge notes were refinanced by our issuance of the old notes in October 1998 to the initial purchaser Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"). See "The Initial Offering." DeCrane Holdings raised additional funds for the tender offer purchases, and expenses of the acquisition transactions, by selling all of the shares of its common stock for $65.0 million and all of the shares of its Senior Redeemable Exchangeable Preferred Stock due 2009 ("DeCrane Holdings Preferred") for $34.0 million. DeCrane Holdings also issued to the DLJMB Funds warrants to acquire an additional 5% of its common stock on a fully diluted basis (assuming exercise of all of the warrants). The following table sets forth the cash sources and uses of funds for the DLJ acquisition, including the Initial Offering (completed in October 1998) and related fees and expenses (dollars in thousands): SOURCES Cash from income tax refund (1)................................................ $ 4,368 Proceeds from the exercise of stock options.................................... 4,314 Bank credit facility: Revolving credit facility.................................................... 5,400 Term facility................................................................ 80,000 Units sold in the Initial Offering............................................. 100,000 DLJMB equity investment........................................................ 99,000 Estimated additional borrowings to fund transaction fees and expenses.......... 2,528 ----------- Total Sources............................................................ $ 295,610 ----------- ----------- USES Purchase price for the shares.................................................. $ 173,116 Purchase of shares from the exercise of stock options.......................... 13,194 Repayment of prior senior credit facility...................................... 93,000 Estimated transaction fees and expenses........................................ 16,300 ----------- Total Uses............................................................... $ 295,610 ----------- ----------- - ------------------------ (1) As of June 30, 1998, DeCrane Aircraft had approximately $4.4 million of income taxes refundable. Since that time, we have received $4.2 million of this amount and used the cash to reduce our indebtedness. 23 PATS, INC. In December 1998, we signed an agreement with certain of the principal shareholders of PATS, Inc. to acquire 100% of its stock for a purchase price of approximately $41.5 million, subject to adjustments for changes to its net working capital, and reserves for certain environmental and other indemnities made by the shareholders. PATS is a designer, manufacturer and installer of auxiliary fuel tanks which significantly extend the flight range of commercial and corporate aircraft. Among other things, PATS is the principal supplier of auxiliary fuel tank systems to the Boeing Business Jet program. PATS also is a supplier of auxiliary power units which supply ground power to aircraft. However, our obligation to close this acquisition is conditional, and will depend on the resolution of various issues, including our obtaining financing on satisfactory terms, the completion of our ongoing diligence review of PATS' business and operations, the agreement to sell by 100% of PATS' shareholders, and the satisfactory completion of our review and analysis of PATS' major contracts. We may or may not be able to satisfactorily resolve each of these issues. USE OF PROCEEDS We are conducting this exchange offer in order to satisfy our obligations under the Registration Rights Agreement entered into at the time of the initial offering of the old notes. We will not receive any cash proceeds from the issuance of the new notes, or the exchanges made by tendering holders of notes. The old notes surrendered in the exchange will be canceled, so our issuance of the new notes will not increase our outstanding debt. The terms of the new notes and the old notes are substantially the same in all material respects, except that the new notes will not be subject to liquidated damages penalties for failure to timely register the notes under the Securities Act, and will be more freely transferable by the holders thereof by reason of their registration thereunder. 24 CAPITALIZATION The following table sets forth the historical cash and cash equivalents and consolidated capitalization of DeCrane Aircraft as of September 30, 1998 and on a pro forma basis. This table should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere herein, the "Unaudited Pro Forma Consolidated Financial Statements" and notes thereto included elsewhere herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." AS OF SEPTEMBER 30, 1998 ----------------------- ACTUAL PRO FORMA ---------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................................................. $ 4,267 $ 4,267 ---------- ----------- ---------- ----------- Total debt: Bank credit facility Term facility......................................................................... $ 80,000 $ 80,000 Revolving credit facility(1).......................................................... 3,800 8,774 Senior Subordinated Notes due 2008(2)................................................... 100,000 100,000 Other debt.............................................................................. 1,093 1,093 ---------- ----------- Total debt................................................................................ 184,893 189,867 Mandatorily redeemable preferred stock.................................................... -- -- Stockholder's equity...................................................................... 98,362 97,629 ---------- ----------- Total capitalization...................................................................... $ 283,255 $ 287,496 ---------- ----------- ---------- ----------- - ------------------------ (1) Pro forma reflects the additional borrowing required to fund the transaction expenses of the Initial Offering and the accrued interest on the old notes. See Note 2 to the "Unaudited Pro Forma Consolidated Financial Data" on page 32. (2) The bridge notes outstanding as of September 30, 1998 in the original principal amount of $100.0 million were refinanced on October 2, 1998 by the old notes which are the subject of this exchange offer. 25 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA BASIS OF PRESENTATION The following unaudited pro forma consolidated financial data of DeCrane Aircraft are based on its historical financial statements adjusted to reflect certain transactions that are aggregated into two categories: the "Acquisition Adjustments" and the "Offering Adjustments", each described below. Unaudited pro forma consolidated statements of operations are presented for the year ended December 31, 1997, the nine months ended September 30, 1998 and the twelve months ended September 30, 1998. Those statements reflect the Acquisition Adjustments and the Offering Adjustments as if they had occurred as of January 1, 1997. The unaudited pro forma consolidated balance sheet reflects the Offering Adjustments as of September 30, 1998; all of the Acquisition Adjustment events had occurred by that date and are also reflected. The Acquisition Adjustments reflect the Audio International, Avtech and Dettmers acquisitions and the DLJ acquisition. For additional information on the Audio International, Avtech and Dettmers acquisitions, see the discussion in Note 3 to DeCrane Aircraft's consolidated financial statements included elsewhere in this Prospectus. For additional information on the DLJ acquisition, see the discussion under Note 1 to DeCrane Aircraft's consolidated financial statements. The Offering Adjustments reflect the issuance and sale of units in the initial offering (comprised of the old notes and warrants for the common stock of DeCrane Holdings) and additional revolving credit facility borrowings and the use of the proceeds therefrom to repay the bridge notes, including accrued interest, and fees and expenses as described in the use of proceeds table in "Recent Developments--The DLJ Acquisition." For additional information on the units in the initial offering, see the discussion in Note 1 to DeCrane Aircraft's consolidated financial statements. The pro forma adjustments are based upon available information and certain assumptions management believes are reasonable under the circumstances. The unaudited pro forma consolidated financial data and accompanying notes should be read in conjunction with the historical consolidated financial statements of DeCrane Aircraft, Audio International and Avtech, including the notes thereto, included elsewhere in this Prospectus. The pro forma financial data do not purport to represent what DeCrane Aircraft's actual results of operations or actual financial position would have been if the transactions described above in fact occurred on such dates or to project DeCrane Aircraft's results of operations or financial position for any future period or date. For a discussion of the consequences of the incurrence of indebtedness in connection with the DLJ acquisition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 26 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1998 DECRANE AIRCRAFT HISTORICAL OFFERING (SUCCESSOR)(1) ADJUSTMENTS(2) PRO FORMA ----------- -------------- --------- (DOLLARS IN THOUSANDS) ASSETS Current assets Cash and cash equivalents....................... $ 4,267 $ -- $ 4,267 Accounts receivable, net........................ 28,617 -- 28,617 Inventories..................................... 37,343 -- 37,343 Income taxes refundable......................... 3,000 -- 3,000 Prepaid expenses and other current assets....... 1,472 -- 1,472 ----------- -------------- --------- Total current assets.......................... 74,699 -- 74,699 ----------- -------------- --------- Property and equipment, net....................... 28,215 -- 28,215 Other assets, principally intangibles, net........ Goodwill and other intangibles.................. 219,954 -- 219,954 Deferred financing costs........................ 6,866 2,097(3) 8,963 Deferred income taxes........................... 3,020 1,212(4) 4,232 Other assets.................................... 546 -- 546 ----------- -------------- --------- Net other assets, principally intangibles..... 230,386 3,309 233,695 ----------- -------------- --------- $333,300 $ 3,309 $336,609 ----------- -------------- --------- ----------- -------------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings........................... $ 80 $ -- $ 80 Current portion of long-term obligations........ 1,267 -- 1,267 Accounts payable................................ 9,801 -- 9,801 Accrued expenses................................ 15,258 (932)(5) 14,326 Income taxes payable............................ 1,610 -- 1,610 ----------- -------------- --------- Total current liabilities..................... 28,016 (932) 27,084 ----------- -------------- --------- Long-term liabilities Revolving credit facility....................... 3,800 4,974(6) 8,774 Term facility................................... 79,550 -- 79,550 Bridge notes.................................... 100,000 (100,000)(7) -- Senior subordinated notes....................... -- 100,000(8) 100,000 Other long-term obligations..................... 196 -- 196 Deferred income taxes........................... 22,844 -- 22,844 Other long-term liabilities..................... 532 -- 532 ----------- -------------- --------- Total long-term liabilities................... 206,922 4,974 211,896 ----------- -------------- --------- Stockholder's equity.............................. 98,362 (733)(9) 97,629 ----------- -------------- --------- $333,300 $ 3,309 $336,609 ----------- -------------- --------- ----------- -------------- --------- See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 27 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 ACQUISITION ADJUSTMENTS ---------------------------------------------------- DECRANE COMPANIES ACQUIRED (10) AIRCRAFT --------------------------------------- HISTORICAL AUDIO (1) INTERNATIONAL, AVTECH DETTMERS OFFERING (PREDECESSOR) INC. CORPORATION INDUSTRIES ADJUSTMENTS ADJUSTMENTS PRO FORMA ------------- -------------- ----------- ---------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues..................... $108,903 $12,431 $34,689 $4,283 $ (252)(11) $-- $160,054 Cost of sales................ 80,247 7,345 22,396 2,917 3,855(12) -- 116,760 ------------- ------- ----------- ---------- ----------- ----------- --------- Gross profit................. 28,656 5,086 12,293 1,366 (4,107) -- 43,294 Selling, general and administrative expenses.... 15,756 3,983 7,036 1,029 (2,184)(13) -- 25,620 ESOP contribution............ -- -- 1,200 -- (1,200)(16) -- -- Amortization of intangible assets..................... 905 -- -- -- 8,719(17) -- 9,624 ------------- ------- ----------- ---------- ----------- ----------- --------- Operating income (loss)...... 11,995 1,103 4,057 337 (9,442) -- 8,050 Interest expense (income).... 3,154 8 (305) 21 16,269(18) 1,890(21) 21,037 Other expenses (income)...... 243 5 (59) (2) -- -- 187 ------------- ------- ----------- ---------- ----------- ----------- --------- Income (loss) before provision for income taxes and extraordinary item..... 8,598 1,090 4,421 318 (25,711) (1,890) (13,174) Provision for income taxes (benefit).................. 3,344 365 1,487 -- (7,611)(20) (759)(22) (3,174) ------------- ------- ----------- ---------- ----------- ----------- --------- Income (loss) before extraordinary item (23).... $ 5,254 $ 725 $ 2,934 $ 318 $(18,100) $(1,131) $(10,000) ------------- ------- ----------- ---------- ----------- ----------- --------- ------------- ------- ----------- ---------- ----------- ----------- --------- OTHER FINANCIAL DATA: EBITDA (24).................. $ 16,915 $ 1,226 $ 4,602 $ 373 $ 3,562 $-- $ 26,678 Depreciation and amortization (25)....................... 4,920 123 545 36 8,368 -- 13,992 Capital expenditures......... 3,842 343 3,009 57 -- -- 7,251 Cash interest expense........ 2,716 41 6 21 15,369 1,733 19,886 See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 28 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 ACQUISITION ADJUSTMENTS ------------------------------------ COMPANIES ACQUIRED (10) DECRANE AIRCRAFT HISTORICAL (1) ----------------------- -------------------------- AVTECH DETTMERS OFFERING (PREDECESSOR) (SUCCESSOR) CORPORATION INDUSTRIES ADJUSTMENTS ADJUSTMENTS PRO FORMA ------------- ----------- ----------- ---------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues...................... $90,077 $ 16,012 $20,984 $2,013 $ (133)(11) $-- $128,953 Cost of sales................. 60,101 11,080 13,267 1,454 (1,766)(12) -- 84,136 ------------- ----------- ----------- ---------- ----------- ----------- --------- Gross profit.................. 29,976 4,932 7,717 559 1,633 -- 44,817 Selling, general and administrative expenses..... 15,719 3,170 3,695 760 (1,927)(13) -- 21,417 Nonrecurring acquisition expenses.................... 3,632 -- 1,229 -- (4,861)(14) -- -- Nonrecurring bonuses and employment contract termination expenses........ -- -- 3,592 -- (3,592)(15) -- -- ESOP contribution............. -- -- 300 -- (300)(16) -- -- Amortization of intangible assets...................... 1,347 802 -- -- 5,069(17) -- 7,218 ------------- ----------- ----------- ---------- ----------- ----------- --------- Operating income (loss)....... 9,278 960 (1,099) (201) 7,244 -- 16,182 Interest expense (income)..... 2,350 1,765 (60) 13 11,542(18) 12(21) 15,622 Other expenses (income)....... 847 181 (35) -- (600)(19) -- 393 ------------- ----------- ----------- ---------- ----------- ----------- --------- Income (loss) before provision for income taxes and extraordinary item.......... 6,081 (986) (1,004) (214) (3,698) (12) 167 Provision for income taxes (benefit)................... 2,892 (506) (322) -- (436)(20) (5)(22) 1,623 ------------- ----------- ----------- ---------- ----------- ----------- --------- Income (loss) before extraordinary item (23)..... $ 3,189 $ (480) $ (682) $ (214) $ (3,262) $ (7) $ (1,456) ------------- ----------- ----------- ---------- ----------- ----------- --------- ------------- ----------- ----------- ---------- ----------- ----------- --------- OTHER FINANCIAL DATA: EBITDA (24)................... $13,636 $ 3,285 $ (837) $ (197) $ 10,789 $-- $ 26,676 Depreciation and amortization (25)........................ 4,358 1,166 262 4 4,704 -- 10,494 Capital expenditures.......... 1,745 307 1,145 4 -- -- 3,201 Cash interest expense......... 2,378 1,641 -- 13 10,835 (106) 14,761 See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 29 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED SEPTEMBER 30, 1998 ACQUISITION ADJUSTMENTS ---------------------------------------------------- COMPANIES ACQUIRED (10) DECRANE --------------------------------------- AIRCRAFT AUDIO HISTORICAL INTERNATIONAL, AVTECH DETTMERS OFFERING (1) INC. CORPORATION INDUSTRIES ADJUSTMENTS ADJUSTMENTS PRO FORMA ------------- -------------- ----------- ---------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Revenues..................... $134,105 $ 1,269 $30,634 $3,220 $ (324)(11) $-- $168,904 Cost of sales................ 90,764 1,165 19,761 2,274 (2,284)(12) -- 111,680 ------------- ------- ----------- ---------- ----------- ----------- --------- Gross profit................. 43,341 104 10,873 946 1,960 -- 57,224 Selling, general and administrative expenses.... 23,633 753 5,523 1,053 (3,275)(13) -- 27,687 Nonrecurring acquisition expense.................... 3,632 -- 1,229 -- (4,861)(14) -- -- Nonrecurring bonuses and employment contract termination expenses....... -- -- 3,592 -- (3,592)(15) -- -- ESOP contribution............ -- -- 600 -- (600)(16) -- -- Amortization of intangible assets..................... 2,438 -- -- -- 7,186(17) -- 9,624 ------------- ------- ----------- ---------- ----------- ----------- --------- Operating income (loss)...... 13,638 (649) (71) (107) 7,102 19,913 Interest expense (income).... 4,671 7 (169) 19 16,072(18) 265(21) 20,865 Other expenses (income)...... 1,029 4 (62) (2) (600)(19) -- 369 ------------- ------- ----------- ---------- ----------- ----------- --------- Income (loss) before provision for income taxes and extraordinary item..... 7,938 (660) 160 (124) (8,370) (265) (1,321) Provision for income taxes (benefit).................. 3,539 (259) 74 -- (1,687)(20) (107)(22) 1,560 ------------- ------- ----------- ---------- ----------- ----------- --------- Income (loss) before extraordinary item (23).... $ 4,399 $ (401) $ 86 $ (124) $ (6,683) $ (158) $ (2,881) ------------- ------- ----------- ---------- ----------- ----------- --------- ------------- ------- ----------- ---------- ----------- ----------- --------- OTHER FINANCIAL DATA: EBITDA (24).................. $ 21,814 $ (630) $ 334 $ (93) $ 12,480 $-- $ 33,905 Depreciation and amortization (25)....................... 7,017 19 405 14 6,537 -- 13,992 Capital expenditures......... 3,052 -- 1,167 18 -- -- 4,237 Cash interest expense........ 4,566 9 -- 18 15,016 108 19,717 See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data. 30 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (1) As of September 30, 1998, reflects DeCrane Aircraft's financial position subsequent to the DLJ acquisition. For the year ended December 31, 1997, reflects DeCrane Aircraft's historical results of operation prior to the DLJ acquisition (Predecessor). For the nine months ended September 30, 1998, reflects DeCrane Aircraft's historical results of operations for the following periods: (i) eight months ended August 31, 1998 prior to the DLJ acquisition (Predecessor); and (ii) one month ended September 30, 1998 subsequent to the DLJ acquisition (Successor). For the twelve months ended September 30, 1998, reflects DeCrane Aircraft's historical results of operations for the following periods: (i) eleven months ended August 31, 1998 prior to the DLJ acquisition (Predecessor); and (ii) one month ended September 30, 1998 subsequent to the DLJ acquisition (Successor). (2) Sources and uses of cash for the initial offering as of September 30, 1998 are as follows (dollars in thousands): SOURCES: Proceeds from units sold in the initial offering................ $ 100,000 Revolving credit facility borrowings............................ 4,974 --------- Total Sources................................................. $ 104,974 --------- --------- USES: Repayment of bridge notes....................................... $ 100,000 Estimated transaction fees and expenses......................... 4,042 Payment of bridge notes accrued interest........................ 932 --------- Total Uses.................................................... $ 104,974 --------- --------- (3) Reflects: (i) $4.0 million of transaction fees and expenses attributable to the initial offering; (ii) the $1.2 million value ascribed to the warrants issued as part of the units in the Initial Offering and capitalized as deferred financing costs; and (iii) a $3.1 million write-off of deferred financing costs associated with the bridge notes. (4) Reflects the income tax benefit (at 38.5%) of the $3.1 million write-off of bridge notes deferred financing costs. (5) Reflects the payment of accrued interest on the bridge notes. (6) Reflects revolving credit facility borrowings required to fund the transaction fees and expenses and bridge notes accrued interest paid in conjunction with the initial offering. (7) Reflects repayment of the bridge notes with the proceeds from the initial offering. (8) Reflects the $100.0 million of notes sold in the initial offering. (9) Reflects the write-off of the bridge notes deferred financing costs, net of income tax benefit, offset by the $1.2 million value ascribed to the warrants and recorded as additional paid-in capital. (10) Represents the results of operations for the companies acquired for the periods not included in the DeCrane Aircraft Historical columns. The results of operations for the acquired companies are for the periods from the beginning of the periods presented to: (i) November 13, 1997 for Audio International; (ii) June 25, 1998 for Avtech; and (iii) June 29, 1998 for Dettmers. (11) Reflects the elimination of intercompany sales. 31 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (12) Reflects the net change in cost of goods sales attributable to the following (dollars in thousands): YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 ------------- ------------- -------------- Increase (decrease) in non-cash acquisition related charges (a)........................... $ 4,636 $ (1,159) $ (1,159) Decrease in depreciation expense (b)............ (431) (414) (695) Elimination of intercompany sales............... (252) (133) (324) Work force reductions attributable to merging the companies acquired........................ (98) (60) (106) ------ ------------- ------- Net increase (decrease) in cost of sales........ $ 3,855 $ (1,766) $ (2,284) ------ ------------- ------- ------ ------------- ------- - ------------------------ (a) To reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (b) To reflect a decrease in depreciation expense resulting from the fair value and remaining economic useful lives of depreciable assets acquired in connection with the DLJ acquisition. (13) Reflects the net decrease in selling, general and administrative expenses attributable to the following (dollars in thousands): YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 ------------ ------------- -------------- Decrease in compensation expense (a)............ $ (1,852) $ (1,775) $ (2,915) Decrease in investor relations expenses (b)..... (362) (176) (369) Other, net (c).................................. 30 24 9 ------------ ------------- ------- Net decrease in selling, general and administrative expenses....................... $ (2,184) $ (1,927) $ (3,275) ------------ ------------- ------- ------------ ------------- ------- - ------------------------ (a) To reflect the resignation of certain former employees and changes to employment agreements for certain remaining employees of the companies acquired. (b) To reflect the decrease in investor relations expenses associated with becoming a privately held company as a result of the DLJ acquisition. (c) To reflect an increase in depreciation expense resulting from the fair value and remaining economic useful lives of depreciable assets acquired in connection with the DLJ acquisition, net of cost savings attributable to employee benefit plans implemented at the companies acquired. (14) Reflects a reduction for nonrecurring charges incurred: (i) by DeCrane Aircraft on behalf of its stockholders related to the DLJ acquisition; and (ii) by Avtech on behalf of its stockholders related to its acquisition by DeCrane Aircraft. (15) Reflects a reduction in expense attributable to employment contract termination expenses and nonrecurring bonuses awarded prior to, and in anticipation of, the acquisition of Avtech. 32 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (16) Reflects a reduction in expense attributable to the termination of the Employee Stock Ownership Plan in conjunction with the acquisition of Avtech. (17) Reflects a net increase in amortization expense pertaining to the amortization of goodwill and other intangible assets related to the DLJ acquisition on a straight-line basis as follows (dollars in thousands): YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, AMOUNT YEAR 1997 1998 1998 ---------- --------- ------------- ------------- -------------- Elimination of Predecessor amortization......................... $ (905) $ (1,347) $ (1,636) Successor amortization: Goodwill............................. $ 170,744 30 5,691 3,794 5,216 FAA certifications................... 30,391 15 2,026 1,351 1,857 Engineering drawings................. 9,138 15 609 406 558 Assembled workforce.................. 6,580 7 940 627 862 Tradenames, trademarks and patents... 3,903 5 to 12 358 238 329 ------ ------------- ------- Net increase in amortization....... $ 8,719 $ 5,069 $ 7,186 ------ ------------- ------- ------ ------------- ------- 33 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (18) Reflects the net increase in interest expense, including deferred financing cost amortization and commitment fees, as a result of the following (dollars in thousands): YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, RATE OR TERM AMOUNT 1997 1998 1998 -------------------- --------- ------------- ------------- -------------- Elimination of Predecessor net interest expense: Pertaining to debt refinanced (a): Interest expense.............. $ (2,411) $ (2,205) $ (2,673) Deferred financing cost amortization................ (317) (96) (118) Commitment fees and expenses.................... (162) (95) (117) Interest income (b)............. 357 145 268 Successor interest expense: Interest expense: Revolving credit facility..... LIBOR (c) +2.25% $ 7,378 567 383 525 Term facility: Term A...................... LIBOR (c) +2.25% 35,000 2,692 1,744 2,417 Term B...................... LIBOR (c) +2.50% 45,000 3,573 2,330 3,223 Bridge notes.................. Prime + (d) 100,000 10,625 8,443 11,318 Deferred financing cost amortization: Revolving credit facility..... 6 years (e) 1,232 205 137 188 Term facility Term A...................... 6 years (f) 862 193 126 174 Term B...................... 7 years (f) 1,109 172 112 155 Bridge notes.................. 7.5 years (e) 3,180 424 283 389 Commitment fees and expenses.... 351 235 323 ------------- ------------- ------- Net increase in interest expense..................... $ 16,269 $ 11,542 $ 16,072 ------------- ------------- ------- ------------- ------------- ------- - -------------------------- (a) See the notes to DeCrane Aircraft's consolidated financial statements included elsewhere in this Prospectus for a description of the debt refinanced. (b) Interest income earned from invested surplus cash balances prior to acquisition. (c) Calculations based on LIBOR at 5.44%. (d) Calculations based on Prime at 8.50%, the rate in effect during the period the bridge notes were issued and outstanding, plus: (i) 2.125% for the year ended December 31, 1997; (ii) 4.0% for the nine months ended September 30, 1998; and 3.75% for the twelve months ended September 30, 1998. (e) Deferred financing costs are amortized on a straight-line basis over the term of the agreement. (f) Deferred financing costs are amortized using the effective interest method. (19) Reflects adjustment for nonrecurring charges associated with a terminated debt offering in June 1998. Such offering was terminated upon initiation of the DLJ acquisition. (20) Represents a decrease in the provision for income taxes as a result of a corresponding change in pro forma taxable income. The effective tax rate differs from the U.S. federal statutory rate due to goodwill amortization related to the DLJ acquisition not deductible for income tax purposes. 34 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (21) Reflects the net increase in interest expense, including deferred financing cost amortization and commitment fees, as a result of the initial offering as follows (dollars in thousands): YEAR NINE MONTHS TWELVE MONTHS ENDED ENDED ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, RATE OR TERM AMOUNT 1997 1998 1998 --------------------- --------- ------------ ------------- -------------- Elimination of bridge notes interest expense: Interest expense........... Prime + (a) $ 100,000 $ (10,625) $ (9,375) $ (12,250) Deferred financing cost amortization............. 7.5 years (b) 3,180 (424) (318) (424) Senior subordinated notes due 2008: Interest expense........... 12.00% 100,000 12,000 9,000 12,000 Deferred financing cost amortization............. 10 years (c) 5,810 581 436 581 Revolving credit facility: Interest expense........... LIBOR (d) + 2.25% 4,974 383 288 383 Commitment fees and expenses................. (25) (19) (25) ------------ ------------- -------------- Net increase in interest expense.................. $ 1,890 $ 12 $ 265 ------------ ------------- -------------- ------------ ------------- -------------- - -------------------------- (a) Calculations based on Prime at 8.50%, the rate in effect during the period the bridge notes were issued and outstanding, plus: (i) 2.125% for the year ended December 31, 1997; (ii) 4.0% for the nine months ended September 30, 1998; and 3.75% for the twelve months ended September 30, 1998. (b) Deferred financing costs are amortized on a straight-line basis over the term of the agreement. (c) Deferred financing costs are amortized using the effective interest method. (d) Calculations based on LIBOR at 5.44%. (22) Represents a decrease in the provision for income taxes as a result of a decrease in pro forma taxable income. (23) In conjunction with DeCrane Aircraft's initial public offering in April 1997, deferred financing costs of $2.1 million, net of income tax benefit, were written off as an extraordinary charge as a result of a debt refinancing with net proceeds from the initial public offering. This amount has not been reflected in the unaudited pro forma consolidated statement of operations for the fiscal year ended December 31, 1997. In conjunction with the DLJ acquisition, deferred financing costs of $296,000, net of income tax benefit, were written off as an extraordinary charge as a result of the termination of DeCrane Aircraft's prior senior credit facility. In conjunction with the Initial Offering, deferred financing costs of $1.9 million, net of income tax benefit, will be written off as an extraordinary charge as a result of the termination of the bridge notes. These amounts have not been reflected in the unaudited pro forma consolidated statement of operations for the periods presented. (24) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 12 above. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of DeCrane Aircraft's operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. DeCrane Aircraft believes that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (25) Reflects depreciation and amortization of plant and equipment, goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts which is classified as a component of interest expense. 35 SELECTED CONSOLIDATED FINANCIAL DATA DECRANE AIRCRAFT The following table presents historical consolidated financial data of DeCrane Aircraft as of and for each of the five years in the period ended December 31, 1997 and as of and for the nine months ended September 30, 1997, the eight months ended August 31, 1998 and the one month ended September 30, 1998. The selected historical financial data as of and for each of the five years in the period ended December 31, 1997 were derived from the audited financial statements of DeCrane Aircraft. The selected historical financial data as of and for the nine, eight and one month periods ended September 30, 1997, August 31, 1998 and September 30, 1998, respectively, were derived from the unaudited historical financial statements of DeCrane Aircraft for such periods, which, in the opinion of management of DeCrane Aircraft, reflect normal and recurring adjustments necessary to present fairly the financial position and results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and DeCrane Aircraft's consolidated financial statements and related notes included elsewhere in this Prospectus. (PREDECESSOR) --------------------------------------------------------------------------------------- NINE MONTHS EIGHT MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------------------------------------- SEPTEMBER 30, AUGUST 31, 1993 1994 1995 1996(1) 1997(2) 1997(3) 1998(4) --------- --------- --------- ----------- --------- --------------- ------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues............................... $ 48,197 $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 80,887 $ 90,077 Cost of sales(6)....................... 36,258 36,407 43,463 49,392 80,247 60,664 60,101 --------- --------- --------- ----------- --------- ------- ------------- Gross profit........................... 11,939 10,685 12,376 15,707 28,656 20,223 29,976 Selling, general and administrative expenses............................. 7,953 7,716 9,426 10,747 15,756 11,012 15,719 Nonrecurring charges(7)................ -- -- -- -- -- -- 3,632 Amortization of intangible assets...... 1,210 1,209 1,115 709 905 616 1,347 --------- --------- --------- ----------- --------- ------- ------------- Operating income....................... 2,776 1,760 1,835 4,251 11,995 8,595 9,278 Interest expense....................... 2,940 3,244 3,821 4,248 3,154 2,598 2,350 Terminated debt offering expenses...... -- -- -- -- -- -- 600 Other (income) expense, net............ (148) 332 382 108 243 242 247 --------- --------- --------- ----------- --------- ------- ------------- Income (loss) before provision for income taxes, cumulative effect of accounting change and extraordinary item................................. (16) (1,816) (2,368) (105) 8,598 5,755 6,081 Provision for income taxes (benefit)(8)......................... 620 613 1,078 712 3,344 2,191 2,892 --------- --------- --------- ----------- --------- ------- ------------- Income (loss) before cumulative effect of accounting change and extraordinary item................... (636) (2,429) (3,446) (817) 5,254 3,564 3,189 Cumulative effect of accounting change(9)............................ (121) -- -- -- -- -- -- Extraordinary loss from debt refinancing(10)...................... -- (264) -- -- (2,078) (2,078) -- --------- --------- --------- ----------- --------- ------- ------------- Net income (loss)...................... $ (757) $ (2,693) $ (3,446) $ (817) $ 3,176 $ 1,486 $ 3,189 --------- --------- --------- ----------- --------- ------- ------------- --------- --------- --------- ----------- --------- ------- ------------- OTHER FINANCIAL DATA: Cash flows from operating activities... $ 2,474 $ (2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,950 $ 3,014 Cash flows from investing activities... (629) (993) (1,462) (24,016) (27,809) (2,842) (87,378) Cash flows from financing activities... (1,458) 3,028 41 21,051 22,957 (1,046) 89,871 EBITDA(11)............................. 6,034 5,196 5,471 7,602 16,915 12,022 13,636 EBITDA margin.......................... 12.5% 11.0% 9.8% 11.7% 15.5% 14.9% 15.1% Depreciation and amortization(12)...... $ 3,258 $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 3,427 $ 4,358 Capital expenditures(13)............... 666 1,016 1,203 5,821 3,842 2,842 1,745 Ratio of earnings to fixed charges(14).......................... -- -- -- 1.0x 3.3x 2.9x 3.2x OTHER OPERATING DATA: Bookings(15)........................... $ 46,830 $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 93,911 $ 94,439 Backlog at end of period(16)........... 23,933 24,493 19,761 44,433 49,005 44,791 84,184 (SUCCESSOR) --------------- ONE MONTH ENDED SEPTEMBER 30, 1998(5) --------------- STATEMENT OF OPERATIONS DATA: Revenues............................... $ 16,012 Cost of sales(6)....................... 11,080 ------- Gross profit........................... 4,932 Selling, general and administrative expenses............................. 3,170 Nonrecurring charges(7)................ -- Amortization of intangible assets...... 802 ------- Operating income....................... 960 Interest expense....................... 1,765 Terminated debt offering expenses...... -- Other (income) expense, net............ 181 ------- Income (loss) before provision for income taxes, cumulative effect of accounting change and extraordinary item................................. (986) Provision for income taxes (benefit)(8)......................... (506) ------- Income (loss) before cumulative effect of accounting change and extraordinary item................... (480) Cumulative effect of accounting change(9)............................ -- Extraordinary loss from debt refinancing(10)...................... (296) ------- Net income (loss)...................... $ (776) ------- ------- OTHER FINANCIAL DATA: Cash flows from operating activities... $ (1,506) Cash flows from investing activities... (307) Cash flows from financing activities... 358 EBITDA(11)............................. 3,285 EBITDA margin.......................... 20.5% Depreciation and amortization(12)...... $ 1,166 Capital expenditures(13)............... 307 Ratio of earnings to fixed charges(14).......................... -- OTHER OPERATING DATA: Bookings(15)........................... $ 16,890 Backlog at end of period(16)........... 84,607 36 (PREDECESSOR) ---------------------------------------------------------------- AS OF DECEMBER 31, (SUCCESSOR) ----------- AS OF SEPTEMBER 30, ----------------------------------------------------- ---------------------- 1993 1994 1995 1996(1) 1997(2) 1997(3) 1998(17) --------- --------- --------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.... $ 441 $ 236 $ 305 $ 320 $ 206 $ 339 $ 4,267 Working capital.............. (637) 11,459 12,583 10,486 24,772 22,329 46,683 Total assets................. 34,653 37,685 36,329 69,266 99,137 70,645 333,300 Total debt(18)............... 19,653 23,874 24,672 42,250 38,838 14,336 184,893 Mandatorily redeemable preferred stock and common stock warrants............. 5,818 2,329 1,633 6,879 -- -- -- Stockholders' equity (deficit).................. (2,618) 766 (1,697) 1,236 39,527 37,789 98,362 - ------------------------ (1) Includes the effect of the acquisition of the remaining 25% minority interest in Cory Components beginning February 20, 1996, the date on which the transaction occurred, and the results of Aerospace Display Systems and Elsinore beginning September 18, 1996 and December 5, 1996, respectively, the dates on which they were acquired. (2) Includes the effect of the acquisition of Audio International beginning November 14, 1997, the date on which it was acquired. (3) Excludes the effect of the acquisition of Audio International, which was not acquired until November 14, 1997. (4) Includes the results of operations of Avtech and Dettmers beginning June 26, 1998 and June 30, 1998, respectively, the dates on which they were acquired. (5) Reflects the results of operations subsequent to the DLJ acquisition (Successor). (6) Includes $1.2 million of non-cash charges for the one month ended September 30, 1998 to reflect cost of sales based on the fair value of inventory acquired in connection with the DLJ acquisition. (7) Represents non-capitalizable transaction costs associated with the DLJ acquisition. (8) Prior to the acquisition of the remaining 25% minority interest in Cory Components in 1996, DeCrane Aircraft did not consolidate the earnings of Cory Components for tax purposes. As such, despite a consolidated pre-tax loss in each of the years, DeCrane Aircraft recorded a provision for income taxes from 1993 up to the date of the acquisition in 1996 which primarily relates to Cory Components. (9) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting for Income Taxes." (10) Represents: (i) the write-off of unamortized deferred financing costs, unamortized original issue discounts and a prepayment penalty incurred as a result of the refinancing by DeCrane Aircraft of a substantial portion of our debt in November 1994; (ii) the write-off, net of an income tax benefit, of deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by DeCrane Aircraft with the net proceeds from its initial public offering in April 1997; and (iii) the write-off, net of an income tax benefit, of deferred financing costs as a result of the repayment of DeCrane Aircraft's existing indebtedness in connection with the DLJ acquisition. 37 (11) EBITDA equals operating income plus depreciation, amortization and non-cash acquisition related charges described in Note 6 above. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of DeCrane Aircraft's operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. DeCrane Aircraft believes that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (12) Reflects depreciation and amortization of plant and equipment and goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts which are classified as a component of interest expense. (13) Includes $4.4 million for the year ended December 31, 1996 related to the acquisition of a manufacturing facility. See "Business--Acquisition History." (14) For purposes of calculating the earnings to fixed charges ratio, earnings represent net income before income taxes, minority interests in the income of majority-owned subsidiaries, cumulative effect of an accounting change, extraordinary items and fixed charges. Fixed charges consist of: (i) interest, whether expensed or capitalized; (ii) amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and (iii) one-third of rental expenses under operating leases considered to represent interest cost (such one-third portion is deemed by DeCrane Aircraft to be a reasonable approximation of the interest portion of such expense). There was a deficiency of earnings to cover fixed charges for the years ended December 31, 1994 and 1995 and the one month ended September 30, 1998 of $1.8 million, $2.3 million and $1.0 million, respectively. There was also a deficiency of earnings to cover fixed charges for the year ended December 31, 1993 of less than $.1 million. (15) Bookings represent the total invoice value of purchase orders received during the period. See "Business--Backlog." (16) 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 DeCrane Aircraft's receipt of orders and the speed with which those orders are filled. See "Business-- Backlog." (17) Reflects the financial position of Avtech and Dettmers and the DLJ acquisition. (18) Total debt is defined as long-term debt, including current portion, and short-term borrowings. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH CONSOLIDATED FINANCIAL STATEMENTS OF DECRANE AIRCRAFT AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Our results of operations have been affected by our history of acquisitions. Since our formation in 1989, we have completed eleven acquisitions of businesses or assets, the most recent of which, Avtech and Dettmers, were closed in June 1998. As a result, our historical financial statements do not reflect the results of all of our current businesses. Our principal strategy is to establish and expand leading positions in high-margin niches within the commercial, regional, corporate and military markets, with a focus on the manufacturing of avionics components and the integration of avionics systems. We also seek to maintain a balance of revenues among the OEM market, the retrofit market and the aftermarket. We believe that such a strategy will reduce the cyclical risk in the aircraft industry. In April 1997, we completed our initial public offering of common stock and used the $28.9 million of net proceeds to refinance debt outstanding. In April 1998, we completed a follow-on common stock offering and used the $34.8 million of net proceeds to reduce borrowings outstanding under our credit facility, a majority of which we incurred to finance the Audio International acquisition. THE DLJ ACQUISITION AND FINANCING In July 1998, DeCrane Holdings, an affiliate of DLJ Merchant Banking Partners II, L.P. formed a finance subsidiary and an acquisition subsidiary. The acquisition subsidiary conducted a successful tender for our shares and, when the tender offer was completed, merged with DeCrane Aircraft. To finance the purchase of shares in the tender offer and to refinance existing debt, the finance subsidiary entered into a $130.0 million syndicated bank credit facility with a group of lenders led by DLJ Capital Funding, Inc., issued $100.0 million of senior subordinated increasing rate bridge notes to DLJ Bridge Finance Inc. and received an equity contribution of approximately $99.0 million from the sale of preferred and common stock by DeCrane Holdings. The bank credit facility and the bridge notes became our obligations when the finance subsidiary was also merged into DeCrane Aircraft. When the two mergers were completed in August, 1998, DeCrane Aircraft became a wholly owned subsidiary of DeCrane Holdings. The bridge notes were refinanced by the sale of the old notes in October, 1998. The gross purchase price for DeCrane Aircraft's shares and options was $186.3 million. The excess of the purchase price over the historical value of the net assets acquired was $127.9 million and was allocated as follows: (i) $4.7 million to inventory; (ii) $3.0 million to fixed assets; (iii) $50.0 million to certain identifiable intangible assets; and (iv) $70.2 million to goodwill. The inventory step-up will be expensed completely during the remainder of 1998. The intangible assets, other than goodwill, will be amortized on a straight-line basis over periods between five and fifteen years. Goodwill will be amortized on a straight-line basis over a period of thirty years. The term loan facility under our bank credit facility consists of a $35.0 million amortizing loan maturing in six years (the "Term A loan") and a $45.0 million amortizing loan maturing in seven years (the "Term B loan"). Scheduled aggregate amortization is $112,500 in 1998 and $887,500 in 1999. The bank credit facility also includes a $25.0 million working capital revolving credit facility and a $25.0 million acquisition revolving credit facility, of which $5.4 million was drawn upon completion of the DLJ acquisition. Both revolving credit facilities will terminate after six years. See "Description of Bank Credit Facility." 39 Borrowings under our bank credit facility generally bear interest based on a margin over, at DeCrane Aircraft's option, the base rate or the Euro-Dollar rate. The applicable margin is 1.00% for base rate borrowings and 2.25% for Euro-Dollar borrowings for the first six months (other than the Term B loan, which has a margin of 1.25% for base rate borrowings and 2.50% for Euro-Dollar borrowings) and thereafter will vary based upon DeCrane Aircraft's ratio of total debt to EBITDA (as defined). DeCrane Aircraft's obligations under the bank credit facility are guaranteed by DeCrane Holdings and all existing and future wholly-owned domestic subsidiaries of DeCrane Aircraft (the "subsidiary guarantors") and are secured by substantially all of the assets of DeCrane Aircraft and the subsidiary guarantors, including a pledge of the capital stock of all existing and future subsidiaries of DeCrane Aircraft (provided that no more than 65% of the voting stock of any foreign subsidiary shall be pledged) and a pledge by DeCrane Holdings of the stock of DeCrane Aircraft. The bank credit facility contains customary covenants and events of default. The notes (including the old notes, and the new notes to be exchanged for old notes in this exchange offer) will mature in 2008 and are guaranteed by DeCrane Aircraft's wholly-owned domestic subsidiaries. Interest on the notes is payable semiannually in cash. The notes contain customary covenants and events of default, including covenants that limit DeCrane Aircraft's ability to incur debt, pay dividends and make certain investments. In connection with the DLJ acquisition, DeCrane Holdings raised approximately $99.0 million through its sale of common stock and DeCrane Holdings Preferred Stock to the DLJMB Funds. The proceeds of those sales were contributed to DeCrane Aircraft. The DeCrane Holdings Preferred provides for cumulative dividends that do not require payment in cash through 2003, but will be payable in cash thereafter and will be mandatorily redeemable in 2009. The DeCrane Holdings Preferred is exchangeable into debentures that will contain customary covenants and events of default, including covenants that limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay dividends and make certain investments. 40 RESULTS OF OPERATIONS The following table sets forth the items in DeCrane Aircraft's consolidated statements of operations as percentages of its revenues for the periods indicated. The percentages for each of the years in the three year period ended December 31, 1997 and the nine months ended September 30, 1997 reflect the historical results of operations prior to the DLJ acquisition (Predecessor). The percentages for the nine months ended September 30, 1998 reflects the combined historical results of operations for the eight months ended August 31, 1998 prior to the DLJ acquisition (Predecessor) and the one month ended September 30, 1998 subsequent to the DLJ acquisition (Successor). NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- Revenues........................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales...................................................... 77.8 75.9 73.7 75.0 67.1 --------- --------- --------- --------- --------- Gross profit....................................................... 22.2 24.1 26.3 25.0 32.9 Selling, general and administrative expenses....................... 16.9 16.5 14.5 13.6 21.2 Amortization of intangible assets.................................. 2.0 1.1 0.8 0.8 2.0 --------- --------- --------- --------- --------- Operating income................................................... 3.3 6.5 11.0 10.6 9.7 Interest expense................................................... 6.8 6.5 2.9 3.2 3.9 Other expense, net................................................. 0.7 0.2 0.2 0.3 1.0 --------- --------- --------- --------- --------- Income (loss) before provision for income taxes, and extraordinary item........................................... (4.2) (0.2) 7.9 7.1 4.8 Provision for income taxes......................................... (2.0) (1.1) (3.1) (2.7) (2.2) --------- --------- --------- --------- --------- Income (loss) before extraordinary item............................ (6.2) (1.3) 4.8 4.4 2.6 Extraordinary loss from debt refinancing........................... -- -- (1.9) (2.6) (0.3) --------- --------- --------- --------- --------- Net income (loss).................................................. (6.2)% (1.3)% 2.9% 1.8% 2.3% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 REVENUES. Revenues increased $25.2 million, or 31.1%, to $106.1 million for the nine months ended September 30, 1998 from $80.9 million for the nine months ended September 30, 1997. Major contributing factors included the inclusion of $14.8 million of revenues from Audio International, which was acquired on November 14, 1997; the inclusion of $13.1 million of revenues from Avtech, which was acquired on June 26, 1998; and the inclusion of $1.2 million of revenues from Dettmers, which was acquired on June 30, 1998. Partially offsetting this increase was a decline in sales to Matsushita of $2.3 million. GROSS PROFIT. Gross profit increased $14.7 million, or 72.6%, to $34.9 million for the nine months ended September 30, 1998 from $20.2 million for the nine months ended September 30, 1997. Gross profit as a percent of revenues increased to 32.9% for the nine months ended September 30, 1998 from 25.0% for the nine months ended September 30, 1997. These improvements were attributable primarily to increased sales volume from acquired companies, which have generally higher gross margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative (referred to as SG&A herein) expenses increased $11.5 million, or 104.5%, to $22.5 million for the nine months ended September 30, 1998 from $11.0 million for the nine months ended September 30, 1997. SG&A expenses as a percent of revenues increased to 21.2% for the nine months ended September 30, 1998 from 13.6% for the nine months ended September 30, 1997. SG&A expenses increased primarily due to the inclusion of SG&A expenses from Audio International, Avtech and Dettmers, the non-capitalizable transaction 41 costs associated with the DLJ acquisition, and the increase in research and development expenditures for new product introductions at Audio International and Dettmers. OPERATING INCOME. Operating income increased $1.6 million to $10.2 million for the nine months ended September 30, 1998 from $8.6 million for the nine months ended September 30, 1997. Operating income as a percent of revenues, however, decreased to 9.7% for the nine months ended September 30, 1998 from 10.6% for the nine months ended September 30, 1997. The increase in operating income resulted from the factors described above, but was offset by higher amortization and other expenses due to the acquisition of Avtech and the DLJ acquisition. INTEREST EXPENSE. Interest expense increased $1.5 million, or 58.4%, to $4.1 million for the nine months ended September 30, 1998 from $2.6 million for the nine months ended September 30, 1997. This increase resulted from the higher debt levels associated with the acquisition of Avtech and the DLJ acquisition. PROVISION FOR INCOME TAXES. During the nine months ended September 30, 1998, we increased our provision for income taxes by $0.2 million to $2.4 million from $2.2 million for the nine months ended September 30, 1997, as lower income before taxes was somewhat offset by an increase in non-deductible expenses. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the nine months ended September 30, 1997, we incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, as a result of a debt refinancing with the proceeds from our initial public offering. NET INCOME. Net income increased $0.9 million to $2.4 million for the nine months ended September 30, 1998 compared to $1.5 million for the same period in 1997 due to the factors described above. BOOKINGS AND BACKLOG. Bookings increased $28.9 million, or 35.1%, to $111.3 million for the nine months ended September 30, 1998 compared to $82.4 million for the same period in 1997. The increase in bookings for 1998 includes $14.7 million attributable to Audio International, $7.7 million attributable to Avtech and $1.4 million attributable to Dettmers. As of September 30, 1998, we had a sales order backlog of $84.6 million compared to $49.0 million as of December 31, 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for 1997 from $65.1 million for 1996. Revenues increased primarily due to the inclusion of $10.7 million of revenues from Aerospace Display Systems, growth in our private labeling programs of $6.4 million, growth in contact sales of $6.3 million driven by new aircraft production rate increases, an increase in sales of harness assemblies for in-flight entertainment systems of $5.1 million, an increase in sales of specialty connectors for cabin management and in-flight entertainment systems principally on Boeing's 777 aircraft of $4.9 million, an increase of sales to IFT of $3.3 million relating to a major systems integration program for Swissair, the inclusion of $3.0 million of revenue from Elsinore, new systems integration programs for navigational systems of $1.5 million, the inclusion of $1.3 million of revenue from Audio International, a new systems integration program for United Parcel Service of $0.9 million, and the overall growth in the commercial aircraft market. Partially offsetting this increase was a decline in sales to AT&T Wireless Services, Inc. of $3.8 million, reflecting the completion in late 1995 and early 1996 of a major systems integration program. GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7 million for 1997 from $15.7 million for 1996. Gross profit as a percentage of revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in profit margin was attributable to an increased sales volume, favorable mix, savings from the rationalization of certain newly purchased manufacturing assets purchased from AMP, 42 Inc. with our existing facilities in El Segundo, California and Lugano, Switzerland, sustained price increases and lower material costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $5.0 million, or 46.6%, to $15.8 million for 1997 from $10.7 million for 1996. SG&A expenses as a percentage of revenues decreased to 14.5% for 1997 from 16.5% for 1996. SG&A expenses increased primarily due to the addition of staff to pursue higher sales to OEMs and to develop capabilities for in-flight entertainment, navigation and satellite communication and safety systems integration services, the inclusion of SG&A expenses from Aerospace Display Systems, the AMP facility and Elsinore, all of which were acquired in late 1996, and the inclusion of SG&A expenses from Audio International, which was acquired in 1997. OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to $12.0 million for 1997 from $4.3 million for 1996. Operating income as a percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The increase in operating income resulted from the factors described above. INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to $3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the completion of the initial public offering on April 16, 1997 and the repayment of a substantial portion of debt with the net proceeds. PROVISION FOR INCOME TAXES. During 1997, we reduced our deferred tax asset valuation allowance by $0.5 million to reflect the book benefit of federal and state net operating loss carry forwards not previously recognized. We have approximately $2.5 million of net operating loss carry forwards available at December 31, 1997 for federal income tax purposes. EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, we incurred a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax benefit, as a result of refinancing debt with the net proceeds from the initial public offering. NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for 1997 from a net loss of $0.8 million for 1996. The increase is a result of the factors described above. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for 1996 from $55.8 million for 1995. Revenues increased primarily due to growth in contact sales driven by new aircraft production rate increases and growth in our private labeling programs of $6.4 million, an increase of sales to IFT of $3.0 million in 1996 relating to a major systems integration program for Swissair, the inclusion of $2.8 million of revenues from Aerospace Display Systems which was acquired on September 18, 1996, an increase in sales of specialty connectors for cabin management and in-flight entertainment systems on Boeing's 777 aircraft of $2.4 million, and an increase in sales of harness assemblies for in-flight entertainment systems of $2.4 million. Partially offsetting this increase was a decline in sales to AT&T Wireless of $9.2 million, reflecting the completion in 1995 of a major systems integration program primarily for American Airlines. GROSS PROFIT. Gross profit increased $3.3 million, or 26.9%, to $15.7 million for 1996 from $12.4 million for 1995. Gross profit as a percentage of revenues increased to 24.1% for 1996 from 22.2% for 1995. This increase was attributable to an improvement in gross profit as a percentage of revenues from the sale of contacts for 1996, partially offset by a decline in higher margin sales to AT&T Wireless. This improvement resulted from sustained price increases, increased sales volume, lower wage-related expenses and lower material costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.3 million, or 14.0%, to $10.7 million for 1996 from $9.4 million for 1995. SG&A expenses as a percentage of revenues decreased to 16.5% for 1996 from 16.9% for 1995. SG&A expenses increased primarily due to the addition of staff to pursue higher sales to OEMs and to develop capabilities for in-flight entertainment, navigation and satellite communication and safety systems integration services, and the inclusion of 43 SG&A expenses from Aerospace Display Systems and Elsinore, which were acquired in 1996. This increase in SG&A expenses was offset partially by the elimination of $0.7 million of expenses related to our acquisition in 1996 of the remaining 25% minority interest in Cory Components in February 1996. OPERATING INCOME. Operating income increased $2.4 million, or 131.7%, to $4.3 million for 1996 from $1.8 million for 1995. The increase in operating income resulted from the factors described above and a decline of $0.4 million in amortization of intangible assets as a result of the termination of certain non-compete agreements. INTEREST EXPENSE. Interest expense increased $0.4 million, or 11.2%, to $4.2 million for 1996 from $3.8 million for 1995. This increase resulted from higher outstanding indebtedness attributed to the funding of the acquisitions of Aerospace Display Systems and Elsinore and the purchase of the AMP manufacturing facility. NET LOSS. Net loss decreased $2.6 million, or 76.3%, to $0.8 million for 1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted from the factors described above and a lower tax provision resulting from the acquisition of the remaining 25% minority interest in Cory Components. LIQUIDITY AND CAPITAL RESOURCES We have required cash primarily to fund acquisitions and, to a lesser extent, to fund capital expenditures and for working capital. Our principal sources of liquidity have been cash flow from operations and third party borrowings. For the nine months ended September 30, 1998, we generated cash from operating activities of $1.5 million. We used $4.5 million in cash for working capital. Our accounts receivable consist of trade receivables and unbilled receivables, which are recognized pursuant to the percentage of completion method of accounting for long-term contracts. Accounts receivable increased $4.6 million for the nine months ended September 30, 1998 from the inclusion of Avtech and Dettmers as well as higher overall sales. Unbilled receivables accounted for $2.0 million of this increase. Inventories increased only $0.5 million for the nine months ended September 30, 1998, due to improved inventory management at several subsidiaries. Accounts payable increased by $0.3 million for the nine months ended September 30, 1998. The inclusion of additional entities was offset by an agreement with a new gold supplier for significantly lower prices in exchange for shorter payment terms. In 1997 and 1996, we generated cash from operating activities of $4.6 million and $3.0 million, respectively. We used $5.4 million in 1997 and $0.8 million in 1996 in cash for working capital. Trade receivables increased $3.0 million in 1997 and $2.7 million in 1996 due to higher sales. Unbilled receivables increased $0.2 million in 1997 as a result of the systems integration program for Swissair (through IFT) that began in mid-1996. Inventories increased by $5.0 million in 1997 and $2.7 million in 1996 in support of sales growth. Accounts payable decreased by $0.4 million in 1997 and increased by $1.9 million in 1996. Net cash used in investing activities was $87.7 million during the nine months ended September 30, 1998. Of this amount, $83.6 million was used for the Avtech acquisition and $2.1 million for the Dettmers acquisition (both net of cash acquired). The total purchase price for the Dettmers acquisition also included additional contingent consideration with a maximum of $2.0 million payable between 1999 and 2002. We spent $2.1 million on capital expenditures during the nine months ended September 30, 1998. We anticipate spending approximately $4.5 million on capital expenditures in 1998. The bank credit facility contains certain restrictions on our ability to make capital expenditures; however, we believe the permitted capital expenditures will be sufficient to complete our investment program and maintain our facilities. Net cash used in investing activities was $27.8 million for 1997 and $24.0 million for 1996. Of the $27.8 million used in 1997, $23.6 million related to the acquisition of Audio International in November 1997. The total purchase price for the Audio International acquisition also included 44 contingent consideration with a maximum of $6.0 million payable in 1999 and 2000. Of the $24.0 million used in 1996, $22.6 million related to the acquisition of the remaining 25% minority interest in Cory Components in February 1996, the acquisition of Aerospace Display Systems in September 1996, the acquisition of Elsinore and the purchase of the AMP manufacturing facility in December 1996. We made capital expenditures of $3.8 million in 1997 and $1.5 million in 1996. Capital expenditures were incurred in 1997 to increase manufacturing capacity in support of revenue growth, improve plating controls and capacity and construct three additional selective plating machines. Net cash provided by financing activities was $90.2 million for the nine months ended September 30, 1998. In connection with the DLJ acquisition, we entered into a new credit facility that provides for term loan borrowings in the aggregate principal amount of $80.0 million and revolving loan borrowings up to an aggregate principal amount of $50.0 million, including $25 million for working capital purposes which expires in 2004 (See Note 1 to the DeCrane Aircraft consolidated financial statements included elsewhere in this Prospectus). In 1998, prior to the DLJ acquisition, we also completed a follow-on common stock offering, using the $34.8 million of net proceeds to reduce amounts outstanding under our then existing senior credit facility, and borrowed $85.8 million under that credit facility to finance the Avtech and Dettmers acquisitions. Net cash provided by financing activities in 1997 was $23.0 million. Our initial public offering raised $28.9 million in net proceeds in April 1997. The net proceeds from the offering were used to repay debt outstanding. In November 1997, the acquisition of Audio International (including the related fees and expenses) was financed with senior credit facility borrowings. Net cash provided by financing activities in 1996, was $21.1 million. Specifically, we financed the acquisition of the remaining 25% minority interest in Cory Components (including the related fees and expenses) in February 1996 for $6.5 million, the acquisition of Aerospace Display Systems (including the related fees and expenses) in September 1996 for $11.4 million, and the acquisition of Elsinore and the initial cash portion of the AMP manufacturing facility acquisition in December 1996 for an aggregate of $8.0 million. The foregoing acquisitions were financed by various combinations of convertible preferred stock, warrants for common stock and convertible notes (all of which were subsequently converted to common stock), debt notes, and a total of $2.1 million in senior credit facility borrowings. Cash increased $4.1 million for the nine months ended September 30, 1998, decreased $0.1 million in 1997 and remained unchanged in 1996 due to the factors described above. The DLJ acquisition created substantial debt for us, resulting in significant debt service obligations. Although we cannot be certain, we anticipate that operating cash flow, together with borrowings under the bank credit facility, will be sufficient to meet our future operating expenses, working capital, capital expenditures and debt service obligations. However, our ability to pay principal or interest, to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance. We will be affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. In addition, we are continually considering acquisitions that complement or expand our existing businesses or that may enable us to expand into new markets. Future acquisitions may require additional debt, equity financing or both. We may not be able to obtain any additional financing on acceptable terms. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required for the fiscal year ending December 31, 1998. 45 In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning January 1, 2000. Management believes the adoption of SFAS No. 133 will not have a material impact on our consolidated financial position or results of operations. SWISS FRANC FORWARD EXCHANGE CONTRACTS Certain of the contact blanks we use in the production of our contacts are manufactured at our Swiss facility and shipped to our El Segundo, California facility for plating and assembly. In 1996, 1997 and 1998, solely in an effort to mitigate the effects of currency fluctuations between the U.S. Dollar and the Swiss Franc, we entered into forward exchange contracts at fixed rates. We plan to continue efforts to mitigate this risk in the future. We do not engage in any currency exchange transactions for trading or speculative purposes. Realized and unrealized gains and losses on foreign exchange contracts are recognized currently in the consolidated statements of operations. COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS We are dependent in part on computer- and date-controlled systems for some internal functions, particularly inventory control, purchasing, customer billing and payroll. In 1996, we performed an evaluation of all of our information systems to determine if the existing hardware and software would meet our long-term requirements. Because of numerous acquisitions made over the past several years, we operate several stand-alone systems using different, and in some cases internally customized, software. We concluded that some of our existing software should be upgraded to newer, off-the-shelf, integrated manufacturing and business application software which is also Year 2000 compliant. We believe the migration to the new integrated software will be completed prior to 2000. Similarly, suppliers of components and services on which we rely, and our customers, may have Year 2000 compliance risks which would affect their operations and their transactions with us. We are developing plans for mitigating the impact of the Year 2000 problem from key vendors and customers. A comprehensive effort in this area began in the fourth quarter of 1998. Although we are not aware of any material customer or vendor related Year 2000 issues, we cannot currently evaluate the magnitude of our exposure. Our review of these third-party compliance risks from our key vendors and customers is not yet complete. Because of the complexity of these issues and the interdependence of many companies using computer- and date-controlled systems, our assessment of the risks may be incorrect. Additionally, in view of the mixed results achieved by software vendors in correcting these problems, we cannot assure you that new systems we obtain to replace noncompliant systems will themselves prove to be fully compliant. We believe that the majority of our computer-controlled systems were put into service during the last five years and that these systems are Year 2000 compliant. We believe the number of products manufactured and sold by us which are dependent upon computer-controlled systems is not significant. We intend to review our Year 2000 exposure from internal computer-controlled systems and manufactured products again prior to the third quarter of 1999. Based on current information, we expect that our costs to remediate and test our systems, and evaluate the risks of our key customers and vendors, will not be material. Costs incurred to date in addressing the Year 2000 issue have not been significant and are being funded through operating cash flows. Our management does not anticipate encountering any significant failures of Year 2000 compliance in our systems, products or supply chain that would materially disrupt our operations. However, we may experience cost overruns and delays as we replace or modify our systems, or address our third-party exposures, which could have a material adverse effect on our consolidated financial position, results of operations or cash flow. We cannot assure you that our assessment of the foregoing 46 risks from our own systems and products, or those of our customers or vendors, is or will be correct. We have not yet determined the extent of contingency planning that may be required if we have incorrectly assessed the foregoing Year 2000 risks. COMMON EUROPEAN CURRENCY The Treaty on European Economic and Monetary Union (the "Maastricht Treaty") provides for the introduction of a single European currency, the Euro, in substitution for the national currencies of the member states of the European Union that adopt the Euro. In May 1998, the European Council determined the 11 member states that met the requirement for the Monetary Union and the currency exchange rates among the currencies for the member states joining the Monetary Union. The transitory period for the Monetary Union starts on January 1, 1999. According to Council Resolution of July 7, 1997, the introduction of the Euro will be made in three steps: (i) a transitory period from January 1, 1999 to December 31, 2001, in which currency accounts may be opened and financial statements may be drawn in Euros, and local currencies and Euro will coexist; (ii) from January 1, 2002 to June 30, 2002, in which local currencies will be exchanged for Euros; and (iii) from July 1, 2002 in which local currencies will disappear. Although there can be no assurance that a single European currency will be adopted or, if adopted, on what time schedule and with what success, substantial transitional costs could result as we redesign our software systems to reflect the adoption of the new currency. In addition, no assurance can be given as to effect of the adoption of the Euro on our commercial agreements in currencies to be replaced by the Euro. 47 BUSINESS We manufacture avionics and related components, and provide systems integration services, for niche markets within the commercial, regional, corporate and military aircraft industries. We believe that we are a leading provider of components within each niche market we serve. Since DeCrane Aircraft was founded in 1989, our strategy has been to combine complementary businesses with leading positions in cabin and flight deck systems. We generated revenues of $168.9 million for the twelve months ended September 30, 1998, and Adjusted EBITDA of $35.0 million for the same period, on a pro forma basis. We seek to maximize our sales by emphasizing the complementary nature of our products and services. We manufacture: - electrical contacts; - connectors (which often include our contacts); - wire harness assemblies (which often include our connectors); - structural supports for avionic connectors and harnesses (often packaged with other products of ours and sold as "installation kits"); - dichroic liquid crystal display ("LCD") devices, which are often used with flight deck avionics; - cockpit audio and communications, lighting, and power and control devices for commercial aircraft; and - stereo systems, video monitors, passenger switches, cabin lighting, seating and climate controls for the high-end corporate aircraft market. Our systems integration services include design and engineering of avionics systems, supplemental type certifications on behalf of the Federal Aviation Administration, the assembly of installation kits for systems to be installed ("kitting"), and installation services. Smoke detection, fire suppression and in-flight entertainment systems for jet aircraft are among the systems for which we supply design, certification, assembly and/or installation services. We manufacture many of the components required to complete a systems integration project. We believe that our combination of these component manufacturing and integration capabilities gives us a critical competitive advantage, which would be difficult for competitors to duplicate. By successfully combining and growing complementary businesses, we have achieved strong revenue growth. From 1993 to 1997, our revenues increased from $48.2 million to $108.9 million on a historical basis. That increase resulted in a compound annual growth rate of 22.6%. During the same period, DeCrane Aircraft's EBITDA increased from $6.0 million to $16.9 million on a historical basis, representing a combined annual growth rate of 29.5%. We have acheived this growth primarily by: - obtaining new customers and additional business from existing customers; - selectively acquiring complementary avionics businesses, generally with high margins; - taking advantage of favorable trends in the aerospace industry (discussed below); - initiating cost reduction programs and productivity improvements; and - increasing the revenues of acquired businesses, by refocusing or diversifying their strategies and products. Since 1990, we have completed eleven acquisitions, most recently Avtech Corporation and Dettmers Industries, Inc. in June 1998. 48 INDUSTRY OVERVIEW AND TRENDS We sell to the commercial, regional, corporate and military aircraft markets. Within these markets, our customers include original equipment manufacturers ("OEMs") of aircraft and avionics equipment, aircraft repair and modification centers, and airlines. The 1998 CURRENT MARKET OUTLOOK released by Boeing in early 1998 (the "1998 Boeing Report") projects that expenditures for new commercial jet aircraft production will total about $520 billion from 1997 through 2007, and worldwide air travel will average 4.9% annual growth over the next two decades. The aircraft component retrofit market (the integration of new systems into existing aircraft) and the aircraft component aftermarket (the manufacture and sale of replacement products for existing aircraft) are served by a highly fragmented group of companies, including many of the OEMs. The aviation industry has been consolidating at an increasing pace in recent years, and we expect that consolidation will continue for the foreseeable future. The Boeing Company and Airbus Industrie are the primary OEMs of commercial aircraft designed to carry 100 or more passengers. There is a slightly larger group of leading principal OEMs of regional and corporate aircraft (fewer than 100 passengers), including Bombardier, Dassault and Gulfstream. The major systems installed on new aircraft, such as flight deck avionics systems, are produced by a limited number of OEMs, including AlliedSignal, Rockwell Collins, General Electric, Honeywell, Raytheon and Sextant Avionique. Components for new aircraft, and sub-systems for major systems, are provided by a much more fragmented group of smaller, specialized companies like our operating subsidiaries. We market our commercial aircraft products directly to the aircraft OEMs as well as to the major systems OEMs. In some cases, we sell our products to competing manufacturers--so our competitors ultimately may sell some of our products. We believe that there are many barriers to entry which limit access to the aircraft industry, including: - the reluctance of OEMs to add new companies as approved vendors on the engineering drawings of the OEMs (a favored status called "print position"); - the general FAA certification requirements necessary to perform aircraft modifications or maintenance; - the required compliance with FAA aircraft manufacturing and aircraft modification design and installation standards; - the required compliance with military specifications for some products sold to military and commercial markets; - the required compliance with qualification and approval standards imposed by aircraft and avionics systems OEMs; and - the significant initial capital investment and tooling requirements necessary for the manufacture of some aircraft components and systems. We believe the following trends are affecting the commercial, regional and corporate aircraft industry: INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1998 Boeing Report projects that the world jetliner fleet will grow from 12,300 aircraft at the end of 1997 to nearly 17,700 aircraft in 2007 and to 26,200 aircraft by 2017. The report also estimates that, over the next 20 years, the industry will require 17,650 new aircraft, both to support the projected world fleet expansion and to replace capacity lost as aircraft are removed from commercial airline service. We believe that every commercial aircraft model currently produced by Boeing and Airbus contains components manufactured by us. The 1998 BOEING REPORT notes that the pent-up demand for replacement aircraft, and upcoming deadlines for noise 49 abatement, may take some older aircraft out of service, and will require carriers to add capacity to keep pace with traffic growth. Boeing has, however, recently announced production cutbacks in several of its lines for 1999 and 2000 in response to continuing instability in its Asian markets. See "Risk Factors--Instability of Asian Market." INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. The U.S. Regional Airline Association forecasts that the total commercial regional aircraft fleet will grow about 58% over the next ten years, with about 50% of the fleet being replaced with new aircraft over the same period. The forecast indicates that about two-thirds of the new aircraft will be jet aircraft (such as the Canadair Regional Jet) with the remainder being turboprop aircraft. These trends should be driven in part by continuing increases in worldwide revenue passenger kilometers (called "RPKs") flown. The 1998 Boeing Report projects that worldwide RPKs will increase at a compound annual growth rate of 5.0% over the next ten years. We believe that the increase in new regional aircraft production is driven by: - the introduction of new regional aircraft with state-of-the-art cockpits and the same safety equipment as larger commercial aircraft; - continued integration of the services of regional carriers with major carriers; - newer longer-range turboprop and jet aircraft that allow regional carriers to consider new point-to-point routes, which would permit passengers to bypass hubs; and - upgraded airport facilities for regional passengers. INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. The ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK projects that 2,300 new corporate aircraft will be delivered from 1997 through 2001. This would be a 61% increase over the previous five-year period. We believe that the increase in new corporate aircraft production is driven by: - the introduction of new, larger and more efficient aircraft; - the growing popularity of fractional aircraft ownership; - the minimal availability of used aircraft; - the need for long range flights to expanding international markets; and - the increased demand for more expedient travel. INCREASED DEMAND FOR CABIN AND FLIGHT DECK SYSTEMS. In recent years, demand for cabin systems has increased. These systems include in-flight passenger telecommunications systems and in-flight entertainment systems, such as video, video-on-demand and other interactive systems. We believe that demand for avionics systems on the flight deck, as well as in the passenger cabin, is increasing, as a result of: - a desire by airlines for additional revenue-producing services; - longer flights combined with a demand by airline passengers for more sophisticated forms of in-flight services; and - the advent of new technologies and FAA mandates related to aircraft safety and navigation. INDUSTRY CONSOLIDATION-REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. To reduce purchasing costs and have greater control over quality, OEMs and aircraft operators have been reducing the number of vendors and suppliers from whom they purchase. Suppliers and vendors must now possess the size and production and distribution capabilities required to provide a broader range of products and services to airlines and OEMs. 50 NEW SAFETY REQUIREMENTS. New technologies and FAA mandates are driving a proliferation of new safety systems for airplanes. The world's airlines, aircraft and avionics OEMs have cooperated with regulatory agencies in the development of industry standards, regulations and system requirements for future air navigation systems (the "FANS" initiative). We expect that this initiative will drive a complete modernization of both airborne and ground-based air traffic management systems. As navigation technology becomes more accurate, new navigation systems such as Global Positioning Systems ("GPS"), may become federally required. Other new technologies which have already been mandated include Traffic Collision Avoidance Systems ("TCAS"), cargo hold fire detection and suppression systems, and windshear detection systems. In anticipation of new FAA recommendations and mandates, many airlines have already begun to install enhanced ground proximity warning systems, predictive windshear detection systems and enhanced digital flight data recorders. Each of these systems presents aircraft avionics retrofit opportunities for us. DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to reduce the operating and capital costs associated with providing services. In response, airlines have increased purchases of some components from third parties and have outsourced some 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. We believe that these trends are creating increased demand for low-cost, high-quality component manufacturers and systems integrators. ACQUISITION HISTORY DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the aircraft market through acquisitions. Since its formation, we have completed eleven acquisitions, summarized as follows: YEAR OF PRINCIPAL PRODUCTS AND SERVICES COMPLETION ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION - ------------- ------------------------------------------------- ------------------------------------------------- 1990 Hollingsead International Avionics support structures 1991 Tri-Star Electronics International Contacts and connectors 1991 Tri-Star Europe, S.A. Contact blanks 1991 Tri-Star Technologies Wire marking equipment 1991 Cory Components Connectors & harness assemblies 1996 Aerospace Display Systems Dichroic LCD devices 1996 Elsinore Engineering Engineering services 1996 AMP manufacturing facility Contact blanks 1997 Audio International Cabin management & entertainment products 1998 Avtech Corporation Cockpit audio, lighting, power & control 1998 Dettmers Industries Corporate aircraft seats COMPETITIVE STRENGTHS We believe that we are well-positioned to take advantage of the foregoing trends and expected growth, as a result of the following competitive strengths: LEADING POSITIONS IN NICHE MARKETS. We have established strong positions in several specialized niches within the commercial aircraft industry. We believe that we are: - the largest supplier of bulk contacts to commercial aircraft original equipment manufacturers ("OEMs"); - the largest supplier of dichroic LCD devices for use by commercial aircraft OEMs; 51 - the largest provider of aircraft entertainment and cabin management products and systems for the high-end corporate aircraft market; - a major supplier of wire harness assemblies for use in in-flight entertainment systems; and - a leading supplier of cockpit audio controls. We have used our strong market positions to compete more effectively as well as to capitalize on industry consolidation trends. DIVERSIFIED REVENUE BASE. We sell to the commercial, regional, corporate and military aircraft markets. Within these markets, our customers include OEMs of aircraft and avionics equipment, aircraft repair and modification centers, and airlines. Each of these markets typically experience different production cycles. We believe that our involvement in multiple markets, reduces our exposure to cyclical product demand in the aircraft industry. Additionally, as a primary supplier of products and services to manufacturers of cabin and flight deck systems, we believe we have opportunities for growth that are independent of the aircraft OEM market. Such systems typically are installed on a retrofit basis by purchasers and operators of existing aircraft, rather than by aircraft OEMs. COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since DeCrane Aircraft was formed in 1989, we have completed eleven acquisitions of businesses and assets. We have successfully executed our strategy of acquiring complementary businesses in the cabin and flight deck markets. Our acquisitions complement each other, and create a core of avionics products and services which increases our cross-selling opportunities. For example, our acquisitions of Dettmers, a corporate aircraft seat manufacturer, and Audio, which makes custom aircraft entertainment and cabin management products, will enable us to offer a more integrated set of products and services to the high-end corporate aircraft market. STRONG CUSTOMER RELATIONSHIPS. We seek to establish and maintain long-term relationships with leaders in our primary markets. For example, we have entered into requirements contracts to supply bulk contacts and specific connectors to Boeing, which is the largest commercial aircraft OEM. Through these agreements, we believe that we are: - the supplier of a substantial majority of the bulk contacts for all aircraft currently manufactured by Boeing; - the sole source supplier of certain connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft; and - the primary supplier of cockpit audio control systems to Boeing. We are also a preferred supplier of wire harness assemblies to Matsushita for its in-flight entertainment systems. LOW-COST, HIGH-QUALITY OPERATIONS. We believe that we have established low-cost operations through cost reduction programs, technological development and, where appropriate, the use of vertical integration. Our low-cost operations are demonstrated, for example, by the growth of programs under which we supply contacts to many of our competitors. We use sophisticated processes to ensure that our products meet or exceed industry and customer quality requirements. Many customers formally have recognized the effectiveness of our quality programs by issuing quality approval letters, awarding quality compliance certificates and authorizing our inspection personnel to act as their authorized quality certification representatives. For example, four of our facilities have received Boeing's D1-9000 Advanced Quality System award, and nine of our facilities are currently ISO-9001 or ISO-9002 certified. 52 REGULATORY CERTIFICATIONS. We employ FAA-certified airframe and power-plant mechanics who are authorized to perform specified aircraft modification functions. This level of expertise enables us to respond rapidly and effectively to our customers' technical requirements. As of January 6, 1999, our subsidiaries: - include one of only 31 currently active Designated Air Stations worldwide which are authorized by the FAA to provide approval and certification of the design of specific aircraft modifications on behalf of the FAA; - hold numerous Parts Manufacturer Approval authorizations from the FAA, permitting them to manufacture and sell various parts in many different types of aircraft; and - hold seven FAA domestic repair station certificates, authorizing them to perform specific aircraft modifications. GROWTH STRATEGY Our principal strategy is to establish and expand leading positions in high-margin, niche markets within the commercial, regional, corporate and military aircraft markets. We focus on the manufacture of avionics components and the integration of avionics systems. We also seek to maintain a balance of revenues among the OEM market, the retrofit market and the aftermarket. We believe that such a strategy will position us to grow by: CAPITALIZING ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN AND FLIGHT DECK SYSTEMS. Our strong market positions, and alignment with many of the leading participants in the industry, should permit us to take advantage of the projected increases in the production of aircraft discussed above. For example, in-flight entertainment systems have become more sophisticated in recent years with the inclusion of such products as video-on-demand and in-seat VCRs. Increasingly, airlines view sophisticated in-flight entertainment systems as a required service on airlines long-haul flights, particularly in first class. Such systems are also increasingly being installed in business and coach class and on planes serving shorter routes. We believe that the trend toward jets instead of turboprops in the corporate and regional markets will further increase our dollar content per aircraft, as well as the demand for our products and services in that market. We believe that this increased demand creates a significant retrofit and aftermarket opportunity for cabin avionics systems, as well as the components and systems integration services necessary to such systems. We work closely with OEMs and modification centers to meet their delivery and scheduling requirements, and, in some cases, to provide total, turnkey solutions to adding avionics systems new aircraft. EXPANDING AND DIVERSIFYING SYSTEMS INTEGRATION SERVICES. Our systems integration services began in the in-flight passenger telecommunications market. Beginning in 1995, we diversified by expanding our systems integration expertise and sales efforts to include navigation and satellite communication, safety, and in-flight entertainment systems. We believe that we are one of the few companies having in-house capabilities in each of the four elements of systems integration (design, certification, kitting and system installation). We have contracted to provide systems integration services for GPS (for KLM Royal Dutch Airlines through Canadian Marconi and Smiths Industries plc), for smoke detection and fire suppression safety systems (for Southwest Airlines through Securaplane and Northwest Airlines through Kidde Safety), for TCAS (for Federal Express) and for in-flight entertainment systems (for Swissair through Interactive Flight Technologies, Inc.). EMPHASIZING INTEGRATED PRODUCT SYSTEMS AND COMPLEMENTARY SERVICES. Over the past several years, we increasingly have combined our manufactured components to create higher value-added products. This activity has created additional opportunities to cross-sell and vertically integrate our products. For example, our contact business provides components to our connector business, which supplies components to our wire harness business. Our harness assemblies often are packaged with its avionics 53 support structures to form the foundation as the installation kits which we then sell to our systems integration customers. We believe that these complementary products and services provide opportunities to increase our sales to existing customers and compete more effectively for new customers. COMPLETING ADDITIONAL STRATEGIC ACQUISITIONS. We operate in a fragmented market, which we estimate to include over 100 companies with revenues of less than $100 million in 1997. We target for acquisition aircraft component manufacturers and systems integration providers that are complementary to our existing businesses, and have a leading market share in their own niches. We seek to leverage our existing strengths, and add new expertise, through acquisitions that offer strategic value and cross-selling opportunities. We regard economies of scale, product line extensions, new customer relationships, increased manufacturing capacity and opportunities for increased cost reductions as particularly important in our analysis of a potential acquisition's strategic value. We are continually engaged in discussions with potential acquisition candidates. However, acquisitions involve many uncertainties, and our attempts to identify appropriate acquisitions, and complete and finance any particular acquisition, may not be successful. PRODUCTS AND SERVICES We believe that our products are used in each of the commercial aircraft models currently produced by Boeing (including McDonnell Douglas models) and Airbus, the two largest commercial aircraft OEMs. Our six principal classes of products and services are: SHARE OF 1997 SALES ON A PRO FORMA CLASS BASIS ----------------------------- ------------------- - electrical contacts About 23% - cockpit audio, About 22% communications, lighting and power and control devices - connectors and harness About 17% assemblies - integration of cabin and About 11% flight deck systems - dichroic LCD devices About 9% - entertainment and cabin About 9% management products No other product or service accounted for more than 10% of our pro forma revenues in 1997. ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity and are installed at the terminus of a wire or an electronic or electrical device. We supply precision-machined contacts for use in connectors found in virtually every electronic and electrical system on a commercial aircraft. We sell contacts directly to aircraft and avionics OEMs and, through our private labeling programs, to several major connector manufacturers who sell connectors to the same markets under their brand name. We believe that we are the supplier of a substantial majority of the bulk contact requirements for all aircraft currently manufactured by Boeing, and the largest supplier of bulk contacts to the commercial aircraft OEMs. COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We are a leading manufacturer of cockpit audio, lighting and power and control devices used in commercial, regional and corporate aircraft. We believe we are the primary supplier of cockpit audio control systems to Boeing, and a leading supplier of power conversion and fluorescent lamp ballast devices and dimmers to corporate aircraft OEMs. We also manufacture commercial aircraft safety system components, 54 including warning tone generators, temperature and de-icing monitoring systems, steep approach monitors and low voltage power supplies for TCAS. CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors link wires and devices in avionics systems, and permit their assembly, installation, repair and removal. Our connectors are specially manufactured to meet the critical performance requirements demanded by OEMs and required in the harsh environment of an operating aircraft. We produce connectors that are used in aircraft galleys, flight decks and control panels in the passenger cabin. We are the sole-source supplier of several specific connectors for in-flight entertainment systems installed by Boeing on its 777 aircraft. We also produce wire harness assemblies for use in cabin avionics systems, from wire, connectors, contacts and hardware. We typically sell our harness assemblies to avionics OEMs. In addition, we incorporate and sell our harness assemblies as part of our systems integration services. We are a primary supplier of harness assemblies to Matsushita, one of the largest manufacturers of in-flight entertainment systems. INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed, patented and produced a wide range of avionics support structures. These structures are used to support and environmentally cool avionics equipment, including navigation, communication and flight control equipment. Our avionics support structures are sold under the Box-Mount-TM- name, which we believe is highly respected in the marketplace. We sell these support structures to aircraft and avionics OEMs, airlines and major modification centers. In addition, these products are essential components of the installation kits used in our systems integration operations. We also perform all of the functions, including design, engineering, certification, manufacturing & installation, necessary to retrofit an aircraft with a new or upgraded avionics system. DICHROIC LCD DEVICES. We believe we are a leading manufacturer of dichroic LCDs and modules used in commercial and military aircraft. (Modules are LCDs packaged with a backlight source and direct-drive electronics.) We believe we are a primary supplier of these devices to aircraft and avionics OEMs and the U.S. military. Our products are used in a variety of flight deck applications, such as flight control systems, fuel quantity indicators, airborne communications and safety systems. Dichroic LCD products are widely used in the aircraft industry because they are easily adapted to custom design, and they possess high performance characteristics, which include high readability in sunlight and darkness, readability from extreme viewing angles, and the ability to withstand wide temperature fluctuations. We also manufacture electronic clocks which use our dichroic LCD devices. We believe that we are the only clock manufacturer which has designed a line of clocks capable of serving all types of aircraft. 55 ENTERTAINMENT AND CABIN MANAGEMENT. We are a leading supplier of aircraft entertainment and cabin management products and systems to the high-end corporate aircraft market. We supply switching and control modules, audio and video components, stereo systems, video monitors, amplifiers, chimes and paging devices, headphone systems, passenger switches, and cabin lighting and climate controls. We also offer systems integration services for cabin management electronics to corporate aircraft OEMs and major modification centers. INDUSTRY REGULATION The aviation industry is highly regulated in the U.S. by the FAA, and in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. We and our customers are subject to these regulations. In addition, many customers impose their own compliance and quality requirements on their suppliers. The FAA prescribes standards and licensing requirements for aircraft components, issues Designated Air Station ("DAS") authorizations, and licenses private repair stations. Our subsidiaries hold various FAA approvals, which may only be used by the subsidiary obtaining such approval. The FAA can authorize or deny authorization of many of the services and products we provide. Any such denial would preclude our ability to provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, the FAA could exercise a wide range of remedies, including a warning letter, a civil penalty action, and suspension or revocation of a certificate or approval. In July of 1997, the FAA notified us that our FAA-approved repair station which holds DAS authorization did not fully comply with some of the requirements for some of the FAA ratings that it held. The FAA granted us until September 10, 1997 to bring the facility into full compliance, and curtailed several operations of the repair station (including prohibiting initiation of new DAS projects) until it achieved full compliance. On August 28, 1997 the FAA inspected the repair station and determined that it was in full compliance with all FAA requirements applicable to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency Certificate including those ratings, and removed the operating restrictions, as of September 5, 1997. The FAA also has the power to issue cease and desist orders and orders of compliance and to initiate court action for injunctive relief. In most (nonemergency) cases, we would be permitted to continue making the products and delivering the goods pending any available appeals, but would be required to stop if the FAA eventually prevailed on appeal. If the FAA were to suspend or revoke our certificates or approvals on an emergency basis, we would be obliged to stop the manufacturing of products and delivering of services that require such certificate or approval. If the FAA determines that noncompliance with its standards creates a safety hazard, it can also order that the pertinent component or aircraft immediately cease to be operated until the condition is corrected. This could require that customers ground aircraft, or remove affected components from aircraft currently in service, both of which are expensive actions. Each type of aircraft operated by airlines in the United States must receive an FAA type certificate ("TC"), generally held by the OEM, indicating that the type design meets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated, that person must obtain an FAA-issued Supplemental Type Certificate ("STC") for the modification. Historically, we have obtained well over 100 STCs, most of which we obtained on behalf of our customers as part of our systems integration services. Some of the STCs we obtain are or will eventually be transferred to our customers. As of January 6, 1999, we own and/or manage 96 STCs. Many of these are multi-aircraft certificates which apply to all of the aircraft of a single type. We foresee the need to obtain additional STCs so that we can expand the services we provide and the customers we serve. 56 STCs can be issued to proposed aircraft modifications, directly by the FAA, or on behalf of the FAA by one of the 31 holders of currently active DAS authorizations (as of January 6, 1999). The FAA designates what types of STC can be issued by each DAS holder. Our subsidiary Elsinore, as one of the 31, can directly issue many of the STCs we and our customers require for our systems integration operations. In many cases, this has increased the speed with which we can obtain STCs and help bring our customers' systems to market. After obtaining an STC, a manufacturer must apply for a Parts Manufacturer Approval ("PMA") from the FAA, or a supplement to an existing PMA, which permits the holder to manufacture and sell installation kits according to the approved design and data package. We have six PMAs, and multiple supplements to each of our PMAs. In general, each initial PMA is an approval of a 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. We routinely apply for and receive PMA supplements. In order to perform the actual installations of a modification, we are also required to have FAA approval. This authority either is specified in our PMAs and supplements, or in our repair station certificates. In order for a company to perform most kinds of repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. As of January 6, 1999, we had seven authorized repair stations. In addition to its approval of design, production, and installation, the FAA certifies personnel. Several of our engineering personnel have been certified by the FAA to perform specific tasks related to the design, production, and performance of aircraft modifications. Such certified personnel include mechanics and repairmen. The FAA also delegates some of its oversight responsibilities, such as testing and inspection responsibilities, to FAA-certified Designated Engineering Representatives ("DERs"). We employ several DERs who evaluate engineering design data packages, ensure compliance with applicable FAA regulations, oversee product testing to ensure airworthiness, and work with the FAA to obtain approvals of those data packages. U. S. military specification ("mil-spec") standards are frequently used by both military and commercial customers in the aircraft industry to define and control characteristics of a product. Through the use of a government Qualified Parts List ("QPL") and Qualified Vendor's List ("QVL"), a customer may be 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. We believe that we hold more QPLs for our contact product line than any other manufacturer. SALES AND MARKETING Product line managers and our product engineering staff provide technical sales support for our direct sales personnel and agents. We may also assign responsibility for marketing, sales and/or services for certain key customers to one of our senior executives. We have nine authorized distributors who purchase, stock and resell several of our product lines. Our systems integration services are sold by sales managers on our staff who are assigned to geographic territories. Because of the significant amount of technical engineering work required in the sales process, our sales managers are generally assisted by a support team of program management, installation and engineering personnel. Each support team specializes in safety systems, in-flight entertainment, or navigation systems. These support teams continue to manage the project throughout the entire integration process. CUSTOMERS In 1997, we sold our products and services to about 1,300 customers. Our primary customers include aircraft and avionics OEMs, airlines, aircraft component manufacturers and distributors, and 57 aircraft repair and modification companies. In fiscal 1997, on a pro forma basis, our two largest customers were Boeing (including McDonnell Douglas) and Matsushita. Boeing accounted for about 22.1%, and Matsushita for about 7.6%, of our 1997 consolidated pro forma revenues. In addition, a significant portion of our sales of components also are sold to Boeing indirectly through our sales to suppliers of Boeing. Historically, our 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. We believe that we have reduced our exposure to such fluctuations by developing capabilities in multiple specialties such as safety systems, in-flight entertainment systems and navigation systems. We have secured orders for integration services in each of these targeted areas. The timing and magnitude of program awards for systems integration services may make other customers significant sources of nonrecurring income in a single year. However, we believe that we will continue to be able to significantly offset such year-to-year fluctuations with new contracts. Most of our sales to Boeing are pursuant to contracts which may be terminated by Boeing at any time, and include various terms favorable to the buyer. For example, one provides that we must extend to Boeing any reductions in prices or lead times that we provide to other customers; and that we must match other suppliers' price reductions of more than five percent, or else delete the affected products from the contract. Another contract relieves Boeing from any obligation to order products covered by the contract if Boeing's customers request an alternate supplier, or our product is not technologically competitive in Boeing's judgment, or Boeing changes the design of an aircraft so that our products are no longer needed, or Boeing reasonably determines that we cannot meet its requirements in the amounts and within the schedules it requires. Our contracts with Boeing also generally grant Boeing an irrevocable non-exclusive worldwide license to use our intellectual property rights (such as designs, trade secrets and tooling) related to products sold to Boeing, if we default, or suffer a bankruptcy filing, or transfer our manufacturing rights to a third party. We generally sell components and services to Matsushita pursuant to purchase orders. However, we do have one supply agreement with Matsushita for connectors, through September 1999. MANUFACTURING AND QUALITY CONTROL Many of our product lines use process-specific equipment and procedures that have been custom-designed or fabricated to provide high-quality products at relatively low cost. Some of our key product lines are vertically integrated, which we believe improves our product performance, customer service and competitive pricing. We have conducted programs to reduce costs including overhead expenses. In some cases these programs have involved the use of proprietary equipment or processes which have enabled us to reduce costs without reducing quality levels. Several of our key customers have developed their own design, product performance, manufacturing process and quality system standards and require us (and other suppliers) to comply with such standards. As a result, we have developed and conducted comprehensive quality policies and procedures which meet or exceed our customers' requirements. Many of our customers have recognized formally the effectiveness of our quality programs by issuing quality approval letters and awarding quality compliance certificates. In addition, some of our customers have authorized our inspection personnel also to act as their authorized quality representatives. That authorization enables us to ship directly into the inventory stockrooms of these customers, eliminating the need for inspection at the receiving end. We use sophisticated equipment and procedures to ensure the quality of our products and to comply with mil-specs and FAA certification requirements. We perform a variety of testing procedures, 58 including environmental testing under different temperature, humidity and altitude levels, shock and vibration testing and X-ray fluorescent measurement. These procedures, together with other customer approved techniques for document, process and quality control, are used throughout our manufacturing facilities. RAW MATERIALS AND COMPONENT PARTS The components we manufacture require the use of various raw materials including gold, aluminum, copper, rhodium, plating chemicals and plastics. The availability and prices of these materials may fluctuate. Their price is a significant component in, and part of, the sales price of many of our products. Although some of our contracts have prices tied to raw materials prices, we cannot always recover increases in raw materials prices in our product sale prices. We also purchase a variety of manufactured component parts from various suppliers. Raw materials and component parts are generally available from multiple suppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials and component parts may affect our ability to meet customer production needs. INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION We have various trade secrets, proprietary information, trademarks, trade names, patents, copyrights and other intellectual property rights which we believe are important to our business in the aggregate (but not individually). COMPETITION We compete with a number of established companies that have significantly greater financial, technological, manufacturing and marketing resources than ours. We believe that our ability to compete depends on high product performance, short lead-time and timely delivery, competitive price, and superior customer service and support. The niche markets within the aircraft industry that we serve are relatively fragmented, with several competitors for each of the products and services we provide. Due to the global nature of the aircraft industry, competition in these categories comes from both U.S. and foreign companies. However, we know of no single competitor that offers the same range of products and services as those we provide. 59 Our principal competitors in contacts and connectors are large and diversified corporations which produce a broad range of products. In other areas we generally face a group of smaller companies and enterprises. CLASS OF PRODUCT PRINCIPAL COMPETITORS - --------------------------------------------------- --------------------------------------------------- - electrical contacts - Amphenol Corporation - Deutsch Engineered Connecting Devices (a division of Deutsch Co.) - ITT Cannon (a division of ITT Industries, Inc.) - cockpit audio, - Becker Avionics, Inc. communications, lighting and power - Crane ELDEC Corp. and control devices - Diehl GmbH & Co. - Gables Engineering Inc. - Page Aerospace, Inc. - connectors - AMP, Inc. - ITT Cannon - Radiall S.A. - integration of cabin and flight deck avionics - Electronic Cable Specialists ("ECS") systems into different aircraft models - Engineering departments of airlines - Numerous independent airframe maintenance and modification companies - dichroic LCD devices - Cristalloid, Inc. - entertainment and cabin management products - Aerospace Lighting Corporation - Baker Electronics - DPI Labs - Grimes Aerospace Company - Nellcor Puritan Bennett Inc. - Pacific Systems Corporation BACKLOG As of September 30, 1998, we had an aggregate sales order backlog of $84.6 million compared to $75.5 million as of December 31, 1997, all on a pro forma basis. Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date will be materially affected by when we receive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predict actual shipments or sales for any future period. EMPLOYEES As of September 30, 1998, we had 1,444 employees (including 53 temporary employees), of whom 197 were in engineering (including 3 temporary employees), 72 were in sales, 1,055 were in manufacturing operations (including 45 temporary employees) and 120 were in finance and administration (including 5 temporary employees). None of our employees are subject to a collective bargaining agreement, and we have not experienced any material business interruption as a result of labor disputes since DeCrane Aircraft was formed. We believe that we have a good relationship with our employees. 60 FACILITIES We lease most of our principal facilities, as described in the following table. APPROX. LEASE LOCATION DESCRIPTION SQ. FT. EXPIRATION - ----------------------------------------------- ------------------------------------------- --------- ---------- El Segundo, CA................................. Manufacturing and engineering facility 81,300 2000 Garden Grove, CA............................... Manufacturing and engineering facility 58,300 2004 Stuart, FL..................................... Manufacturing facility and offices 29,700 2008 Lugano, Switzerland............................ Manufacturing facility 28,000 2003 Hatfield, PA................................... Manufacturing and engineering facility 27,500 1999 Lugano, Switzerland............................ Manufacturing facility 21,000 2001 Irvine, CA..................................... Manufacturing facility 16,400 1999 Seattle, WA.................................... Storage facility 10,000 2001 Stuart, FL..................................... Manufacturing facility 9,000 1999 Wiltshire, United Kingdom...................... Manufacturing facility 5,700 2013 El Segundo, CA................................. Executive offices 5,000 2004 Santa Barbara, CA.............................. Engineering facility 3,500 2000 Seattle, WA.................................... Engineering facility 3,200 1999 Santa Ana, CA.................................. Engineering facility 1,300 1999 Additionally, we have a leased manufacturing facility of approximately 52,000 square feet in Santa Fe Springs, CA, which expires in 2000, and that we have leased in part to several subtenants. Also, we own a manufacturing and engineering facility comprised of six buildings having an aggregate of 87,382 square feet in Seattle, Washington (and additional leased rental office and vacant space nearby, comprising another 34,229 square feet), and an 18,000 square foot manufacturing and engineering facility in North Little Rock, Arkansas. We believe that our properties are in good condition and are adequate to support our operations for the foreseeable future. ENVIRONMENTAL MATTERS Our facilities and operations are 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, some environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may be separately asserted (as "joint and several" liability) against multiple parties who have some relationship to a site or a source of waste. We have sent waste to treatment, storage, or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of several of those sites. In addition, some of our operations are located on properties which are contaminated to varying degrees. We have not incurred, nor do we expect to incur liabilities in any significant amount as a result of the foregoing matters, because in these cases other entities have been held primarily responsible, the levels of contamination are sufficiently low so as not to require remediation, or we are indemnified against such costs. In most cases, we do not believe that we have any material liability for past waste disposal. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. It is possible, given the retroactive nature of CERCLA liability, that we will from time to time receive additional notices of potential liability, relating to current or former activities. 61 Some of our manufacturing processes create wastewater which requires chemical treatment, and one of our facilities has been cited for failure to adequately treat that water. The costs associated with remedying that failure have been immaterial. See "--Legal Proceedings." We have been and are in substantial compliance with environmental requirements. We believe that we have no liabilities under environmental requirements, except for liabilities which would we do not expect would likely have a material adverse effect on our business, results of operations or financial condition. However, some risk of environmental liability is inherent in the nature of our business, and we might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental requirements. See "Risk Factors--Environmental Risks and Regulations" and "Business--Legal Proceedings." LEGAL PROCEEDINGS Our manufacturing facility in El Segundo, California, has received several notices of violation related to its wastewater discharge permit, most recently on June 18, 1998. We have taken various corrective measures. However, we continue to experience difficulty in meeting the wastewater flow limitations contained in its discharge permit and we are evaluating additional measures, including seeking modification to our permit. We have installed new treatment equipment. The cost for such installation, plus the anticipated cost of any additional installations and/or outsourcing of the plating processes that create the discharge, is not expected to be material. We do not believe that the notices will result in any material sanctions. See "Risk Factors--Environmental Risks and Regulations" and "Business--Environmental Matters." As part of its investigation of the crash off the Canadian coast on September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety Board ("TSB") notified us that they recovered burned wire which was attached to the in-flight entertainment system installed on some of Swissair's aircraft by one of our subsidiaries. Attorneys for families of persons who died aboard the flight requested that we put our insurance carrier on notice of a potential claim by those families, and we did so. The TSB has advised us that it has no evidence that the system we installed malfunctioned or failed during the flight. We are fully cooperating with the TSB investigation. We are a party to a license agreement with McDonnell Douglas (now a part of Boeing) pursuant to which we may request specified data in order to design and market modifications to aircraft manufactured by McDonnell Douglas. Under the agreement, we are to pay McDonnell Douglas a royalty of five percent of the net sales price of all modifications sold by us, for which we have requested data from McDonnell Douglas. We have requested data for a single modification, which we believe is exempt from the agreement's provision requiring royalties. In 1996, McDonnell Douglas made a demand for $650,000 for royalties. We do not believe that we are obligated to McDonnell Douglas in any amount. However, if the claim is asserted, and if we are unsuccessful in defending it, we may be required to pay royalties to McDonnell Douglas. Three of our subsidiaries are defendants in an action filed in federal court by American International Airways, Inc., relating to the conversion and modification of two Boeing 747 aircraft from passenger to freighter configuration. No specific amount of damages is sought. The events in question occurred prior to our purchase of the relevant businesses from their prior owner. DeCrane Aircraft and two of the subsidiaries are indemnified for any such liability and for the further cost of defense of the action. The third defendant subsidiary is being defended with a reservation of rights by its insurance carrier, and we intend to deny any liability. On July 21, 1998, plaintiffs seeking to represent a purported class of our stockholders filed in Delaware Chancery Court an action entitled TAAM Associates, Inc. v. DeCrane, et al. against DeCrane Aircraft, our directors, DLJ, Inc. and one of its affiliates. The compliant alleged, among other things, that our directors had breached their fiduciary duties by entering into the merger agreement with the 62 DLJ affiliate (see "Recent Developments--The DLJ Acquisition") without engaging in an auction or "active market check" and, therefore, agreed to terms that were unfair and inadequate from the standpoint of our stockholders. On July 24, 1998, the plaintiffs amended the complaint to add allegations that the Schedule 14D-9 we filed with the SEC as part of the tender offer and merger transaction contained various material misstatements or omissions; that the termination fees to the affiliate of DLJ were unreasonable; and that the directors who approved the DLJ acquisition had conflicts of interest. The complaint sought among other things an injunction barring the transaction, or damages plus attorneys' fees and litigation expenses. Without admitting any wrongdoing in the action, in order to avoid the burden and expense of further litigation, the defendants reached an agreement in principle with the plaintiffs which contemplates settlement of the action. The foregoing defendants and the plaintiffs entered into a memorandum of understanding under which the parties, subject to selected facts being confirmed through discovery which has not been completed, would enter into a settlement agreement subject to approval by the Court of Chancery. That memorandum of understanding required that we make several additional disclosures by filing an amendment to our Schedule 14D-9, which we did, and for a complete release and settlement of all claims arising out of the facts set forth in the complaint. The memorandum also contemplates that plaintiffs' counsel will apply to the Court of Chancery for an award of attorney's fees and litigation expenses in an amount not exceeding $375,000, which application the defendants agreed not to oppose. In August 1998, DeCrane Aircraft and R. Jack DeCrane, its chief executive officer, were served in an action filed in state court in California by Robert A. Rankin, claiming that he was due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith, fraudulent misrepresentation in violation of certain provisions of the California Labor Code (for which doubled damages are sought), promissory estoppel, and wrongful discharge in violation of public policy (as a result of his allegations of improprieties in connection with the DLJ acquisition transactions). The action seeks not less than $1.5 million plus punitive damages and costs. The action is in its early stage of development and discovery has not been completed. We intend to vigorously defend against the claim. Mr. Rankin's employment with DeCrane Aircraft has been terminated. We are party to other litigation incident to the normal course of business. We do not believe that the outcome of any of such other matters in which we are currently involved will have a material adverse effect on our financial condition or results of operations. 63 MANAGEMENT The following table sets forth certain information concerning each person who is currently a director or executive officer of DeCrane Aircraft. Each director also serves as a director of DeCrane Holdings. NAME AGE POSITION - ------------------------------------------ --- --------------------------------------------------------------- R. Jack DeCrane........................... 52 Director and Chief Executive Officer Charles H. Becker......................... 52 President and Chief Operating Officer John R. Hinson............................ 36 Chief Financial Officer, Secretary and Treasurer Thompson Dean............................. 40 Director John F. Fort, III......................... 57 Director Dr. Robert J. Hermann..................... 65 Director Dr. Paul G. Kaminski...................... 56 Director Susan C. Schnabel......................... 37 Director Timothy J. White.......................... 37 Director R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as President since it was founded in December 1989, until April 1993 when he was elected to the newly-created office of Chief Executive Officer. Prior to founding our company, Mr. DeCrane held various positions at the aerospace division of B.F. Goodrich. Mr. DeCrane was a Group Vice President at the aerospace division of B.F. Goodrich with management responsibility for three business units from 1986 to 1989. CHARLES H. BECKER has been President and Chief Operating Officer of DeCrane Aircraft since April 1998. Mr. Becker previously served as Group Vice President of Components of the Company from December 1996 to April 1998, and President of Tri-Star from December 1994 to April 1998. Prior to joining us, Mr. Becker was President of the Interconnect Systems Division of Microdot, Inc. from 1984 to 1994. JOHN R. HINSON has been the Chief Financial Officer, Secretary and Treasurer for DeCrane Aircraft since September 1998. From April 1998 to August 1998, he served as Vice President, Planning & Business Development. From March 1995 to March 1998, Mr. Hinson was Vice President, Finance and Chief Financial Officer for the Tri-Star Companies. From October 1991 to March 1995 he held various positions, including Director of Finance and Director of Operations, at MiniMed, Inc. Prior to that, Mr. Hinson was employed in financial positions by Hewlett-Packard Company and Bankers Trust Company. THOMPSON DEAN has been the Managing Partner of DLJ Merchant Banking, Inc. ("DLJMB Inc."), since November 1996. Previously, Mr. Dean was a Managing Director of DLJMB Inc. (and its predecessor). Mr. Dean serves as a director of Commvault Inc., Von Hoffman Press, Inc., Manufacturer's Services Limited, Phase Metrics, Inc., AKI Holding Corp. and Insilco Holding Corporation. JOHN F. FORT, III served as Chairman of the Board of Directors of Tyco International, Inc. from 1982 to December 1992, and as Chief Executive Officer from 1982 to June 1992. Mr. Fort serves as a director of Tyco International, Inc., Dover Corporation and Roper Industries. DR. ROBERT J. HERMANN is a Senior Partner of Global Technology Partners. Dr. Hermann most recently served as Senior Vice President for Science and Technology at United Technologies Corporation and served in various other capacities at United Technologies Corporation since 1982. Prior to joining United Technologies Corporation, Dr. Hermann spent twenty years with the National Security Agency. In 1977 he was appointed Principal Deputy Assistant Secretary of Defense for Communications, Command, Control and Intelligence, and in 1979 was named Assistant Secretary of 64 the Air Force for Research, Development and Logistics and Director of the National Reconnaissance Office. DR. PAUL G. KAMINSKI is a Senior Partner of Global Technology Partners. Dr. Kaminski currently serves as Chief Executive Officer of Technovation, Inc., a consulting firm focusing on business strategy and advanced technology. Dr. Kaminski served as U.S. Undersecretary of Defense for Acquisition and Technology from October 1994 to 1997. Prior to that time, he served as Chairman and Chief Executive Officer of Technology Strategies and Alliances. Dr. Kaminski is a former Chairman of the Defense Science Board and is currently a member of the Senate Select Committee on Intelligence-Technical Advisory Group, the NRO Advisory Council and the National Academy of Engineering. Dr. Kaminski is a director of General Dynamics Corporation, Dyncorp, Eagle-Picher Technologies and several privately held information technology companies. SUSAN C. SCHNABEL has been a Managing Director of DLJMB Inc. since January 1998. In 1997, she served as Chief Financial Officer of PETsMART, a high growth specialty retailer of pet products and supplies. From 1990 to 1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation, where she became a Managing Director in 1996. Ms. Schnabel serves as a director of Dick's Clothing and Sporting Goods, Environmental Systems Products and Wavetek Corporation. TIMOTHY J. WHITE has been a Vice President of DLJMB Inc. since June 1998. From October 1994 to May 1998, Mr. White was an Associate and Vice President at Donaldson, Lufkin & Jenrette Securities Corporation. From May 1994 to October 1994, Mr. White was an Associate Counsel in the Office of the Independent Counsel, United States Department of Justice. Prior to that time, Mr. White was an attorney with Davis Polk & Wardwell. 65 SUMMARY COMPENSATION TABLE The following table describes all annual compensation awarded to, earned by or paid to our Chief Executive Officer and the four-most highly compensated executive officers other than the Chief Executive Officer for the years ended December 31, 1997, 1996 and 1995. ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------------------- ------------------------------------------------ SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION YEAR SALARY BONUS (1) AWARDS SAR(2) PAYOUT (3) --------- --------- --------- ------------- ----------- ----------- --------- ----------- R. Jack DeCrane........ 1997 $ 244,744 $ 220,000 -- 50,000 $ 29,411 Chief Executive Officer 1996 206,600 146,000 7,813 34,028 -- and Director(4) 1995 180,000 55,000 -- -- -- R.G. MacDonald(5)...... 1997 184,859 102,000 10,536 4,000 -- 1996 177,437 82,000 13,200 -- -- 1995 173,607 35,000 8,292 -- -- Charles H. Becker...... 1997 174,492 102,000 6,168 15,000 18,000 President and Chief 1996 148,750 65,000 9,103 19,850 30,586 Operating Officer(6) 1995 137,515 16,000 1,610 14,179 -- Roger L. Keller(7)..... 1997 163,866 30,000 1,682 10,000 -- 1996 150,000 -- 2,083 19,850 -- 1995 121,250 7,500 -- 14,179 17,405 Robert A. Rankin(8).... 1997 149,309 103,000 7,158 15,000 -- 1996 139,375 65,000 12,838 19,850 -- 1995 135,000 20,000 6,628 -- 80,357 - ------------------------ (1) Amounts paid by us for premiums on health, life and long-term disability insurance and automobile leases provided by us for the benefit of the named executive officer. (2) Number of shares of common stock issuable upon exercise of options granted during the last fiscal year. (3) Relocation costs. (4) Mr. DeCrane also served as Chairman of the Board of Directors through August 1998. (5) Mr. MacDonald served as President through December 1996 and Vice Chairman of the Board of Directors through August 1998. (6) Mr. Becker served as Group Vice President of Components and President of Tri-Star through April 1998. Mr. Becker became President and Chief Operating Officer in April 1998. (7) Mr. Keller served as Group Vice President of Systems from December 1996 until January 1999, President of Hollingsead from December 1995 until January 1999, and Vice President for Engineering, Sales and Program Management of Hollingsead from May 1994 through November 1995. (8) Mr. Rankin served as Chief Financial Officer, Secretary and Treasurer until August 1998. 66 STOCK OPTION/SARS GRANTS IN LAST FISCAL YEAR The following table sets forth individual grants of stock options granted to the executive officers named below during the fiscal year ended December 31, 1997, pursuant to the share incentive plan then in place. (See "Employment Agreements and Compensation Arrangements--Former Share Incentive Plan."). POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES ANNUAL RATES OF STOCK UNDERLYING % OF EXERCISE OR PRICE APPRECIATION(1) OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION ------------------------ NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10% - ------------------------------------------- ------------- --------------- ----------- ------------- ---------- ------------ R. Jack DeCrane............................ 50,000 30.6% $ 16.75 2007 $ 526,699 $ 1,334,759 R.G. MacDonald............................. 4,000 2.4% 16.75 2007 42,136 106,781 Charles H. Becker.......................... 15,000 9.2% 16.75 2007 158,010 400,428 Roger L. Keller............................ 10,000 6.1% 16.75 2007 105,340 266,952 Robert A. Rankin........................... 15,000 9.2% 16.75 2007 158,010 400,428 - ------------------------ (1) The potential realizable value assumes a rate of annual compound stock price appreciation of 5% and 10% from the date the option was granted over the full option term. These assumed annual compound rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future prices of the common stock. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information about the stock options exercised by the executive officers named below during the fiscal year ended December 31, 1997. NUMBER OF VALUE OF SECURITIES UNEXERCISED SHARES UNDERLYING IN-THE-MONEY ACQUIRED VALUE UNEXERCISED OPTIONS/SAR NAME ON EXERCISE REALIZED OPTIONS/SAR AT FY-END(1) - ---------------------------------------- --------------- ----------- ------------- ----------------- EXERCISABLE/ EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE ------------- ----------------- R. Jack DeCrane......................... -- -- $80,819/95,370 $1,329,172/655,294 R.G. MacDonald.......................... -- -- 45,372/15,342 747,324/187,814 Charles H. Becker....................... -- -- 14,180/34,849 229,559/287,686 Roger L. Keller......................... -- -- 13,047/30,982 210,897/305,098 Robert A. Rankin........................ -- -- 16,448/32,581 269,315/247,930 - ------------------------ (1) Based on the common stock share price of $16.75 per share as of December 31, 1997, the measuring date. In August 1998, on the effective date of the mergers conducted as a part of the DLJ acquisition, all outstanding options for the common stock of DeCrane Aircraft were canceled. See "Recent 67 Developments--The DLJ Acquisition". The holders of all vested and unvested options received a cash payment determined, for each option, as follows: ($23.00 per share--exercise price of X maximum number of shares holder could option) have purchased (if all options were fully vested) by exercising option just before the effective date. EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS On July 17, 1998, the Compensation Committee of our Board of Directors approved an employment agreement between the Company and R. Jack DeCrane replacing his prior employment agreement that was to expire on September 1, 1998. Mr. DeCrane's employment agreement provides for various benefits, including: - an initial salary of $310,000, which is subject to annual review and increase, but not decrease; - an annual bonus ranging from 0% to 100% of Mr. DeCrane's annual base salary depending on the degree to which we achieve certain performance goals; - a $500,000 bonus in recognition of our then-recent acquisition of Avtech Corporation; - a $250,000 signing bonus; - options to purchase 50,000 shares of common stock of DeCrane Aircraft at a price equal to the fair market value of the shares as of July 16, 1998 (one-half of which were immediately exercisable; the rest became exercisable upon the completion of the DLJ acquisition); - a $150,000 cash continuation bonus payable on January 2, 1999, if employed by us on January 1, 1999. Mr. DeCrane's immediately exercisable options were cancelled in August 1998 and he received a cash payout in lieu of the options, calculated according to the formula noted above, under "Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values." The employment agreement also provides that if certain change-of-control events occur, and Mr. DeCrane's employment is terminated by us for any reason (other than for cause (as defined in the agreement) or as a result of his death or disability), or by Mr. DeCrane for good reason (as defined in the agreement), then we will pay Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment will be $1.00 less than three times the sum of Mr. DeCrane's average base salary plus bonus for the five calendar years preceding his termination date. FORMER SHARE INCENTIVE PLAN We adopted a Share Incentive Plan in 1993 which permitted us to grant to our eligible employees options to purchase shares of our common stock, shares of common stock with conditional vesting based upon performance criteria, and options to receive payments based on the appreciation of common stock, commonly known as Share Appreciation Rights (or "SARs"). That plan permitted such grants to be made to key employees of DeCrane Aircraft designated by a compensation committee of the Board of Directors. As described above, all options to purchase common stock outstanding were terminated when the DLJ acquisition transactions were completed, and the holders received cash payments in exchange for those options. DeCrane Holdings has indicated to us that it intends to give certain key members of our management the opportunity to purchase an equity participation in DeCrane Holdings pursuant to customary arrangements. However, these parties have not entered into any agreement regarding such equity participation. 68 1996 INCENTIVE PLAN In 1996 we introduced an incentive plan (the "1996 Incentive Plan") for our management personnel tied to DeCrane Aircraft's and each operating unit's annual budget as approved each year by the Compensation Committee of the Board of Directors. The 1996 Incentive Plan matrix provides for an annual bonus of up to 70% of participating employees' base salary if the relevant operating unit achieves 110% of budget. Fifty percent of the bonus is payable solely based on performance of 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 our Chief Executive Officer or the president of the relevant operating unit. 401(K) RETIREMENT PLAN Effective April 1992, we adopted the Lincoln National Life Insurance Company Non-Standardized 401(k) Salary Reduction Plan and Trust Prototype Plan. 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. Effective October 1, 1997, we matched 25% of the employee contribution up to 6% of the employee's salary for the fourth quarter of 1997 and each quarter of 1998. Effective January 1, 1999, we plan to match 50% of the employee contribution for up to 6% of the employee's salary. The full amount vested in a participant's account will be distributed to a participant following termination of employment, normal retirement or in the event of disability or death. DIRECTORS' COMPENSATION The directors of DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors or committees thereof. However, John F. Fort, III, an independent director not affiliated with any investor in DeCrane Holdings, receives a director's fee of $5,000 for each meeting attended. Also, all directors are reimbursed for out-of-pocket expenses. We expect to continue those policies. DeCrane Holdings does not compensate or intend to compensate its directors. 69 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the outstanding shares of common stock of DeCrane Aircraft are owned by DeCrane Holdings. DeCrane Aircraft has no other class of stock outstanding. The following table sets forth the beneficial ownership of DeCrane Holdings' voting securities as of December 31, 1998 by its principal owners (and other persons who we are required to mention, such as executive officers and directors). COMMON STOCK 14% SENIOR REDEEMABLE --------------------------- EXCHANGEABLE PREFERRED STOCK NUMBER OF DUE 2008 SHARES, PERCENTAGE, ---------------------------- PARTIALLY PARTIALLY NUMBER OF NAME OF BENEFICIAL OWNER (1) DILUTED(2) DILUTED(2) SHARES PERCENTAGE - ------------------------------------------------------------ ---------- --------------- ----------- --------------- DLJMB Funds(3).............................................. 2,981,087 99% 340,000 99% Thompson Dean(4)............................................ -- -- -- DLJMB Inc. 277 Park Avenue New York, New York 10172 Susan C. Schnabel(4)........................................ -- -- -- -- DLJMB Inc. 277 Park Avenue New York, New York 10172 Timothy J. White(4)......................................... -- -- -- -- DLJMB Inc. 277 Park Avenue New York, New York 10172 Global Technology Partners, LLC(5).......................... -- -- -- -- 1300 I Street N.W. Washington, D.C. Dr. Robert J. Hermann(5).................................... 5,938 -- 714 -- c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. Dr. Paul G. Kaminski(5)..................................... 5,938 -- 714 -- c/o Global Technology Partners, LLC 1300 I Street, N.W. Washington, D.C. John F. Fort, III........................................... -- -- -- -- R. Jack DeCrane............................................. -- -- -- -- Charles H. Becker........................................... -- -- -- -- John R. Hinson.............................................. -- -- -- -- All directors and named executive officers as a group (9 persons)............................................... 11,876 -- 1,428 -- - ------------------------ (1) Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares. (2) The common stock columns show number of shares owned and total percentage of ownership in the manner required by SEC rules. The entry for each person who holds warrants assumes that that person, and no-one else, fully exercises any rights that they have under those warrants to purchase shares of common stock. (3) Reflects 2,826,087 shares, and warrants for the issuance of an additional 155,000 shares, held directly by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and the following related investors: DLJ Merchant Banking Partners II-A, L.P.; DLJ Offshore Partners II, C.V. ("Offshore"); 70 DLJ Diversified Partners, L.P.; DLJ Diversified Partners-A, L.P.; DLJ Millennium Partners, L.P.; DLJ Millennium Partners-A, L.P.; DLJMB Funding II, Inc.; UK Investment Plan 1997 Partners, Inc. ("UK Partners"); DLJ EAB Partners, L.P.; DLJ First ESC L.P. and DLJ ESC II L.P. See "Certain Relationships and Related Transactions" and "Plan of Distribution." The address of Offshore is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of UK Partners is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. The address of each of the other persons is 277 Park Avenue, New York, New York 10172. (4) Messrs. Dean and White and Ms. Schnabel are officers of DLJMB Inc., an affiliate of DLJMB and DLJSC. The share data shown for these individuals excludes shares shown as held by the DLJMB Funds; Messrs. Dean and White and Ms. Schnabel disclaim beneficial ownership of those shares. (5) Messrs. Hermann and Kaminski are members of Global Technology Partners, LLC ("GTP"). Six members of GTP, including Messrs. Hermann and Kaminski, acquired 20,098 shares of DeCrane Holdings common stock, and 2,417 shares of DeCrane Holdings 14% Senior Redeemable Exchangeable Preferred Stock due 2008, in a transaction negotiated with DeCrane Holdings. The share data shown for GTP and Messrs. Hermann and Kaminski excludes shares shown as held by the individual members; Messrs. Hermann and Kaminski disclaim beneficial ownership in any of the shares held by the other members. DeCrane Holdings is authorized to issue an aggregate of 3,500,000 shares of DeCrane Holdings Common Stock, par value $.01 per share, of which 2,846,185 are outstanding (excluding 310,000 reserved for issuance for outstanding warrants). DeCrane Holdings is authorized to issue up to 2,500,000 shares of Preferred Stock, par value $.01 per share, in one or more series, of which 342,417 are outstanding. For a full description of DeCrane Holdings' capital stock, please review DeCrane Holdings' Certificate of Incorporation and Certificate of Designation for its 14% Senior Redeemable Exchangeable Preferred Stock due 2008. You can obtain a copy from us or from the exhibits to the registration statement of which this prospectus is a part. See "Where You Can Obtain More Information" in the Summary. 71 CERTAIN RELATIONSHIPS AND TRANSACTIONS THE MERGER AGREEMENT. The Merger Agreement entered into in connection with the DLJ acquisition entitled a holding company controlled by DLJMB to designate a number of directors proportionally commensurate with its stock ownership of DeCrane Aircraft. DeCrane Holdings selected all of the current members of the Board of Directors of DeCrane Aircraft. DLJMB or its designate selected all of the members of the Board of Directors of DeCrane Holdings. THE DLJ ACQUISITION. DLJ Capital Funding, Inc., an affiliate of DLJMB, received customary fees and reimbursement of expenses in connection with the arrangement and syndication of the bank credit facility and as a lender thereunder. DLJ Bridge Finance, Inc., an affiliate of DLJMB, received customary fees in connection with its commitment to purchase and its purchase of the bridge notes. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), which is also an affiliate of DLJMB, acted as financial advisor and dealer manager in connection with the tender offer, as arranger of the bank credit facility and received customary fees for those services, DLJSC also acted as the initial purchaser of the old notes. The aggregate amount of all fees payable to the DLJ entities in connection with the DLJ acquisition is approximately $12.0 million. DeCrane Aircraft is also obligated to reimburse DLJSC for certain reasonable out-of-pocket expenses incurred in connection with the tender offer (including the fees and disbursements of outside counsel) and to indemnify DLJSC against certain liabilities, including certain liabilities under the federal securities laws. In addition, DeCrane Aircraft is obligated to pay DLJSC an annual advisory fee of $300,000 beginning on the consummation of the tender offer for a period of five years. We may from time to time enter into other investment banking relationships with DLJSC or one of its affiliates pursuant to which DLJSC or its affiliate will receive customary fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of DLJSC against certain liabilities, including liabilities under the federal securities laws. THE INVESTORS AGREEMENT. In connection with the DLJ acquisition, an Investors' Agreement dated as of August 28, 1998 (the "Investors' Agreement") was entered into among DeCrane Holdings and the DLJMB Funds. It provides that any person acquiring shares of common stock or preferred stock of DeCrane Holdings who is required by the terms of the Investors' Agreement or any employment agreement or stock purchase, option, stock option or other compensation plan of DeCrane Holdings to become a party thereto shall execute an agreement to become bound by the Investors' Agreement and thereafter shall be bound by it. The terms of the Investors' Agreement restrict transfers of the shares of DeCrane Holdings common stock and preferred stock by the stockholders party to the agreement. The agreement permits those shareholders to participate in certain sales of shares of DeCrane Holdings' common stock by the DLJMB Funds and permits the DLJMB Funds to require the other shareholders who are party to the Investors Agreement to sell shares of DeCrane Holdings' common stock in certain circumstances should the DLJMB Funds choose to sell any such shares owned by them. The DLJMB Funds are entitled, pursuant to the agreement, to request six demand registrations with respect to the DLJMB warrants for DeCrane Holdings common stock, the common stock and preferred stock held by the funds, which are immediately exercisable subject to customary deferral and cutback provisions. In addition, the shareholders will also be entitled to unlimited piggyback registration rights (other than in the case of a registration of shares issuable in connection with any employee benefit plan or in connection with an acquisition), subject to customary cutback provisions. The agreement provides that DeCrane Holdings will indemnify the shareholders against certain liabilities and expenses, including liabilities under the Securities Act. The Investors' Agreement also provides that the DLJMB Funds have the right to appoint all of the members of the Boards of Directors of DeCrane Holdings and DeCrane Aircraft, and that at least one of such directors on each board will be an independent director. Messrs. Hermann, Kaminski and Fort are independent directors. 72 Each warrant for DeCrane Holdings common stock held by the DLJMB funds entitles the holder thereof to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. These warrants are exercisable at any time prior to 5:00 p.m. New York City time on August 28, 2009, subject to applicable federal and state securities laws. In connection with the DLJ acquisition, Global Technology Partners, LLC ("GTP") will have options to purchase up to 1.25% of DeCrane Holdings common stock. The options will vest over a three-year period, subject to acceleration if the DLJMB Funds sell any of their shares of common stock. Those options will be exercisable at an exercise price equal to the price paid for DeCrane Holdings' common stock by the DLJMB Funds. In addition, in December 1998 six members of GTP, including Messrs. Hermann and Kaminski, purchased approximately $704,000 of shares of newly issued common and preferred stock of DeCrane Holdings. DeCrane Aircraft loaned half of the purchase price for such shares to those members at an interest rate equal to the interest rate on the longest maturity senior bank debt of DeCrane Aircraft in effect from time to time, plus 1.0%. The loans are repayable out of the proceeds from the sale of such stock and are secured by such stock. DeCrane Holdings has indemnified GTP against certain claims and liabilities, including liabilities under the Securities Act. PRIOR SHAREHOLDERS AGREEMENT. Pursuant to the Fifth Amended and Restated Shareholders Agreement dated January 10, 1997 among the Company, Nassau Capital Partners, L.P., Brantley Venture Partners II, L.P., DSV Partners, IV, Electra Investment Trust P.L.C., Electra Associates, Inc. and certain other parties, and subject to election by the Company's stockholders, Nassau, Brantley and DSV each had the right to nominate a representative to serve as a director so long as the relevant stockholder owns at least five percent of the common stock. The Shareholders Agreement also provided that Mr. DeCrane may nominate a director for election by DeCrane Aircraft's stockholders for so long as he was the Chief Executive Officer of DeCrane Aircraft. The Shareholders Agreement ceased to be in effect upon consummation of the DLJ acquisition. WAIVERS AND EXCHANGES OF SECURITIES. Effective immediately prior to our initial public offering ("IPO"), certain of the Company's then-existing shareholders, including Nassau, Brantley, DSV and the Electra entities, and holders of warrants for common stock, agreed to waive a number of rights under the agreements by which such shareholders and warrant holders acquired such rights from DeCrane Aircraft, releasing DeCrane Aircraft from certain dividend payment requirements, voting requirements and certain other rights, as well as eliminating certain negative and affirmative covenants contained therein. The foregoing agreement provided for: (i) the conversion of all 6,847,705 shares of issued and outstanding cumulative convertible preferred stock into 1,941,804 shares of common stock; (ii) the cashless exercise and conversion of all 52,784 and 9,355 issued and outstanding of such preferred stock warrants and common stock warrants, respectively, into a total of 16,585 shares of common stock; (iii) the cashless exercise of 508,497 mandatorily redeemable common stock warrants (the "Redeemable Warrants") into a total of 507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable Warrants. In December 1997, the Company issued an additional 16,918 shares of common stock to the Electra entities and 33,825 shares to Nassau to resolve a disputed calculation regarding the number of shares that should have been issued as part of the conversions described above. Redeemable Warrants exercisable into 208,968 common shares remained after the foregoing conversions. Of this amount, 138,075 Redeemable Warrants were cancelled upon the consummation of the IPO and repayment of DeCrane Aircraft's senior subordinated debt and convertible notes in accordance with the terms of the respective warrant agreements. Redeemable Warrants exercisable into 70,893 common shares remained after the foregoing conversions, the IPO and application of the net proceeds therefrom. Concurrent with the consummation of the IPO, the mandatory redemption feature 73 of these warrants was terminated and, as a result, the value ascribed thereto was reclassified to stockholders' equity as additional paid-in capital. Upon consummation of the IPO and as part of the foregoing conversions, R.G. MacDonald, Charles H. Becker, Robert A. Rankin and John R. Hinson exchanged an aggregate of 75,000 shares of preferred stock of the Company for 21,268 shares of common stock. FORMER INDEPENDENT DIRECTOR. In June 1997, the Company extended its Share Incentive Plan for employees to independent non-management directors of the Company who are not appointed to the Board pursuant to the Existing Shareholders Agreement, and issued 6,000 options to Mitchell I. Quain, the only director presently qualifying for such plan. Such options were cancelled and Mr. Quain received a cash payment therefor in connection with the consummation of the tender offer. See "Recent Developments--The DLJ Acquisition." 74 DESCRIPTION OF BANK CREDIT FACILITY The bank credit facility is provided by a syndicate of lenders led by DLJSC, as arranger, and DLJ Capital Funding, as syndication agent. The bank credit facility includes an $80.0 million term loan facility and a $50.0 million revolving credit facility which provides for loans and under which up to $10.0 million in letters of credit may be issued. The term loan facility is comprised of a Term A facility of $35.0 million which matures on August 28, 2004 and a Term B facility of $45.0 million which matures on August 28, 2005. The revolving credit facility is comprised of an acquisition facility of $25.0 million and a working capital facility of $25.0 million. A portion of the working capital facility was used to finance the conversion of shares into cash in connection with the DLJ acquisition and the remainder can be used for general corporate and working capital purposes, each of which matures on August 28, 2004. The working capital facility is subject to a potential, but uncommitted, increase of up to $20.0 million at the our request at any time prior to such maturity date. Such increase will be available only if one or more financial institutions agrees, at the time of our request, to provide it. Loans under the bank credit facility initially bear interest at our option, at the alternate base rate plus 1.00% or the reserve adjusted Euro-Dollar rate plus 2.25% for the revolving credit facility and Term A facility and the base rate plus 1.25% or the reserve adjusted Euro-Dollar rate plus 2.50% for the Term B facility. We will pay commitment fees at a rate equal to 0.50% per annum on the unused portion of the working capital facility and at a rate equal to 0.50% or 0.75% per annum, depending upon utilization, on the unused portion of the acquisition facility. Those fees are payable quarterly in arrears and upon the maturity or termination of the revolving credit facility. Beginning six months after the August 28, 1998 closing date of the facility, the applicable margins and commitment fees will be determined based on the ratio (the "Leverage Ratio") of consolidated total debt to consolidated EBITDA of DeCrane Aircraft and its subsidiaries (as defined in the documentation for the bank credit facility). We will pay a letter of credit fee on the undrawn amounts of letters of credit issued and outstanding under the bank credit facility at a rate per annum equal to the then-applicable margin for Euro-Dollar loans under the Term A facility, which shall be shared by all lenders participating in such letter of credit, and an additional amount to be mutually agreed upon to the issuer of each letter of credit. The term loans are subject to the following amortization schedule: TERM A LOAN TERM B LOAN YEAR AMORTIZATION AMORTIZATION - ------------------------------------------------------------------ ------------- ------------- 1................................................................. 0.0% 1.0% 2................................................................. 5.0% 1.0% 3................................................................. 10.0% 1.0% 4................................................................. 20.0% 1.0% 5................................................................. 25.0% 1.0% 6................................................................. 40.0% 1.0% 7................................................................. -- 94.0% ----- ----- 100.0% 100.0% ----- ----- ----- ----- The bank credit facility will be subject to mandatory prepayment: - with 50% of the net cash proceeds received from the issuance of equity securities to the extent that the Leverage Ratio exceeds 3.5 to 1, subject to certain exceptions, - with 100% of the net cash proceeds received from the issuance of debt, subject to certain exceptions, 75 - with 100% of the net cash proceeds received from permitted asset sales, subject to certain exceptions and - with 50% of excess cash flow (as defined in the bank credit facility) for each fiscal year to the extent that the Leverage Ratio exceeds 3.5 to 1. We are required to apply all mandatory prepayment amounts first to the prepayment of the term loan facility, and thereafter to the prepayment of the revolving credit facility. DeCrane Holdings, and each of DeCrane Aircraft's wholly-owned direct and indirect domestic subsidiaries other than Audio International Sales, Inc., a U.S. Virgin Islands corporation (the "subsidiary guarantors") are guarantors of the bank credit facility. Our obligations under the bank credit facility are also secured by: - all existing and after-acquired personal property of DeCrane Aircraft and the subsidiary guarantors, including a pledge of all of the stock of all existing or future subsidiaries DeCrane Aircraft (provided that no more than 65% of the voting stock of any foreign subsidiary shall be pledged), - first-priority perfected liens on all material existing and after-acquired real property interests of DeCrane Aircraft and the subsidiary guarantors, subject to customary permitted liens (as defined in the bank credit facility), - a pledge by DeCrane Holdings of the stock of DeCrane Aircraft, and - a negative pledge on all assets of DeCrane Aircraft and its subsidiaries, in each case subject to certain exceptions. The bank credit facility contains customary covenants and restrictions on our ability to engage in certain activities, including, but not limited to: (i) limitations on other indebtedness, liens, investments and guarantees, (ii) restrictions on dividends and redemptions and payments on subordinated debt and (iii) restrictions on mergers and acquisitions, sales of assets and leases. The bank credit facility also contains financial covenants requiring us to maintain a minimum EBITDA, a minimum coverage of interest expense and a minimum coverage of fixed charges, and to not exceed a maximum leverage ratio or maximum level of capital expenditures. Borrowings under the bank credit facility are subject to significant conditions, including compliance with certain financial ratios and the absence of any material adverse change. See "Risk Factors-- Substantial Leverage." 76 DESCRIPTION OF NOTES GENERAL The notes have been issued pursuant to an Indenture (the "Indenture") between DeCrane Aircraft and State Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the notes include those stated in the Indenture, and those which are incorporated into the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The notes are subject to all of those terms, and holders of notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The terms of the new notes and the old notes are substantially the same in all material respects, except that the new notes will not be subject to liquidated damages penalties for failure to timely register the notes under the Securities Act, and will be more freely transferable by the holders thereof by reason of their registration thereunder. This section is a summary of the Indenture's principal terms, not a complete statement. You should read the entire Indenture, and the Registration Rights Agreement described below, for a complete understanding of the rights and obligations of the holders of notes. Copies of the Indenture and Registration Rights Agreement are available as set forth under "--Additional Information." Also, the terms of the Indenture use many specially defined terms. In this summary, we have used the key defined terms, which are shown here as capitalized words. You should refer to the definitions listed in "--Certain Definitions" below for their complete scope and meaning. The notes are general unsecured obligations of DeCrane Aircraft and are subordinated in right of payment to all existing and future Senior Indebtedness of DeCrane Aircraft (including borrowings under the bank credit facility). The notes rank PARI PASSU with any future senior subordinated Indebtedness of DeCrane Aircraft and rank senior in right of payment to all future subordinated Indebtedness of DeCrane Aircraft. The notes are effectively subordinated to all liabilities of DeCrane Aircraft's subsidiaries that are not Guarantors, including trade payables. The notes are unconditionally guaranteed on a senior subordinated basis by DeCrane Aircraft's existing wholly-owned domestic subsidiaries. The Note Guarantees are general unsecured obligations of the Guarantors, are subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the bank credit facility, and rank senior in right of payment to any future subordinated indebtedness of the Guarantors. On a PRO FORMA basis, as of September 30, 1998, DeCrane Aircraft and the Guarantors would have had outstanding approximately $89.8 million of Senior Indebtedness and DeCrane Aircraft's non-Guarantor subsidiaries would have had approximately $1.9 million of outstanding liabilities (other than guarantees under the bank credit facility), including trade payables. The Indenture will permit DeCrane Aircraft and its Subsidiaries to incur additional Indebtedness, including Senior Indebtedness, in the future. See "Risk Factors--Subordination of the Notes to Senior Debt; Possible Additional Subordinated Debt" and "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." As of the date of the Indenture, all of DeCrane Aircraft's Subsidiaries were designated as Restricted Subsidiaries. However, under certain circumstances, DeCrane Aircraft will be permitted to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The notes will initially be limited in aggregate principal amount to $100.0 million and will mature on September 30, 2008. Interest on the notes will accrue at the rate of 12% per annum and will be payable semi-annually in arrears on March 30 and September 30, commencing on March 30, 1999, to holders of record on the immediately preceding March 15 and September 15. Interest on the notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of 77 twelve 30-day months. Principal of, premium, if any, and interest on the notes will be payable at the office or agency of DeCrane Aircraft maintained for such purpose within the City and State of New York or, at the option of DeCrane Aircraft, payment of interest may be made by check mailed to the holders of the notes at their respective addresses set forth in the register of holders of notes; PROVIDED that all payments of principal, premium and interest with respect to notes represented by one or more permanent global notes will be paid by wire transfer of immediately available funds to the account of the Depository Trust Company or any successor thereto. Until otherwise designated by DeCrane Aircraft, DeCrane Aircraft's office or agency in New York will be the office of the Trustee maintained for such purpose. The notes will be issued in denominations of $1,000 and integral multiples thereof. Subject to the covenants described below, DeCrane Aircraft may issue additional notes under the Indenture having the same terms in all respects as the notes (or in all respects except for the payment of interest on the notes (i) scheduled and paid prior to the date of issuance of such notes or (ii) payable on the first Interest Payment Date following such date of issuance). The notes offered hereby and any such additional notes would be treated as a single class for all purposes under the Indenture. SUBORDINATION The payment of Subordinated Note Obligations is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or cash equivalents of all Senior Indebtedness, whether outstanding on the date of the Indenture or thereafter incurred. Upon any distribution to creditors of DeCrane Aircraft in a liquidation or dissolution of DeCrane Aircraft or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to DeCrane Aircraft or their property, an assignment for the benefit of creditors or any marshalling of DeCrane Aircraft's assets and liabilities, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before the holders of notes will be entitled to receive any payment with respect to the Subordinated Note Obligations, and until all Obligations with respect to Senior Indebtedness are paid in full in cash or cash equivalents, any distribution to which the holders of notes would be entitled shall be made to the holders of Senior Indebtedness (except that holders of notes may receive and retain Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). DeCrane Aircraft also may not make any payment upon or in respect of the Subordinated Note Obligations (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") if (a) a default in the payment of the principal of, premium, if any, or interest on or commitment fees relating to, Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (b) any other default occurs and is continuing with respect to Designated Senior Indebtedness that permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the holders of any Designated Senior Indebtedness. Payments on the notes may and shall be resumed, in the case of a payment default, upon the date on which such default is cured or waived, and otherwise, upon the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been waived or cured for a period of not less than 90 days. 78 "Designated Senior Indebtedness" means (a) any Indebtedness outstanding under the bank credit facility and (b) any other Senior Indebtedness permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by DeCrane Aircraft in writing to the Trustee as "Designated Senior Indebtedness." "Permitted Junior Securities" means Equity Interests in DeCrane Aircraft or debt securities of DeCrane Aircraft that are subordinated to all Senior Indebtedness (and any debt securities issued in exchange for Senior Indebtedness) to substantially the same extent as, or to a greater extent than, the notes are subordinated to Senior Indebtedness. "Senior Indebtedness" means, with respect to any Person, (a) all Obligations of such Person outstanding under the bank credit facility and all Hedging Obligations payable to a lender or an Affiliate thereof or to a Person that was a lender or an Affiliate thereof at the time the contract was entered into under the bank credit facility or any of its Affiliates, including, without limitation, interest accruing subsequent to the filing of, or which would have accrued but for the filing of, a petition for bankruptcy, whether or not such interest is an allowable claim in such bankruptcy proceeding, (b) any other Indebtedness, unless the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to any other Senior Indebtedness of such Person and (c) all Obligations with respect to the foregoing. However, Senior Indebtedness does not include (i) any liability for federal, state, local or other taxes, (ii) any Indebtedness of such Person (other than pursuant to the bank credit facility) to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred in violation of the Indenture. "Subordinated Note Obligations" means all Obligations with respect to the notes, including, without limitation, principal, premium (if any) and interest payable pursuant to the terms of the notes (including upon the acceleration or redemption thereof), together with and including any amounts received or receivable upon the exercise of rights of rescission or other rights of action (including claims for damages) or otherwise. The Indenture further requires that DeCrane Aircraft promptly notify holders of Senior Indebtedness if payment of the notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, holders of notes may recover less ratably than creditors of DeCrane Aircraft who are holders of Senior Indebtedness. NOTE GUARANTEES DeCrane Aircraft's payment obligations under the notes are jointly and severally guaranteed (the "Note Guarantees") by the Guarantors. The Note Guarantee of each Guarantor is subordinated to the prior payment in full in cash or cash equivalents of all Senior Indebtedness of such Guarantor (including such Guarantor's guarantee of the bank credit facility) to the same extent that the notes are subordinated to Senior Indebtedness of DeCrane Aircraft. The obligations of each Guarantor under its Note Guarantee are limited so as not to constitute a fraudulent conveyance under applicable law. The Indenture provides that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless: (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the notes, the Indenture and the Registration 79 Rights Agreement; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; (iii) DeCrane Aircraft would, at the time of such transaction and after giving PRO FORMA effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." The requirements of clause (iii) of this paragraph will not apply in the case of a consolidation with or merger with or into DeCrane Aircraft or another Guarantor. The Indenture provides that, in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) will be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See "Repurchase at the Option of Holders." OPTIONAL REDEMPTION Except as provided below, the notes are not redeemable at DeCrane Aircraft's option prior to September 30, 2003. Thereafter, the notes will be subject to redemption at any time at the option of DeCrane Aircraft, in whole or in part, upon not less than 30 nor more than 60 days' notice, in cash at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on September 30 of the years indicated below: YEAR PERCENTAGE - -------------------------------------------------------------------------------------- ----------- 2003.................................................................................. 106.000% 2004.................................................................................. 104.000% 2005.................................................................................. 102.000% 2006 and thereafter................................................................... 100.000% Notwithstanding the foregoing, on or prior to September 30, 2001, DeCrane Aircraft may redeem up to 35% of the aggregate principal amount of notes ever issued under the Indenture in cash at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; PROVIDED that at least 65% of the aggregate principal amount of notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption and PROVIDED further that such redemption shall occur within 90 days of the date of the closing of any such Public Equity Offering. In addition, at any time prior to September 30, 2003, DeCrane Aircraft may, at its option upon the occurrence of a Change of Control, redeem the notes, in whole but not in part, upon not less than 30 nor more than 60 days' prior notice (but in no event may any such redemption occur more than 60 days after the occurrence of such Change of Control), in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the notes as if the notes were to remain outstanding and be redeemed on September 30, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest to the date of redemption. "Treasury Rate" means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the 80 most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to September 30, 2003; PROVIDED that if the period from the redemption date to September 30, 2003 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. SELECTION AND NOTICE If less than all of the notes are to be redeemed at any time, selection of notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the notes are listed, or, if the notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED that no notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Senior Subordinated Note is to be redeemed in part only, the notice of redemption that relates to such Senior Subordinated Note shall state the portion of the principal amount thereof to be redeemed. A new Senior Subordinated Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Senior Subordinated Note. notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. MANDATORY REDEMPTION DeCrane Aircraft is not required to make mandatory redemption of, or sinking fund payments with respect to, the notes. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of notes will have the right to require DeCrane Aircraft to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase (the "Change of Control Payment"). Within 60 days following any Change of Control, DeCrane Aircraft will (or will cause the Trustee to) mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Change of Control Offer, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached their obligations described in the Indenture by virtue thereof. On the Change of Control Payment Date, DeCrane Aircraft will, to the extent lawful, accept for payment all notes or portions thereof properly tendered pursuant to the Change of Control Offer, deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all notes or portions thereof so tendered, and deliver or cause to be delivered to the Trustee the notes so accepted together with an Officers' Certificate stating the aggregate principal amount of notes or portions thereof being purchased by DeCrane Aircraft. The Paying Agent will promptly mail to each 81 holder of notes so tendered the Change of Control Payment for such notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book-entry) to each holder a new Note equal in principal amount to any unpurchased portion of the notes surrendered, if any; PROVIDED that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Indenture provides that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, DeCrane Aircraft will either repay all outstanding Senior Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Senior Indebtedness to permit the repurchase of notes required by this covenant. DeCrane Aircraft will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the notes to require that DeCrane Aircraft repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. The bank credit facility prohibits DeCrane Aircraft from purchasing any notes and also provides that certain change of control events (which may include events not otherwise constituting a Change of Control under the Indenture) with respect to DeCrane Aircraft would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Indebtedness to which DeCrane Aircraft becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when DeCrane Aircraft is prohibited from purchasing notes, DeCrane Aircraft could seek the consent of its lenders to the purchase of notes or could attempt to refinance the borrowings that contain such prohibition. If DeCrane Aircraft does not obtain such a consent or repay such borrowings, DeCrane Aircraft will remain prohibited from purchasing notes. In such case, DeCrane Aircraft's failure to purchase tendered notes would constitute an Event of Default under the Indenture, which would, in turn, constitute a default under the bank credit facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of notes. DeCrane Aircraft will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by DeCrane Aircraft and purchases all notes validly tendered and not withdrawn under such Change of Control Offer. "Change of Control" means the occurrence of any of the following: (a) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of DeCrane Aircraft and its Subsidiaries, taken as a whole, to any "person" or "group" (as such terms are used in Section 13(d) of the Exchange Act), other than the Principals and their Related Parties; (b) the adoption of a plan for the liquidation or dissolution of DeCrane Aircraft; (c) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" or "group" (as such terms are used in Section 13(d) of the Exchange Act), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly through one or more intermediaries, of 50% or more of the voting power of the outstanding voting stock of DeCrane Aircraft; or 82 (d) the first day on which a majority of the members of the board of directors of DeCrane Aircraft are not Continuing Members. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require DeCrane Aircraft to repurchase such notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole to another Person or group may be uncertain. "Continuing Members" means, as of any date of determination, any member of the board of directors of DeCrane Aircraft who (a) was a member of such board of directors immediately after consummation of the Acquisition or (b) was nominated for election or elected to such board of directors with the approval of, or whose election to the board of directors was ratified by, at least a majority of the Continuing Members who were members of such board of directors at the time of such nomination or election or any successor Continuing Directors appointed by such Continuing Directors (or their successors). ASSET SALES The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (a) DeCrane Aircraft or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the board of directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (b) at least 75% of the consideration therefor received by DeCrane Aircraft or such Restricted Subsidiary is in the form of (i) cash or Cash Equivalents or (ii) property or assets that are used or useful in a Permitted Business, or the Capital Stock of any Person engaged in a Permitted Business if, as a result of the acquisition by DeCrane Aircraft or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary; PROVIDED that the amount of (x) any liabilities (as shown on DeCrane Aircraft's or such Restricted Subsidiary's most recent balance sheet), of DeCrane Aircraft or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases DeCrane Aircraft or such Restricted Subsidiary from further liability, (y) any securities, notes or other obligations received by DeCrane Aircraft or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by DeCrane Aircraft or such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received), and (z) any Designated Noncash Consideration received by DeCrane Aircraft or any of its Restricted Subsidiaries in such Asset Sale having an aggregate fair market value, taken together with all other Designated Noncash Consideration received pursuant to this clause (z) that is at that time outstanding, not to exceed 15% of Total Assets at the time of the receipt of such Designated Noncash Consideration (with the fair market value of each item of Designated Noncash Consideration being measured at the time received and without giving effect to subsequent changes in value), shall be deemed to be cash for purposes of this provision; 83 and PROVIDED further that the 75% limitation referred to in clause (b) above will not apply to any Asset Sale in which the cash or Cash Equivalents portion of the consideration received therefrom, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax proceeds would have been had such Asset Sale complied with the aforementioned 75% limitation. Within 365 days after the receipt of any Net Proceeds from an Asset Sale, DeCrane Aircraft or any such Restricted Subsidiary shall apply such Net Proceeds, at its option (or to the extent DeCrane Aircraft is required to apply such Net Proceeds pursuant to the terms of the bank credit facility), to (a) repay or purchase Senior Indebtedness or Pari Passu Indebtedness of DeCrane Aircraft or any Indebtedness of any Restricted Subsidiary, PROVIDED that, if DeCrane Aircraft shall so repay or purchase Pari Passu Indebtedness of DeCrane Aircraft, it will equally and ratably reduce Indebtedness under the notes if the notes are then redeemable, or, if the notes may not then be redeemed, DeCrane Aircraft shall make an offer (in accordance with the procedures set forth below for an Asset Sale Offer) to all holders of notes to purchase at a purchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest thereon to the date of purchase, the notes that would otherwise be redeemed, or (b) an investment in property, the making of a capital expenditure or the acquisition of assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if (i) as a result of the acquisition by DeCrane Aircraft or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary or (ii) the Investment in such Capital Stock is permitted by clause (f) of the definition of Permitted Investments. Pending the final application of any such Net Proceeds, DeCrane Aircraft may temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, DeCrane Aircraft will be required to make an offer to all holders of notes (an "Asset Sale Offer") to purchase the maximum principal amount of notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, DeCrane Aircraft may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of notes surrendered by holders thereof in connection with an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be purchased as set forth under "--Selection and Notice." Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Asset Sale Offer, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the Indenture by virtue thereof. 84 CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any other payment or distribution on account of DeCrane Aircraft's or any of its Restricted Subsidiaries' Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of DeCrane Aircraft or dividends or distributions payable to DeCrane Aircraft or any Wholly Owned Restricted Subsidiary of DeCrane Aircraft); (b) purchase, redeem or otherwise acquire or retire for value any Equity Interests of DeCrane Aircraft, any of its Restricted Subsidiaries or any other Affiliate of DeCrane Aircraft (other than any such Equity Interests owned by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft); (c) make any principal payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value, any Indebtedness of DeCrane Aircraft that is subordinated in right of payment to the notes, except in accordance with the mandatory redemption or repayment provisions set forth in the original documentation governing such Indebtedness (but not pursuant to any mandatory offer to repurchase upon the occurrence of any event); or (d) make any Restricted Investment; (all such payments and other actions set forth in clauses (a) through (d) above being collectively referred to as "Restricted Payments"); unless, at the time of and after giving effect to such Restricted Payment: (i) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (ii) DeCrane Aircraft would, immediately after giving PRO FORMA effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (iii) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by DeCrane Aircraft and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (a) (to the extent that the declaration of any dividend referred to therein reduces amounts available for Restricted Payments pursuant to this clause (iii)), (b) through (i), (k), (l), (o), (p) and (r) of the next succeeding paragraph), is less than the sum, without duplication, of (A) 50% of the Consolidated Net Income of DeCrane Aircraft for the period (taken as one accounting period) commencing October 1, 1998 to the end of DeCrane Aircraft's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (B) 100% of the Qualified Proceeds received by DeCrane Aircraft on or after the date of the Indenture from contributions to DeCrane Aircraft's capital or from the issue or sale on or after the date of the Indenture of Equity Interests of DeCrane Aircraft or of Disqualified Stock or convertible debt securities of DeCrane Aircraft to the extent that they have been converted into such Equity Interests (other than Equity Interests, Disqualified Stock or convertible debt securities 85 sold to a Subsidiary of DeCrane Aircraft and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (C) the amount equal to the net reduction in Investments in Persons after the date of the Indenture who are not Restricted Subsidiaries (other than Permitted Investments) resulting from (x) Qualified Proceeds received as a dividend, repayment of a loan or advance or other transfer of assets (valued at the fair market value thereof) to DeCrane Aircraft or any Restricted Subsidiary from such Persons, (y) Qualified Proceeds received upon the sale or liquidation of such Investment and (z) the redesignation of Unrestricted Subsidiaries (excluding any increase in the amount available for Restricted Payments pursuant to clause (j) or (n) below arising from the redesignation of such Restricted Subsidiary) whose assets are used or useful in, or which is engaged in, one or more Permitted Business as Restricted Subsidiaries (valued, proportionate to DeCrane Aircraft's equity interest in such Subsidiary, at the fair market value of the net assets of such Subsidiary at the time of such redesignation). The foregoing provisions will not prohibit: (a) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (b) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of DeCrane Aircraft (the "Retired Capital Stock") in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of DeCrane Aircraft) of, other Equity Interests of DeCrane Aircraft (other than any Disqualified Stock) (the "Refunding Capital Stock"), PROVIDED that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (iii)(B) of the preceding paragraph; (c) the defeasance, redemption, repurchase, retirement or other acquisition of subordinated Indebtedness of DeCrane Aircraft with the net cash proceeds from an incurrence of, or in exchange for, Permitted Refinancing Indebtedness; (d) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of DeCrane Aircraft or DeCrane Holdings held by any member of DeCrane Holdings' or DeCrane Aircraft's (or any of its Restricted Subsidiaries') management pursuant to any management equity subscription agreement or stock option agreement and any dividend to DeCrane Holdings to fund any such repurchase, redemption, acquisition or retirement, PROVIDED that (i) the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed (x) $4.0 million in any calendar year (with unused amounts in any calendar year being carried over to succeeding calendar years subject to a maximum (without giving effect to the following clause (y)) of $7.0 million in any calendar year), plus (y) the aggregate cash proceeds received by DeCrane Aircraft during such calendar year from any reissuance of Equity Interests by DeCrane Aircraft or DeCrane Holdings to members of management of DeCrane Aircraft and its Restricted Subsidiaries and (ii) no Default or Event of Default shall have occurred and be continuing immediately after such transaction; (e) payments and transactions in connection with the Acquisition, the Acquisition Financing, the Offering, the bank credit facility (including commitment, syndication and arrangement fees payable thereunder) and the application of the proceeds thereof (including the purchase of shares of Common Stock of DeCrane Aircraft and any payment therefor by way of dissenting rights or otherwise) and the payment of fees and expenses with respect thereto; (f) the payment of dividends or the making of loans or advances by DeCrane Aircraft to DeCrane Holdings not to exceed $3.0 million in any fiscal year for costs and expenses incurred by DeCrane Holdings in its capacity as a holding company or for services rendered by DeCrane Holdings on behalf of DeCrane Aircraft; 86 (g) payments or distributions to DeCrane Holdings pursuant to any Tax Sharing Agreement; (h) the payment of dividends by a Restricted Subsidiary on any class of common stock of such Restricted Subsidiary if (i) such dividend is paid pro rata to all holders of such class of common stock and (ii) at least 51% of such class of common stock is held by DeCrane Aircraft or one or more of its Restricted Subsidiaries; (i) the repurchase of any class of common stock of a Restricted Subsidiary if (i) such repurchase is made pro rata with respect to such class of common stock and (ii) at least 51% of such class of common stock is held by DeCrane Aircraft or one or more of its Restricted Subsidiaries; (j) any other Restricted Investment made in a Permitted Business which, together with all other Restricted Investments made pursuant to this clause (j) since the date of the Indenture, does not exceed $25.0 million (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (j), either as a result of (i) the repayment or disposition thereof for cash or (ii) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to DeCrane Aircraft's equity interest in such Subsidiary at the time of such redesignation) at the fair market value of the net assets of such Subsidiary at the time of such redesignation), in the case of clause (i) and (ii), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (j); PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Investment; (k) the declaration and payment of dividends to holders of any class or series of Disqualified Stock of DeCrane Aircraft or any Restricted Subsidiary issued on or after the date of the Indenture in accordance with the covenant described under the caption "-Incurrence of Indebtedness and Issuance of Preferred Stock"; PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (l) repurchases of Equity Interests deemed to occur upon exercise of stock options if such Equity Interests represent a portion of the exercise price of such options; (m) the payment of dividends or distributions on DeCrane Aircraft's common stock, following the first public offering of DeCrane Aircraft's common stock or DeCrane Holdings' common stock after the date of the Indenture, of up to 6.0% per annum of (i) the net proceeds received by DeCrane Aircraft from such public offering of its common stock or (ii) the net proceeds received by DeCrane Aircraft from such public offering of DeCrane Holdings' common stock as common equity or preferred equity (other than Disqualified Stock), other than, in each case, with respect to public offerings with respect to DeCrane Aircraft's common stock or DeCrane Holdings' common stock registered on Form S-8; PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after any such payment of dividends or distributions; (n) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (n) since the date of the Indenture, does not exceed $10.0 million (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (n) either as a result of (i) the repayment or disposition thereof for cash or (ii) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to DeCrane Aircraft's equity interest in such Subsidiary at the time of such redesignation) at the fair market value of the net assets of such Subsidiary at the time of such redesignation), in the case of clause (i) and (ii), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (n); PROVIDED that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (o) the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary; 87 (p) the purchase, redemption or other acquisition or retirement for value of any Equity Interests of any Restricted Subsidiary issued after the date of the Indenture, PROVIDED that the aggregate price paid for any such repurchased, redeemed, acquired or retired Equity Interests shall not exceed the sum of (i) the amount of cash and Cash Equivalents received by such Restricted Subsidiary from the issue or sale thereof and (ii) any accrued dividends thereon the payment of which would be permitted pursuant to clause (k) above; (q) any Investment in an Unrestricted Subsidiary that is funded by Qualified Proceeds received by DeCrane Aircraft on or after the date of the Indenture from contributions to DeCrane Aircraft's capital or from the issue and sale on or after the date of the Indenture of Equity Interests of DeCrane Aircraft or of Disqualified Stock or convertible debt securities to the extent they have been converted into such Equity Interests (other than Equity Interests, Disqualified Stock or convertible debt securities sold to a Subsidiary of DeCrane Aircraft and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock) in an amount (measured at the time such Investment is made and without giving effect to subsequent changes in value) that does not exceed the amount of such Qualified Proceeds; and (r) distributions or payments of Receivables Fees. The board of directors of DeCrane Aircraft may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such designation, all outstanding Investments by DeCrane Aircraft and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Restricted Investments in an amount equal to the greater of (i) the net book value of such Investments at the time of such designation and (ii) the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Investment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of (i) all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by DeCrane Aircraft or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be the fair market value on the date of receipt thereof by DeCrane Aircraft of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment shall be determined by the board of directors of DeCrane Aircraft whose resolution with respect thereto shall be delivered to the Trustee. Not later than the date of making any Restricted Payment, DeCrane Aircraft shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Indenture provides that (a) DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Indebtedness), (b) DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, issue any shares of Disqualified Stock and (c) DeCrane Aircraft will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; PROVIDED that DeCrane Aircraft or any Restricted Subsidiary may incur Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for DeCrane Aircraft's most recently ended four full fiscal quarters for which internal financial statements are 88 available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a consolidated PRO FORMA basis (including a PRO FORMA application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Indebtedness"): (i) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of Indebtedness under the bank credit facility; PROVIDED that the aggregate principal amount of all Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of DeCrane Aircraft and such Restricted Subsidiaries thereunder) then classified as having been incurred in reliance upon this clause (i) that remains outstanding under the bank credit facility after giving effect to such incurrence does not exceed an amount equal to $150.0 million; (ii) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of Existing Indebtedness; (iii) the incurrence by DeCrane Aircraft of Indebtedness represented by the notes and the Indenture and by the Guarantors of Indebtedness represented by the Note Guarantees; (iv) the incurrence by DeCrane Aircraft and its Restricted Subsidiaries of Indebtedness denominated in Swiss francs (or a European common currency as a result of the implementation of European Monetary Union and the cessation of use of Swiss francs as the lawful currency of Switzerland) in an aggregate principal amount (or accreted value, as applicable) not to exceed $4.0 million outstanding after giving effect to such incurrence; (v) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Indebtedness represented by Capital Expenditure Indebtedness, Capital Lease Obligations or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of DeCrane Aircraft or such Restricted Subsidiary, in an aggregate principal amount (or accreted value, as applicable) not to exceed $15.0 million outstanding after giving effect to such incurrence; (vi) Indebtedness arising from agreements of DeCrane Aircraft or any Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition; PROVIDED that (A) such Indebtedness is not reflected on the balance sheet of DeCrane Aircraft or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (A)) and (B) the maximum assumable liability in respect of such Indebtedness shall at no time exceed the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by DeCrane Aircraft and/or such Restricted Subsidiary in connection with such disposition; (vii) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to be incurred; (viii) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of intercompany Indebtedness between or among DeCrane Aircraft and/or any of its Restricted Subsidiaries; PROVIDED 89 that (i) if DeCrane Aircraft is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than DeCrane Aircraft or a Restricted Subsidiary thereof and (B) any sale or other transfer of any such Indebtedness to a Person that is not either DeCrane Aircraft or a Restricted Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by DeCrane Aircraft or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (viii); (ix) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (A) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding and (B) exchange rate risk with respect to agreements or Indebtedness of such Person payable denominated in a currency other than U.S. dollars, PROVIDED that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (x) the guarantee by DeCrane Aircraft or any of its Restricted Subsidiaries of Indebtedness of DeCrane Aircraft or a Restricted Subsidiary of DeCrane Aircraft that was permitted to be incurred by another provision of this covenant; (xi) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of Acquired Indebtedness in an aggregate principal amount (or accreted value, as applicable) not to exceed $10.0 million outstanding after giving effect to such incurrence; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by DeCrane Aircraft or any Restricted Subsidiary in the ordinary course of business; and (xiii) the incurrence by DeCrane Aircraft or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) outstanding after giving effect to such incurrence, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (xiii), not to exceed $20.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, DeCrane Aircraft shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, DeCrane Aircraft may, at any time, change the classification of an item of Indebtedness (or any portion thereof) to any other clause or to the first paragraph hereof PROVIDED that DeCrane Aircraft would be permitted to incur such item of Indebtedness (or such portion thereof) pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. All Indebtedness under the bank credit facility outstanding on the date of the Indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." As a result, DeCrane Aircraft will be permitted to incur significant additional secured indebtedness under clause (i) of the definition of "Permitted Indebtedness." See "Risk Factors-- Substantial Leverage." 90 LIENS The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, other than a Permitted Lien, that secures obligations under any Pari Passu Indebtedness or subordinated Indebtedness of DeCrane Aircraft on any asset or property now owned or hereafter acquired by DeCrane Aircraft or any of its Restricted Subsidiaries, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless the notes are equally and ratably secured with the obligations so secured until such time as such obligations are no longer secured by a Lien; PROVIDED that, in any case involving a Lien securing subordinated Indebtedness of DeCrane Aircraft, such Lien is subordinated to the Lien securing the notes to the same extent that such subordinated Indebtedness is subordinated to the notes. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (a) (i) pay dividends or make any other distributions to DeCrane Aircraft or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (ii) pay any Indebtedness owed to DeCrane Aircraft or any of its Restricted Subsidiaries, (b) make loans or advances to DeCrane Aircraft or any of its Restricted Subsidiaries or (c) transfer any of its properties or assets to DeCrane Aircraft or any of its Restricted Subsidiaries. However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the bank credit facility as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, (c) the Indenture and the notes, (d) applicable law and any applicable rule, regulation or order, (e) any agreement or instrument of a Person acquired by DeCrane Aircraft or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent created in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, PROVIDED that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) customary non-assignment provisions in leases and contracts entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (e) above on the property so acquired, (h) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, 91 (i) Permitted Refinancing Indebtedness, PROVIDED that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are, in the good faith judgment of DeCrane Aircraft's board of directors, not materially less favorable, taken as a whole, to the holders of the notes than those contained in the agreements governing the Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted to be incurred pursuant to the covenants described under "--Incurrence of Indebtedness and Issuance of Preferred Stock" and "--Liens" that limit the right of the debtor to dispose of the assets securing such Indebtedness, (k) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business, (l) other Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be incurred subsequent to the Issuance Date pursuant to the provisions of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock", (m) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business, and (n) restrictions created in connection with any Receivables Facility that, in the good faith determination of the board of directors of DeCrane Aircraft, are necessary or advisable to effect such Receivables Facility. MERGER, CONSOLIDATION, OR SALE OF ASSETS The Indenture provides that DeCrane Aircraft may not consolidate or merge with or into (whether or not DeCrane Aircraft is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (a) DeCrane Aircraft is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than DeCrane Aircraft) or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia, (b) the Person formed by or surviving any such consolidation or merger (if other than DeCrane Aircraft) or the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of DeCrane Aircraft under the Registration Rights Agreement, the notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, (c) immediately after such transaction no Default or Event of Default exists and (d) DeCrane Aircraft or the Person formed by or surviving any such consolidation or merger (if other than DeCrane Aircraft), or to which such sale, assignment, transfer, conveyance or other disposition shall have been made (i) will, at the time of such transaction and after giving PRO FORMA effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (ii) would (together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage Ratio immediately after such transaction (after giving PRO FORMA effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period) than the Fixed Charge Coverage Ratio of DeCrane Aircraft and its Restricted Subsidiaries immediately prior to such transaction. 92 The foregoing clause (d) will not prohibit (a) a merger between DeCrane Aircraft and a Wholly Owned Subsidiary of DeCrane Holdings created for the purpose of holding the Capital Stock of DeCrane Aircraft, (b) a merger between DeCrane Aircraft and a Wholly Owned Restricted Subsidiary or (c) a merger between DeCrane Aircraft and an Affiliate incorporated solely for the purpose of reincorporating DeCrane Aircraft in another State of the United States so long as, in each case, the amount of Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries is not increased thereby. The Indenture provides that DeCrane Aircraft will not lease all or substantially all of its assets to any Person. TRANSACTIONS WITH AFFILIATES The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate of DeCrane Aircraft (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to DeCrane Aircraft or such Restricted Subsidiary than those that would have been obtained in a comparable transaction by DeCrane Aircraft or such Restricted Subsidiary with an unrelated Person and (b) DeCrane Aircraft delivers to the Trustee, with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $7.5 million, either (i) a resolution of the board of directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the board of directors or (ii) an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions: (a) customary directors' fees, indemnification or similar arrangements or any employment agreement or other compensation plan or arrangement entered into by DeCrane Aircraft or any of its Restricted Subsidiaries in the ordinary course of business (including ordinary course loans to employees not to exceed (i) $5.0 million outstanding in the aggregate at any time and (ii) $2.0 million to any one employee) and consistent with the past practice of DeCrane Aircraft or such Restricted Subsidiary; (b) transactions between or among DeCrane Aircraft and/or its Restricted Subsidiaries; (c) payments of customary fees by DeCrane Aircraft or any of its Restricted Subsidiaries to DLJMB and its Affiliates made for any financial advisory, financing, underwriting or placement services or in respect of other investment banking activities, including, without limitation, in connection with acquisitions or divestitures which are approved by a majority of the board of directors in good faith; (d) any agreement as in effect on the date of the Indenture or any amendment thereto (so long as such amendment is not disadvantageous to the holders of the notes in any material respect) or any transaction contemplated thereby; 93 (e) payments and transactions in connection with the Acquisition, the bank credit facility and the Bridge notes (including commitment, syndication and arrangement fees payable thereunder) and the Offering (including discounts and commissions in connection therewith) and the application of the proceeds thereof, and the payment of the fees and expenses with respect thereto; (f) Restricted Payments that are permitted by the provisions of the Indenture described under the caption "--Restricted Payments" and any Permitted Investments; (g) payments and transactions in connection with the GTP Investment, and the payment of fees and expenses with respect thereto; and (h) sales of accounts receivable, or participations therein, in connection with any Receivables Facility. SALE AND LEASEBACK TRANSACTIONS The Indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; PROVIDED that DeCrane Aircraft or any Restricted Subsidiary may enter into a sale and leaseback transaction if (a) DeCrane Aircraft or such Restricted Subsidiary, as the case may be, could have (i) incurred Indebtedness in an amount equal to the Attributable Indebtedness relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii) incurred a Lien to secure such Indebtedness pursuant to the covenant described under the caption "--Liens," (b) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the board of directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (c) the transfer of assets in such sale and leaseback transaction is permitted by, and DeCrane Aircraft applies the proceeds of such transaction in compliance with, the covenant described under the caption "Repurchase at the Option of Holders--Asset Sales." NO SENIOR SUBORDINATED INDEBTEDNESS The Indenture provides that (i) DeCrane Aircraft will not Incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the notes and (ii) no Guarantor will Incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the Note Guarantees. ADDITIONAL NOTE GUARANTEES The Indenture provides that, if any Wholly-Owned Restricted Subsidiary of DeCrane Aircraft that is a Domestic Subsidiary guarantees any Indebtedness under the bank credit facility, then such Restricted Subsidiary shall become a Guarantor and execute a Supplemental Indenture and deliver an Opinion of Counsel, in accordance with the terms of the Indenture. ACCOUNTS RECEIVABLE FACILITY The Indenture provides that no Accounts Receivable Subsidiary will incur any Indebtedness if immediately after giving effect to such incurrence the aggregate outstanding Indebtedness of all 94 Accounts Receivable Subsidiaries (excluding any Indebtedness owed to DeCrane Aircraft or any Restricted Subsidiary) would exceed $60.0 million. REPORTS The Indenture provides that, whether or not required by the rules and regulations of the Securities and Exchange Commission (the "SEC"), so long as any notes are outstanding, DeCrane Aircraft will furnish to the holders of notes (a) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if DeCrane Aircraft were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by DeCrane Aircraft's certified independent accountants (PROVIDED that DeCrane Aircraft may deliver financial information with respect to its (direct or indirect) parent if DeCrane Aircraft delivers to the Trustee an Officer's Certificate certifying that such financial information is substantially equivalent to the financial information with respect to DeCrane Aircraft) and (b) all current reports that would be required to be filed with the SEC on Form 8-K if DeCrane Aircraft were required to file such reports, in each case, within the time periods specified in the SEC's rules and regulations. In addition, following the consummation of the exchange offer contemplated by the Registration Rights Agreement, whether or not required by the rules and regulations of the SEC, DeCrane Aircraft will file a copy of all such information and reports with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, DeCrane Aircraft and the Guarantors have agreed that, for so long as any notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (a) default for 30 days in the payment when due of interest on the notes (whether or not prohibited by the subordination provisions of the Indenture); (b) default in payment when due of the principal of or premium, if any, on the notes (whether or not prohibited by the subordination provisions of the Indenture); (c) failure by DeCrane Aircraft or any of its Restricted Subsidiaries for 30 days after receipt of notice from the Trustee or holders of at least 25% in principal amount of the notes then outstanding to comply with the provisions described under the captions "Repurchase at the Option of Holders--Change of Control," "--Asset Sales," "Certain Covenants--Restricted Payments," "--Incurrence of Indebtedness and Issuance of Preferred Stock" or "Merger, Consolidation or Sale of Assets"; (d) failure by DeCrane Aircraft for 60 days after notice from the Trustee or the holders of at least 25% in principal amount of the notes then outstanding to comply with any of its other agreements in the Indenture or the notes; (e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by DeCrane Aircraft or any of its Restricted Subsidiaries (or the payment of which is guaranteed by DeCrane 95 Aircraft or any of its Restricted Subsidiaries), whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay Indebtedness at its stated final maturity (after giving effect to any applicable grace period provided in such Indebtedness) (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its stated final maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (f) failure by DeCrane Aircraft or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $10.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (g) except as permitted by the Indenture, any Note Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting of behalf of any Guarantor, shall deny or disaffirm its obligations under its Note Guarantee; and (h) certain events of bankruptcy or insolvency with respect to DeCrane Aircraft or any of its Restricted Subsidiaries that is a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately; PROVIDED that, so long as any Indebtedness permitted to be incurred pursuant to the bank credit facility shall be outstanding, such acceleration shall not be effective until the earlier of (a) an acceleration of any such Indebtedness under the bank credit facility or (b) five business days after receipt by DeCrane Aircraft and the administrative agent under the bank credit facility of written notice of such acceleration. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to DeCrane Aircraft or any Significant Subsidiary, all outstanding notes will become due and payable without further action or notice. holders of the notes may not enforce the Indenture or the notes except as provided in the Indenture. In the event of a declaration of acceleration of the notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (e) of the preceding paragraph, the declaration of acceleration of the notes shall be automatically annulled if the holders of any Indebtedness described in clause (e) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (i) the annulment of the acceleration of the notes would not conflict with any judgment or decree of a court of competent jurisdiction and (ii) all existing Events of Default, except non-payment of principal or interest on the notes that became due solely because of the acceleration of the notes, have been cured or waived. Subject to certain limitations, holders of a majority in principal amount of the then outstanding notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the Trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the notes. 96 DeCrane Aircraft is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and DeCrane Aircraft is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF MEMBER, DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No member, director, officer, employee, incorporator or stockholder of DeCrane Aircraft, as such, shall have any liability for any obligations of DeCrane Aircraft under the notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. Such waiver may not be effective to waive liabilities under the federal securities laws, and it is the view of the SEC that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE DeCrane Aircraft may, at its option and at any time, elect to have all of its and the Guarantors' obligations discharged with respect to the outstanding notes, the Note Guarantees and the Indenture ("Legal Defeasance") except for (a) the rights of holders of outstanding notes to receive payments in respect of the principal of, premium, if any, and interest on such notes when such payments are due from the trust referred to below, (b) DeCrane Aircraft's obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust, (c) the rights, powers, trusts, duties and immunities of the Trustee, and DeCrane Aircraft's obligations in connection therewith and (d) the Legal Defeasance provisions of the Indenture. In addition, DeCrane Aircraft may, at its option and at any time, elect to have their obligations released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (a) DeCrane Aircraft must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and DeCrane Aircraft must specify whether the notes are being defeased to maturity or to a particular redemption date, (b) in the case of Legal Defeasance, DeCrane Aircraft shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (i) DeCrane Aircraft has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, subject to customary assumptions and exclusions, the holders of the outstanding 97 notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred, (c) in the case of Covenant Defeasance, DeCrane Aircraft shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred, (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or, insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit, (e) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than the Indenture) to which DeCrane Aircraft or any of its Subsidiaries is a party or by which DeCrane Aircraft or any of its Subsidiaries is bound, (f) DeCrane Aircraft must have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions, after the 123rd day following the deposit, the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision or any other applicable federal or New York bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (g) DeCrane Aircraft must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by DeCrane Aircraft with the intent of preferring the holders of notes over the other creditors of DeCrane Aircraft with the intent of defeating, hindering, delaying or defrauding creditors of DeCrane Aircraft or others, and (h) DeCrane Aircraft must deliver to the Trustee an Officers' Certificate and an opinion of counsel (which opinion may be subject to customary assumptions and exclusions), each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A holder may transfer or exchange notes in accordance with the Indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and DeCrane Aircraft may require a holder to pay any taxes and fees required by law or permitted by the Indenture. DeCrane Aircraft are not required to transfer or exchange any Note selected for redemption. Also, DeCrane Aircraft is not required to transfer or exchange any Note for a period of 15 days before a selection of notes to be redeemed. The registered holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture, the Note Guarantees and the notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes), and any existing default or compliance with any provision of the Indenture, the Note Guarantees or the notes may be waived with 98 the consent of the holders of a majority in principal amount of the then outstanding notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes). Without the consent of each holder affected, an amendment or waiver may not (with respect to any notes held by a non-consenting holder) (a) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver, (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the notes (other than the provisions described under the caption "--Repurchase at the Option of holders"), (c) reduce the rate of or extend the time for payment of interest on any Note, (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the notes (except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration), (e) make any Note payable in money other than that stated in the notes, (f) make any change in the provisions of the Indenture relating to waivers of past Defaults, (g) waive a redemption payment with respect to any Note (other than the provisions described under the caption "--Repurchase at the Option of Holders"), (h) release any Guarantor from its obligations under its Note Guarantee or the Indenture, except in accordance with the terms of the Indenture or (i) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, any (i) amendment to or waiver of the covenant described under the caption "-- Repurchase at the Option of Holders--Change of Control," and (ii) amendment to Article 10 of the Indenture (which relates to subordination) will require the consent of the holders of at least two-thirds in aggregate principal amount of the notes then outstanding if such amendment would materially adversely affect the rights of holders of notes. Notwithstanding the foregoing, without the consent of any holder of notes, DeCrane Aircraft, the Guarantors and the Trustee may amend or supplement the Indenture, the Note Guarantees or the notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated notes in addition to or in place of certificated notes, to provide for the assumption of DeCrane Aircraft's obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of DeCrane Aircraft's assets, to make any change that would provide any additional rights or benefits to the holders of notes or that does not materially adversely affect the legal rights under the Indenture of any such holder, or to comply with requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to provide for guarantees of the notes. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of any Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. 99 The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. REGISTRATION RIGHTS; LIQUIDATED DAMAGES We are conducting this exchange offer, and filing the registration statement of which this Prospectus is part, in order to comply with our obligations under the Registration Rights Agreement which we entered into with the Initial Purchaser at the time of the DLJ acquisition. If we are not permitted to complete this exchange offer, because it is not permitted by applicable law or SEC policy, or any holder of the old notes (or certain new notes bearing transfer restrictions) notifies us of certain restrictions on its participation in the exchange offer within 20 business days of the completion of this exchange offer, we will file with the SEC a Shelf Registration Statement to cover resales of the notes by holders who satisfy certain conditions relating to the provision of information. The Registration Rights Agreement requires that we file the registration statement of which this Prospectus is part, within 120 days after October 5, 1998; use our reasonable best efforts to have it declared effective by the SEC within 180 days after October 5, 1998; unless not permitted by applicable law or SEC policy, commence the Exchange Offer and use our reasonable best efforts to issue the new notes, within 30 business days after the effective date of the foregoing registration statement; and, if obligated to file a shelf registration statement because certain parties cannot register their notes in connection with the Exchange Offer, file it within 120 days after such obligation arises, and use our reasonable best efforts to cause it to be declared effective within 180 days after that date. If (a) we fail to file any of the registration statements required by the Registration Rights Agreement when required, (b) any of those registration statements is not declared effective by the SEC by the deadlines specified above, (c) we fail to complete this exchange offer within 40 business days of the deadline for filing the related registration statement, or (d) any required registration statement declared effective but thereafter ceases to be effective or usable as contemplated by the Registration Rights Agreement, we are in default of the Registration Rights Agreement (herein, a "Registration Default"). We are required under the terms of the old notes and the Registration Rights Agreement to pay "Liquidated Damages" to each holder of notes, with respect to the first 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of notes held by such holder. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages for all Registration Defaults of $.25 per week per $1,000 principal amount of notes. All accrued Liquidated Damages will be paid by us on each Damages Payment Date to the Global Note holder by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of notes will be required to make certain representations to DeCrane Aircraft and the Guarantors (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver certain information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their notes included in the 100 Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above with respect to the Shelf Registration Statement. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "ACCOUNTS RECEIVABLE SUBSIDIARY" means an Unrestricted Subsidiary of DeCrane Aircraft to which DeCrane Aircraft or any of its Restricted Subsidiaries sells any of its accounts receivable pursuant to a Receivables Facility. "ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (a) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (b) Indebtedness secured by a Lien encumbering an asset acquired by such specified Person at the time such asset is acquired by such specified Person. "ACQUISITION" means the acquisition by an indirect subsidiary of DeCrane Holdings of at least majority of the outstanding stock of DeCrane Aircraft, the merger of such subsidiary into DeCrane Aircraft, the repayment of certain indebtedness of DeCrane Aircraft, the payment of certain related fees and expenses and the Finance Merger. "ACQUISITION FINANCING" means (i) the issuance and sale by DeCrane Aircraft of the notes, (ii) the execution and delivery by DeCrane Aircraft (or its predecessor) and certain of its subsidiaries of the bank credit facility and the borrowing thereunder and the issuance and sale by DeCrane Aircraft (or its predecessor) of bridge notes to finance the Acquisition and (iii) the issuance and sale by DeCrane Holdings of common stock and preferred stock for consideration, the proceeds of each of which were used to fund the purchase price for the Acquisition. "AFFILIATE" of any specified Person means any other Person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified Person. For purposes of this definition, "control," when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "ASSET SALE" means (a) the sale, lease, conveyance, disposition or other transfer (a "disposition") of any properties, assets or rights (including, without limitation, by way of a sale and leaseback) (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole will be governed by the provisions of the Indenture described under the caption "-- Change of Control" and/or the provisions described under the caption "-- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (b) the issuance, sale or transfer by DeCrane Aircraft or any of its Restricted Subsidiaries of Equity Interests of any of DeCrane Aircraft's Restricted Subsidiaries, in the case of either clause (a) or (b), whether in a single transaction or a series of related transactions (i) that have a fair market value in excess of $5.0 million or (ii) for net proceeds in excess of $5.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (a) dispositions in the ordinary course of business; (b) a disposition of assets by DeCrane Aircraft to a Restricted Subsidiary or by a Restricted Subsidiary to DeCrane Aircraft or to another Restricted Subsidiary; (c) a disposition of Equity Interests by a Restricted Subsidiary to DeCrane Aircraft or to another Restricted Subsidiary; (d) the sale and leaseback of any assets within 90 days of the acquisition thereof; (e) foreclosures on 101 assets; (f) any exchange of like property pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, for use in a Permitted Business; (g) any sale of Equity Interests in, or Indebtedness or other securities of, an Unrestricted Subsidiary; (h) a Permitted Investment or a Restricted Payment that is permitted by the covenant described under the caption "--Restricted Payments"; and (i) sales of accounts receivable, or participations therein, in connection with any Receivables Facility. "ATTRIBUTABLE INDEBTEDNESS" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "BANK CREDIT FACILITY" means that certain Credit Agreement, dated as of August 28, 1998 among DeCrane Aircraft, various financial institutions party thereto, DLJ Capital Funding, Inc., as syndication agent, and The First National Bank of Chicago, as administrative agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, modified, renewed, refunded, replaced or refinanced from time to time, including any agreement (i) extending or shortening the maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, PROVIDED that on the date such Indebtedness is incurred it would not be prohibited by clause (i) of "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (iv) otherwise altering the terms and conditions thereof. Indebtedness under the bank credit facility outstanding on the date of the Indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." "CAPITAL EXPENDITURE INDEBTEDNESS" means Indebtedness incurred by any Person to finance the purchase or construction or any property or assets acquired or constructed by such Person which have a useful life or more than one year so long as (a) the purchase or construction price for such property or assets is included in "addition to property, plant or equipment" in accordance with GAAP, (b) the acquisition or construction of such property or assets is not part of any acquisition of a Person or line of business and (c) such Indebtedness is incurred within 90 days of the acquisition or completion of construction of such property or assets. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (a) in the case of a corporation, corporate stock, (b) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (c) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CASH EQUIVALENTS" means (i) Government Securities, (ii) any certificate of deposit maturing not more than 365 days after the date of acquisition issued by, or demand deposit or time deposit of, an Eligible Institution or any lender under the bank credit facility, (iii) commercial paper maturing not more than 365 days after the date of acquisition of an issuer (other than an Affiliate of DeCrane Aircraft) with a rating, at the time as of which any investment therein is made, of "A-3" (or higher) according to S&P or "P-2" (or higher) according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (iv) any bankers acceptances of money market deposit accounts issued by an Eligible 102 Institution and (v) any fund investing exclusively in investments of the types described in clauses (i) through (iv) above and (vi) in the case of any Subsidiary organized or having its principal place of business outside the United States, investments denominated in the currency of the jurisdiction in which such Subsidiary is organized or has its principal place of business which are similar to the items specified in clauses (i) through (v) above (including without limitation any deposit with any bank that is a lender to any such Subsidiary). "CONSOLIDATED CASH FLOW" means, with respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period plus, to the extent deducted in computing Consolidated Net Income, (a) an amount equal to any extraordinary or non-recurring loss plus any net loss realized in connection with an Asset Sale, (b) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, (c) Fixed Charges of such Person for such period, (d) depreciation, amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period), including charges related to non-cash minority interests, of such Person and its Restricted Subsidiaries for such period, (e) net periodic post-retirement benefits, (f) other income or expense net as set forth on the face of such Person's statement of operations, (g) expenses and charges related to the Acquisition, the bank credit facility and the application of the proceeds thereof which are paid, taken or otherwise accounted for within 180 days of the consummation of the Acquisition, and (h) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisition or divestitures (including, but not limited to, financing and refinancing fees and costs incurred in connection with the Acquisition), in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any period, the sum of, without duplication, (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; PROVIDED that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense); and (b) the consolidated capitalized interest of such Person and its Restricted Subsidiaries for such period, whether paid or accrued; PROVIDED, however, that Receivables Fees shall be deemed not to constitute Consolidated Interest Expense. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "CONSOLIDATED NET INCOME" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; PROVIDED that (a) the Net Income (or loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (b) the Net Income (or loss) of any Restricted Subsidiary other than a Subsidiary organized or having its principal place of business outside the United States 103 shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income (or loss) is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary, (c) the Net Income (or loss) of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (d) the cumulative effect of a change in accounting principles shall be excluded and (e) expenses and charges related to the Acquisition, the bank credit facility and the application of the proceeds thereof which are paid, taken or otherwise accounted for within 180 days of the consummation of the Acquisition shall be excluded. "DECRANE HOLDINGS" means DeCrane Holdings Co., a Delaware corporation, the corporate parent of DeCrane Aircraft, or its successors. "DEFAULT" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "DESIGNATED NONCASH CONSIDERATION" means the fair market value of non-cash consideration received by DeCrane Aircraft or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Noncash Consideration pursuant to an Officers' Certificate, setting forth the basis of such valuation, executed by the principal executive officer and the principal financial officer of DeCrane Aircraft, less the amount of cash or Cash Equivalents received in connection with a sale of such Designated Noncash Consideration. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable), or upon the happening of any event (other than any event solely within the control of the issuer thereof), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, is exchangeable for Indebtedness (except to the extent exchangeable at the option of such Person subject to the terms of any debt instrument to which such Person is a party) or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the notes mature; PROVIDED that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require DeCrane Aircraft to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that DeCrane Aircraft may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described under the caption "--Certain Covenants--Restricted Payments," and PROVIDED further that, if such Capital Stock is issued to any plan for the benefit of employees of DeCrane Aircraft or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by DeCrane Aircraft in order to satisfy applicable statutory or regulatory obligations. "DLJMB" means DLJ Merchant Banking Partners II, L.P. and its Affiliates. "DOMESTIC SUBSIDIARY" means a Subsidiary that is organized under the laws of the United States or any State, district or territory thereof other than Audio International Sales, Inc., a U.S. Virgin Islands corporation. "ELIGIBLE INSTITUTION" means a commercial banking institution that has combined capital and surplus not less than $100.0 million or its equivalent in foreign currency, whose short-term debt is rated "A-3" or higher according to Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to Moody's Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments. 104 "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "EXISTING INDEBTEDNESS" means Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries (other than Indebtedness under the bank credit facility) in existence on the date of the Indenture, until such amounts are repaid. "FINANCE MERGER" means the merger of DeCrane Finance Co. with and into DeCrane Aircraft. "FIXED CHARGES" means, with respect to any Person for any period, the sum, without duplication, of (a) the Consolidated Interest Expense of such Person for such period and (b) all dividend payments on any series of preferred stock of such Person (other than dividends payable solely in Equity Interests that are not Disqualified Stock), in each case, on a consolidated basis and in accordance with GAAP. "FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period (exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the Calculation Date (as defined)) to the Fixed Charges of such Person for such period (exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the Calculation Date). In the event that the referent Person or any of its Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect to such incurrence, assumption, guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock and the use of the proceeds therefrom, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, acquisitions that have been made by DeCrane Aircraft or any of its Subsidiaries, including all mergers or consolidations and any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated to include the Consolidated Cash Flow of the acquired entities on a PRO FORMA basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation practices, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, as determined in good faith by the principal financial officer of DeCrane Aircraft (regardless of whether such cost savings could then be reflected in PRO FORMA financial statements under GAAP, Regulation S-X promulgated by the SEC or any other regulation or policy of the SEC) and without giving effect to clause (c) of the proviso set forth in the definition of Consolidated Net Income. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "GTP" means Global Technology Partners, LLC and its Affiliates. "GTP INVESTMENT" means the sale by DeCrane Holdings to GTP of its common stock, the purchase price of which will be partially financed by the GTP Loan, and the granting by DeCrane Holdings to GTP of options to purchase shares of its common stock. 105 "GTP LOANS" means one or more loans by DeCrane Aircraft or DeCrane Holdings to GTP to finance GTP's purchase of common stock of DeCrane Holdings; provided, however, that the aggregate principal amount of all such GTP Loans outstanding at any time shall not exceed $2 million. "GUARANTEE" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "GUARANTORS" means (i) each of the Domestic Subsidiaries of DeCrane Aircraft that is a Wholly Owned Restricted Subsidiary on the date of the Indenture and (ii) any other Subsidiary that executes a Note Guarantee in accordance with the provisions of the Indenture. "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under (a) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (b) other agreements or arrangements designed to protect such Person against fluctuations in interest rates and (c) agreements or arrangements designed to protect such Person against fluctuations in exchange rates. "INDEBTEDNESS" means, with respect to any Person, any indebtedness of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing Indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the guarantee by such Person of any Indebtedness of any other Person, PROVIDED that Indebtedness shall not include the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be (a) the accreted value thereof (together with any interest thereon that is more than 30 days past due), in the case of any Indebtedness that does not require current payments of interest, and (b) the principal amount thereof, in the case of any other Indebtedness; PROVIDED that the principal amount of any Indebtedness that is denominated in any currency other than United States dollars shall be the amount thereof, as determined pursuant to the foregoing provision, converted into United States dollars at the Spot Rate in effect on the date that such Indebtedness was incurred (or, if such indebtedness was incurred prior to the date of the Indenture, the Spot Rate in effect on the date of the Indenture). "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees by the referent Person of, and Liens on any assets of the referent Person securing, Indebtedness or other obligations of other Persons), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP, PROVIDED that an investment by DeCrane Aircraft for consideration consisting of common equity securities of DeCrane Aircraft shall not be deemed to be an Investment. If DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of DeCrane Aircraft such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of DeCrane Aircraft, DeCrane Aircraft shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair 106 market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described under the caption "--Restricted Payments." "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "MANAGEMENT LOANS" means one or more loans by DeCrane Aircraft or DeCrane Holdings to officers and/or directors of DeCrane Aircraft and any of its Restricted Subsidiaries to finance the purchase by such officers and directors of common stock of DeCrane Holdings; PROVIDED, however, that the aggregate principal amount of all such Management Loans outstanding at any time shall not exceed $5.0 million. "NET INCOME" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (a) any gain (or loss), together with any related provision for taxes on such gain (or loss), realized in connection with (i) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (ii) the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (b) any extraordinary or nonrecurring gain (or loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (or loss). "NET PROCEEDS" means the aggregate cash proceeds received by DeCrane Aircraft or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of, without duplication, (a) the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions, recording fees, title transfer fees and appraiser fees and cost of preparation of assets for sale) and any relocation expenses incurred as a result thereof, (b) taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), (c) amounts required to be applied to the repayment of Indebtedness (other than revolving credit Indebtedness incurred pursuant to the bank credit facility) secured by a Lien on the asset or assets that were the subject of such Asset Sale and (d) any reserve established in accordance with GAAP or any amount placed in escrow, in either case for adjustment in respect of the sale price of such asset or assets until such time as such reserve is reversed or such escrow arrangement is terminated, in which case Net Proceeds shall include only the amount of the reserve so reversed or the amount returned to DeCrane Aircraft or its Restricted Subsidiaries from such escrow arrangement, as the case may be. "NON-RECOURSE DEBT" means Indebtedness (i) no default with respect to, which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock (other than the stock of an Unrestricted Subsidiary pledged by DeCrane Aircraft to secure debt of such Unrestricted Subsidiary) or assets of DeCrane Aircraft or any of its Restricted Subsidiaries; PROVIDED that in no event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely as a result of any default provisions contained in a guarantee thereof by DeCrane Aircraft or any of its Restricted Subsidiaries if DeCrane Aircraft or such Restricted Subsidiary was otherwise permitted to incur such guarantee pursuant to the Indenture. 107 "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OFFERING" means the offering of the notes by DeCrane Aircraft. "PARI PASSU INDEBTEDNESS" means Indebtedness of DeCrane Aircraft that ranks PARI PASSU in right of payment to the notes. "PERMITTED BUSINESS" means the avionics manufacturing industry and any business in which DeCrane Aircraft and its Restricted Subsidiaries are engaged on the date of the Indenture or any business reasonably related, incidental or ancillary thereto. "PERMITTED INVESTMENTS" means (a) any Investment in DeCrane Aircraft or in a Restricted Subsidiary of DeCrane Aircraft, (b) any Investment in cash or Cash Equivalents, (c) any Investment by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of DeCrane Aircraft or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, DeCrane Aircraft or a Wholly Owned Restricted Subsidiary of DeCrane Aircraft, (d) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described under the caption "-Repurchase at the Option of Holders-Asset Sales," (e) any Investment acquired solely in exchange for Equity Interests (other than Disqualified Stock) of DeCrane Aircraft, (f) any Investment in a Person engaged in a Permitted Business (other than an Investment in an Unrestricted Subsidiary) having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (f) that are at that time outstanding, not to exceed 15% of Total Assets at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value), (g) Investments relating to any special purpose Wholly Owned Subsidiary of DeCrane Aircraft organized in connection with a Receivables Facility that, in the good faith determination of the board of directors of DeCrane Aircraft, are necessary or advisable to effect such Receivables Facility and (h) the Management Loans and GTP Loans. "PERMITTED LIENS" means: (i) Liens on property of a Person existing at the time such Person is merged into or consolidated with DeCrane Aircraft or any Restricted Subsidiary, PROVIDED that such Liens were not incurred in contemplation of such merger or consolidation and do not secure any property or assets of DeCrane Aircraft or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation; (ii) Liens existing on the date of the Indenture; (iii) Liens securing Indebtedness consisting of Capitalized Lease Obligations, purchase money Indebtedness, mortgage financings, industrial revenue bonds or other monetary obligations, in each case incurred solely for the purpose of financing all or any part of the purchase price or cost of construction or installation of assets used in the business of DeCrane Aircraft or its Restricted Subsidiaries, or repairs, additions or improvements to such assets, PROVIDED that (A) such Liens secure Indebtedness in an amount not in excess of the original purchase price or the original cost of any such assets or repair, additional or improvement thereto (plus an amount equal to the reasonable fees and expenses in connection with the incurrence of such Indebtedness), (B) such Liens do not extend to any other assets of DeCrane Aircraft or its Restricted Subsidiaries (and, in the case of repair, addition or improvements to any such assets, such Lien extends only to the assets (and improvements thereto or thereon) repaired, added to or improved), (C) the Incurrence of such Indebtedness is permitted by "-- Certain Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock" and (D) such Liens attach within 365 days of such purchase, construction, installation, repair, addition or improvement; (iv) Liens to secure any refinancings, renewals, extensions, modification or replacements (collectively, "refinancing") (or successive refinancings), in whole or in part, of any Indebtedness secured by Liens referred to in the clauses above so long as such Lien does not extend to any other property (other than improvements thereto); (v) Liens securing letters of credit entered into in the ordinary course of 108 business and consistent with past business practice; (vi) Liens on and pledges of the capital stock of any Unrestricted Subsidiary securing Non-Recourse Debt of such Unrestricted Subsidiary; (vii) Liens securing Indebtedness (including all Obligations) under the bank credit facility; and (viii) other Liens securing Indebtedness that is permitted by the terms of the Indenture to be outstanding having an aggregate principal amount at any one time outstanding not to exceed $50.0 million. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries issued within 60 days after repayment of, in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries; PROVIDED that (a) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus premium, if any, and accrued interest on the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith), (b) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded, and (c) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to, the notes on terms at least as favorable, taken as a whole, to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PRINCIPALS" means DLJMB. "PUBLIC EQUITY OFFERING" means any issuance of common stock by DeCrane Aircraft (other than to DeCrane Holdings and other than Disqualified Stock) or common stock or preferred stock by DeCrane Holdings (other than Disqualified Stock) registered pursuant to the Securities Act, other than issuances registered on Form S-8 and issuances registered on Form S-4, excluding issuances of common stock pursuant to employee benefit plans of DeCrane Holdings or DeCrane Aircraft or otherwise as compensation to employees of DeCrane Aircraft or DeCrane Holdings. "QUALIFIED PROCEEDS" means any of the following or any combination of the following: (i) cash; (ii) Cash Equivalents; (iii) assets that are used or useful in a Permitted Business; and (iv) the Capital Stock of any Person engaged in a Permitted Business if, in connection with the receipt by DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft of such Capital Stock, (A) such Person becomes a Restricted Subsidiary of DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft or (B) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft. "RECEIVABLES FACILITY" means one or more receivables financing facilities, as amended from time to time, pursuant to which DeCrane Aircraft or any of its Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable Subsidiary. "RECEIVABLES FEES" means distributions or payments made directly or by means of discounts with respect to any participation interests issued or sold in connection with, and other fees paid to a Person that is not a Restricted Subsidiary in connection with, any Receivables Facility. "RELATED PARTY" means, with respect to any Principal, (i) any controlling stockholder or partner of such Principal on the date of the Indenture, or (ii) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding (directly or through one or more Subsidiaries) a 51% or more controlling interest of which consist of the Principals and/or such other Persons referred to in the immediately preceding clauses (i) or (ii). 109 "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "SPOT RATE" means, for any currency, the spot rate at which such currency is offered for sale against United States dollars as determined by reference to the New York foreign exchange selling rates, as published in The Wall Street Journal on such date of determination for the immediately preceding business day or, if such rate is not available, as determined in any publicly available source of similar market data. "STATED MATURITY" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "SUBSIDIARY" means, with respect to any Person, (a) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (b) any partnership or limited liability company (i) the sole general partner or the managing general partner or managing member of which is such Person or a Subsidiary of such Person or (ii) the only general partners or managing members of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TAX SHARING AGREEMENT" means any tax sharing agreement or arrangement between DeCrane Aircraft and DeCrane Holdings, as the same may be amended from time to time; PROVIDED that in no event shall the amount permitted to be paid pursuant to all such agreements and/or arrangements exceed the amount DeCrane Aircraft would be required to pay for income taxes were it to file a consolidated tax return for itself and its consolidated Restricted Subsidiaries as if it were a corporation that was a parent of a consolidated group. "TOTAL ASSETS" means the total consolidated assets of DeCrane Aircraft and its Restricted Subsidiaries, as shown on the most recent balance sheet (excluding the footnotes thereto) of DeCrane Aircraft prepared in accordance with GAAP. "UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the board of directors as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to DeCrane Aircraft or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of DeCrane Aircraft; (c) is a Person with respect to which neither DeCrane Aircraft nor any of its Restricted Subsidiaries has any direct or indirect obligation (i) to subscribe for additional Equity Interests (other than Investments described in clause (g) of the definition of Permitted Investments) or (ii) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels, of operating results; and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries. Any such designation by the board of directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the board resolution giving effect to such 110 designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described under the caption entitled "--Certain Covenants-Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of DeCrane Aircraft as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption entitled "--Certain Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock," DeCrane Aircraft shall be in default of such covenant). The board of directors of DeCrane Aircraft may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of DeCrane Aircraft of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under the caption entitled "-Certain Covenants-Incurrence of Indebtedness and Issuance Preferred of Stock" and (ii) no Default or Event of Default would be in existence following such designation. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted Subsidiary of such Person all the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture and Registration Rights Agreement without charge by writing to us, or obtaining from public sources a copy of the exhibits to the registration statement of which this Prospectus is a part. See "Where You Can Get More Information" in the summary. 111 THE INITIAL OFFERING In August 1998, in connection with the DLJ acquisition, DeCrane Aircraft assumed responsibility (by merger) for $100.0 million of Senior Subordinated Increasing Rate Notes to DLJ Bridge Finance, Inc. We used the proceeds from these bridge notes to fund the tender offer purchases made as part of the DLJ acquisition, and certain related expenses. The bridge notes were refinanced by our issuance in October of the old notes to the initial purchaser Donaldson, Lufkin & Jenrette Securities Corporation. See "Recent Developments--The DLJ Acquisition." The old notes were not registered under the Securities Act, and accordingly subject to various transfer restrictions. We concurrently entered into a Registration Rights Agreement, which requires us to take certain steps to issue the new notes, offer them in exchange for the old notes under this exchange offer, and register them, all as described in "Description of Notes--Registration Rights Agreement." The terms of the old notes and the new notes are identical in most respects, except as described in "Description of Notes." THE EXCHANGE OFFER We are conducting this exchange offer, and filing the registration statement of which this Prospectus is part, in order to comply with our obligations under the Registration Rights Agreement which we entered into with the Initial Purchaser at the time of the DLJ acquisition. If we are not permitted to complete this exchange offer, because it is not permitted by applicable law or SEC policy, or any holder of the old notes (or certain new notes bearing transfer restrictions) notifies us of certain restrictions on its participation in the exchange offer within 20 business days of the completion of this exchange offer, we will file with the SEC a Shelf Registration Statement to cover resales of the notes by holders who satisfy certain conditions relating to the provision of information. This exchange offer is not extended to, and we will not accept tenders from, holders of old notes in any jurisdiction in which this exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES The terms and conditions for this exchange offer are set forth in this Prospectus and in the accompanying Letter of Transmittal. Subject to those terms and conditions, we will accept for exchange old notes which are properly tendered on or prior to the expiration date (described below) and not withdrawn as permitted below. For each $1,000 principal amount at maturity of old notes surrendered pursuant to this exchange offer, the holder will receive an exchange note with the same principal amount at maturity. We will keep this exchange offer open for not less than 20 business days (or longer if required by applicable law) after the date that this Prospectus is first sent to the holders of the old notes. We are mailing it, on or about the date on the cover page, to all registered holders of old notes at the addresses set forth in the register maintained by the Trustee. This exchange offer is subject to certain conditions as set forth under "Certain Conditions to this exchange offer" below. We expressly reserve the right, at any time or from time to time, to extend the period of time during which this exchange offer is open, and thereby delay acceptance of any old notes, by giving oral or written notice of such extension to the Exchange Agent and notice of such extension to each holder as described below. During any such extension, all old notes previously tendered will remain subject to this exchange offer and we may accept them for exchange. We will return any old notes not accepted for exchange for any reason, without expense to the tendering holders, as promptly as is practicable after the expiration or termination of this exchange offer. 112 We expressly reserve the right to amend or terminate this exchange offer, and to cease accepting any tenders of old notes, if any of the conditions of this exchange offer specified below under "Certain Conditions to this Exchange Offer" occur. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. If the exchange offer is extended, we will give that notice by means of a press release or other public announcement no later than 9:00 a.m., New York City Time, on the next business day after the previously scheduled expiration date. Other than as may be required by applicable law, we have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a release to the Dow Jones News Service. Holders of old notes do not have any appraisal or dissenters' rights in connection with this exchange offer. Old notes which are not tendered for exchange or are tendered but not accepted in connection with this exchange offer will remain outstanding and be entitled to the benefits of the Indenture, but will not be entitled to any further registration rights under the Registration Rights Agreement. We intend to conduct this exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC. PROCEDURES FOR TENDERING OLD NOTES If you tender old notes as set forth below and we accept them, we will have a binding agreement on the terms and conditions set forth in this Prospectus and in the Letter of Transmittal. Except as set forth below, in order to tender old notes and accept this exchange offer, you must: - complete and sign a Letter of Transmittal, and comply with the instructions which it contains, - forward it (and any other required documents) using a method of delivery permitted by the Letter of Transmittal to the Exchange Agent appointed by us, whose address appears below and in the Letter of Transmittal, by 5:00 p.m. New York City time on the expiration date, and - either deliver your old notes in the same package, or comply with the book entry delivery method noted below, or comply with the guaranteed postponed delivery method noted below. Please note that, if your old notes are held through a broker, dealer, commercial bank, trust company or other nominee, you must contact that person promptly if you wish to tender your notes. YOU MAY ELECT WHICH METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS YOU USE, BUT YOU DO SO AT YOUR OWN RISK. IF YOU CHOOSE TO DELIVER DOCUMENTS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ANY CASE, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO DECRANE AIRCRAFT. SIGNATURE GUARANTEES. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed, unless the old notes surrendered for exchange pursuant thereto are tendered either (i) by a registered Holder of the old notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an institution which itself is eligible to issue the guarantees described below. The only kind of signature guarantees which will be acceptable are those made by a firm which is a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. If old notes are registered in the name of a person other than the person signing the Letter of Transmittal, the old notes surrendered for exchange must be endorsed by, or be accompanied 113 by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by us in our sole discretion, duly executed by the registered holder with a signature guarantee of the kind described above. We will determine all questions as to the validity, form, eligibility, time of receipt and acceptance of old notes tendered for exchange in our sole discretion. We reserve the absolute right to reject any and all tenders of any particular old notes not properly tendered, or to not accept any particular old notes which acceptance, in our judgment or that of our counsel, might be unlawful. We also reserve the absolute right to waive any defects or irregularities or conditions of this exchange offer as to any particular old notes, either before or after the expiration of this offer Date (including the ineligibility of any holder to tender old notes). Our interpretation of the terms and conditions of this exchange offer as to any particular old notes shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with the tender of old notes for exchange must be cured within such reasonable period of time as we determine. Neither DeCrane Aircraft, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of old notes for exchange, nor incur any liability for failure to give such notification. If the Letter of Transmittal is signed by a person or persons other than the registered holder or holders of old notes, those old notes must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name or names of the registered holder or holders that appear on the old notes. If the Letter of Transmittal or any old notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers or corporations or others acting in a fiduciary or representative capacity, the person signed must indicate their capacity and, unless waived by us, submit along with the documents proper evidence satisfactory to us of its authority to so act. By executing, or otherwise becoming bound by, the Letter of Transmittal, each holder of the old notes (other than certain specified holders) will represent that (i) it is not an affiliate of DeCrane Aircraft, (ii) any new notes to be received by it were acquired in the ordinary course of its business and (iii) it has no arrangement with any person to participate in the distribution (within the meaning of the Securities Act) of the new notes. If the tendering holder is a broker-dealer that will receive new notes for its owns account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See "--Resale of the New Notes." ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to this exchange offer, we will accept, promptly after the expiration date, all old notes properly tendered and will issue the new notes promptly after acceptance of the old notes. See "--Certain Conditions to this Exchange Offer" below. For purposes of this exchange offer, we shall be deemed to have accepted properly tendered old notes for exchange when, as and if we have given oral or written notice thereof to the Exchange Agent. In all cases, issuance of new notes for old notes that are accepted for exchange pursuant to this exchange offer will be made only after timely receipt by the Exchange Agent of certificates for such old notes or a timely Book-Entry Confirmation of such old notes into the Exchange Agent's account at DTC pursuant to the book-entry transfer procedures described below, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of this exchange offer or if certificates 114 representing old notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged old notes will be returned without expense to the tendering holder thereof (or, in the case of old notes tendered by book-entry transfer into the Exchange Agent's account at DTC pursuant to the book-entry transfer procedures described below, such non-exchanged old notes will be credited to an account maintained with DTC) as promptly as practicable after the expiration or termination of this exchange offer. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the old notes at DTC for purposes of this exchange offer promptly after the date of this Prospectus. Any financial institution that is a participant in DTC's systems may make book-entry delivery of old notes by causing DTC to transfer such old notes into the Exchange Agent's account in accordance with DTC's Automated Tender Offer Program ("ATOP") procedures for transfer. However, we will only make exchanges for old notes tendered in this manner after: (i) timely confirmation that the book-entry transfer of old notes has been made into the Exchange Agent's account, and (ii) timely receipt by the Exchange Agent of all other documents required by the Letter of Transmittal, and a confirmation message, transmitted by DTC, confirming the book-entry transfer of the old notes, and stating that DTC has received an express acknowledgment from the holder that it has received and agrees to be bound by the terms of the Letter of Transmittal, and that we may enforce such agreement against it. Please note that, even if you deliver old notes by this book-entry transfer method, you must still deliver the Letter of Transmittal, properly completed and duly executed, with any required signature guarantees and any other required documents, to the Exchange Agent at its address set forth under "--Exchange Agent", on before the expiration date for this exchange offer. Please note also that delivery of documents to DTC in accordance with its procedures does not constitute delivery to the Exchange Agent. GUARANTEED DELIVERY PROCEDURES If a registered holder of the old notes desires to tender them, and they are not immediately available, or time will not permit the notes or other required documents to reach the Exchange Agent before the expiration date for the exchange offer, or the procedure for book-entry transfer cannot be completed on a timely basis, the holder still may validly accomplish a tender of the notes if: (i) the tender is made through a firm which is a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States, (ii) prior to that expiration date, the Exchange Agent receives from one of those institutions a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) along with a Notice of Guaranteed Delivery, substantially in the form we have provided, by telegram, telex, facsimile transmission, mail or hand delivery), and (iii) the certificates for all physically tendered old notes, in proper form for transfer, or a confirmation of book-entry transfer as described above, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery. 115 The Notice of Guaranteed Delivery must state the name and address of the holder of old notes, state the amount of old notes tendered, state that tender is being made thereby, and guarantee that within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a confirmation of book-entry transfer as described above, and all other documents required by the Letter of Transmittal, will be deposited by the institution with the Exchange Agent, WITHDRAWAL RIGHTS Tenders of old notes may be withdrawn at any time prior to the expiration date for this exchange offer. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any notice of withdrawal must specify the name of the person having tendered the old notes to be withdrawn, identify the old notes to be withdrawn (including the principal amount at maturity of such old notes), and (where certificates for old notes have been transmitted) specify the name in which such old notes are registered, if different from that of the withdrawing holder. If certificates for old notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any note of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of such facility. Our determination of all questions as to the validity, form and eligibility (including time of receipt) of such notices will be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of this exchange offer. We will return any old notes tendered for exchange but which are not exchanged for any reason, without cost to such holder (or, in the case of old notes tendered by book-entry transfer into the Exchange Agent's account at DTC pursuant to the book-entry transfer procedures described above, we will cause such old notes to be credited to an account maintained with DTC for the old notes) as soon as practicable after withdrawal, rejection of tender or termination of this exchange offer. Properly withdrawn old notes may be re-entered by following one of the procedures described under "Procedures for Tendering Old Notes" above at any time on or prior to the expiration date for this exchange offer. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provisions of this exchange offer, we are not required to accept for exchange, or to issue new notes in exchange for, any old notes and may terminate or amend this exchange offer, if at any time before the acceptance of such old notes for exchange or this exchange of the new notes for such old notes, such acceptance or issuance would violate applicable law or any interpretation of the staff of the SEC. The foregoing condition is for our sole benefit and may be asserted by us regardless of the circumstances giving rise to such condition. Our failure at any time to exercise the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, we will not accept for exchange any old notes tendered, nor issue any new notes and no new notes will be issued in exchange for any such old notes, if at such time any stop order shall be threatened or in effect with respect to either (i) the registration statement of which this Prospectus constitutes a part or (ii) the qualification of the Indenture under the Trust Indenture Act. 116 EXCHANGE AGENT We have appointed State Street Bank & Trust Co. as the Exchange Agent for this exchange offer. All executed Letters of Transmittal should be directed to the Exchange Agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent, addressed as follows: Deliver To: State Street Bank & Trust Co., Exchange Agent By Mail or By Hand: By Facsimile: With Telephone Confirmation to: Attention: Delivery to any other address or transmission to any other number will not be a valid delivery. FEES AND EXPENSES Our solicitation for this exchange offer is being made primarily by mail. However, we may made additional solicitation by telegraph, telephone, electronic mail or in person by our officers and regular employees. No additional compensation will be paid to any such officers and employees who engage in soliciting tenders. We will not make any payment to brokers, dealers, or others soliciting acceptances of this exchange offer. However, we will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. Our cash expenses to be incurred in connection with this exchange offer will be paid by us, and we estimate that they will total about $ . TRANSFER TAXES Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes in connection therewith; except that holders who: - instruct us to register new notes in the name of a person other than the registered tendering holder, or - request that old notes not tendered or not accepted in this exchange offer to be returned to a person other than the registered tendering holder, will be responsible for the payment of any applicable transfer tax thereon. RESALE OF THE NEW NOTES Under existing interpretations of the staff of the SEC contained in several no-action letters to third parties, the new notes generally should be freely transferable after this exchange offer by a holder (other than a broker or dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, if: - the new notes are acquired in the ordinary course of the holder's business; 117 - the holder is not participating, and has not entered into an arrangement or understanding to participate, in a distribution of the new notes (as "distribution" is understood under the Securities Act); - the holder is not our affiliate (as "affiliate" is defined in Rule 405 under the Securities Act), or a broker or dealer who purchased the old notes for resale; and - the holder is not a broker or dealer who acquired the old notes for its own account. However, the foregoing view relies on statements by the staff of the Division of Corporation Finance of the SEC, in interpretive letters which discuss other transactions. We have not sought our own interpretive letter, so there is no definitive legal determination of the foregoing issue. Each holder of old notes who signs, or otherwise becomes bound by, the Letter of Transmittal (other than certain specified holders) will represent that it qualifies for each of the criteria listed above. Any holders who do not meet the foregoing criteria will not be able to tender their old notes in this exchange offer, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the notes, unless such sale or transfer is made pursuant to an exemption from such requirements. In any resales of new notes, any participating broker-dealer who acquired the notes for its own account as a result of market-making or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the new notes (other than a resale of an unsold allotment from the original sale of the old notes) with this prospectus, as it may be amended or supplemented. Under the Registration Rights Agreement, we are required to allow participating broker-dealers (and other persons, if any, subject to similar prospectus delivery requirements) to use this Prospectus as it may be amended or supplemented from time to time, in connection with the resale of such exchange notes. CERTAIN FEDERAL INCOME TAX CONSEQUENCES This section is a summary of certain federal income tax considerations relevant to this exchange offer. It is not a complete analysis of all potential tax effects. We have not considered foreign or state taxes, gift taxes or gift taxes (among other things), and your individual tax liabilities and consequences also depend on your own circumstances. We based this summary on U.S. federal tax law, regulations, pronouncements and judicial decisions now in effect. All of the laws and rules may change, and changes can be made retroactively as well. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO YOU OF PARTICIPATING IN THIS EXCHANGE OFFER. Your exchange of old notes for new notes pursuant to this exchange offer should have no federal income tax consequences to you as a holder of the notes. When you exchange an old note for a new note under this exchange offer, you should have the same adjusted basis and holding period in the new note as you had in the old note immediately before the exchange occurred. 118 PLAN OF DISTRIBUTION Each broker-dealer who acquired old notes for its own account, as a result of market-making activities or other trading and who participates in this exchange offer activities (which we call "participating broker-dealers" in this Prospectus) must acknowledge that it will deliver a prospectus in connection with any resale of new notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of the new notes received in exchange for old notes, IF it acquired the old notes as a result of market-making activities or other trading activities. We have agreed that we will make this Prospectus, as amended or supplemented, available to any participating broker-dealer for use in any such resale, and those broker-dealers will be authorized to deliver it for no more than 90 days after the expiration date of the exchange offer. We will not receive any proceeds from any sales of the new notes by participating broker-dealers. New notes received by such brokers-dealers for their own account in this exchange offer may be sold from time to time, in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the notes, or a combination of such methods of resale, and may be sold at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from the participating broker-dealer that resells the new notes that were received by it for its own account under this exchange offer. Any broker or dealer that participates in a distribution of that kind may be deemed to be an "underwriter" within the meaning of the Securities Act. Any profit on resulting resales of new notes, and any omissions or concessions received by any such persons, may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. We will promptly send additional copies of this Prospectus, and any amendment or supplement to this Prospectus, to any participating broker-dealer that requests such documents in the Letter of Transmittal. See "The Exchange Offer." LEGAL MATTERS The validity of the new notes offered hereby will be passed upon for DeCrane Aircraft by Spolin & Silverman LLP, Santa Monica, California. EXPERTS The consolidated balance sheets as of December 31, 1996 and 1997 and the consolidated statements of operations, of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 1997 of DeCrane Aircraft Holdings, Inc. and the balance sheets as of September 30, 1996 and 1997 and the statements of income, of stockholder's equity and of cash flows for each of the three years in the period ended September 30, 1997 of Avtech Corporation included in this Prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Audio International, Inc. and subsidiary as of December 31, 1996 and 1995 and for each of the two years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Thomas & Thomas, independent accountants, given on the authority of said firm as experts in auditing and accounting. 119 INDEX TO FINANCIAL STATEMENTS PAGE --------- DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Report of Independent Accountants........................................................................ F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)......................................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997, eight months ended August 31, 1998 and the one month ended September 30, 1998 (unaudited)................................................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997, and the eight months ended August 31, 1998 and the one month ended September 30, 1998 (unaudited)............................................................................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997, eight months ended August 31, 1998 and the one month ended September 30, 1998 (unaudited)................................................................................... F-7 Notes to Consolidated Financial Statements............................................................... F-8 AVTECH CORPORATION Report of Independent Accountants........................................................................ F-51 Balance Sheets as of September 30, 1996 and 1997 and June 25, 1998 (unaudited)........................... F-52 Statements of Income for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and June 25, 1998 (unaudited)................................................................. F-53 Statements of Stockholders' Equity for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 25, 1998 (unaudited)................................................................. F-54 Statements of Cash Flows for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June 30, 1997 and June 25, 1998 (unaudited)............................................................ F-55 Notes to Financial Statements............................................................................ F-56 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY Report of Independent Accountants........................................................................ F-63 Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited).......... F-64 Consolidated Statements of Income for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).......................................................... F-65 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)....................................................... F-66 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unaudited).......................................................... F-67 Notes to Consolidated Financial Statements............................................................... F-68 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DeCrane Aircraft Holdings, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California February 24, 1998 F-2 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, SEPTEMBER -------------------- 30, 1998 1996 1997 (SUCCESSOR) (PREDECESSOR) --------- --------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents......................................... $ 320 $ 206 $ 4,267 Accounts receivable, net.......................................... 13,185 18,152 28,617 Inventories....................................................... 19,573 25,976 37,343 Income taxes refundable........................................... -- -- 3,000 Prepaid expenses and other current assets......................... 812 782 1,472 --------- --------- ------------ Total current assets............................................ 33,890 45,116 74,699 Property and equipment, net......................................... 12,187 14,054 28,215 Other assets, principally intangibles, net.......................... 23,189 39,967 230,386 --------- --------- ------------ Total assets.................................................. $ 69,266 $ 99,137 $ 333,300 --------- --------- ------------ --------- --------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings............................................. $ 1,974 $ 568 $ 80 Current portion of long-term obligations to unaffiliated lenders......................................................... 3,004 858 1,267 Convertible subordinated notes payable to related parties......... 2,922 -- -- Accounts payable.................................................. 7,420 8,032 9,801 Accrued expenses.................................................. 7,241 6,911 15,258 Income taxes payable.............................................. 843 3,975 1,610 --------- --------- ------------ Total current liabilities....................................... 23,404 20,344 28,016 --------- --------- ------------ Long-term liabilities Long-term obligations Unaffiliated lenders............................................ 28,323 37,412 183,546 Related parties................................................. 6,027 -- -- Other long-term liabilities....................................... 85 96 532 Deferred income taxes............................................. 3,312 1,758 22,844 --------- --------- ------------ Total long-term liabilities..................................... 37,747 39,266 206,922 --------- --------- ------------ Commitments and contingencies (Notes 17 and 23)..................... -- -- -- Mandatorily redeemable common stock warrants........................ 6,879 -- -- --------- --------- ------------ Stockholders' equity Cumulative convertible preferred stock, $.01 par value (no par value prior to February 19, 1997), 8,314,018 shares authorized; 6,847,705 shares issued and outstanding as of December 31, 1996 (none as of December 31, 1997 and September 30, 1998)........... 13,850 -- -- Undesignated preferred stock, $.01 par value, 10,000,000 shares initially authorized as of February 19, 1997; none issued and outstanding..................................................... -- -- -- Common stock, no par value, 4,253,550 shares authorized; 85,593 shares issued and outstanding prior to February 19, 1997........ 216 -- -- Common stock, $.01 par value, 9,924,950 shares authorized as of February 19, 1997; 5,318,563 and 100 shares issued and outstanding as of December 31, 1997 and September 30, 1998, respectively (none as of December 31, 1996)..................... -- 53 -- Additional paid-in capital........................................ -- 51,057 99,000 Accumulated deficit............................................... (12,951) (11,444) (776) Accumulated other comprehensive income (loss)..................... 121 (139) 138 --------- --------- ------------ Total stockholders' equity...................................... 1,236 39,527 98,362 --------- --------- ------------ Total liabilities and stockholders' equity.................... $ 69,266 $ 99,137 $ 333,300 --------- --------- ------------ --------- --------- ------------ 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) ONE MONTH NINE MONTHS EIGHT MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED ENDED SEPTEMBER 30, ------------------------------- SEPTEMBER 30, AUGUST 31, 1998 1995 1996 1997 1997 1998 (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) --------- --------- --------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) Revenues......................... $ 55,839 $ 65,099 $ 108,903 $ 80,887 $ 90,077 $ 16,012 Cost of sales.................... 43,463 49,392 80,247 60,664 60,101 11,080 --------- --------- --------- ------------- ------------- ------------- Gross profit............... 12,376 15,707 28,656 20,223 29,976 4,932 --------- --------- --------- ------------- ------------- ------------- Operating expenses Selling, general and administrative expenses...... 9,426 10,747 15,756 11,012 15,719 3,170 Nonrecurring charges........... -- -- -- -- 3,632 -- Amortization of intangible assets....................... 1,115 709 905 616 1,347 802 --------- --------- --------- ------------- ------------- ------------- Total operating expenses..... 10,541 11,456 16,661 11,628 20,698 3,972 --------- --------- --------- ------------- ------------- ------------- Income from operations........... 1,835 4,251 11,995 8,595 9,278 960 Other expenses (income) Interest expense Unaffiliated lenders......... 2,628 2,807 2,520 1,964 2,350 1,765 Related parties.............. 1,193 1,441 634 634 -- -- Terminated debt offering expenses..................... -- -- -- -- 600 -- Other expenses (income)........ 297 (85) 131 161 199 175 Minority interests............. 85 193 112 81 48 6 --------- --------- --------- ------------- ------------- ------------- Income (loss) before provision for income taxes and extraordinary item............. (2,368) (105) 8,598 5,755 6,081 (986) Provision (benefit) for income taxes.......................... 1,078 712 3,344 2,191 2,892 (506) --------- --------- --------- ------------- ------------- ------------- Income (loss) before extraordinary item............. (3,446) (817) 5,254 3,564 3,189 (480) Extraordinary loss from debt refinancing, net of income tax benefit........................ -- -- 2,078 2,078 -- 296 --------- --------- --------- ------------- ------------- ------------- Net income (loss)................ $ (3,446) $ (817) $ 3,176 $ 1,486 $ 3,189 $ (776) --------- --------- --------- ------------- ------------- ------------- --------- --------- --------- ------------- ------------- ------------- 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) COMMON STOCK ----------------------------------- ACCUMULATED NO PAR VALUE $.01 PAR VALUE OTHER CUMULATIVE --------------- ----------------- COMPRE- CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- HENSIVE PREFERRED OF OF PAID-IN ULATED INCOME PREDECESSOR: STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL - ------------------------------ ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Balance, December 31, 1994...................... $ 5,549 85,593 $ 58 -- $-- $ -- $ (5,057) $ 216 $ 766 ------- Comprehensive loss Net loss.................. -- -- -- -- -- -- (3,446) -- (3,446) Translation adjustment.... -- -- -- -- -- -- -- 287 287 ------- (3,159) Adjustment to estimated redemption value of mandatorily redeemable common stock warrants..... -- -- -- -- -- -- 696 -- 696 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Balance, December 31, 1995...................... 5,549 85,593 58 -- -- -- (7,807) 503 (1,697) ------- Comprehensive loss Net loss.................. -- -- -- -- -- -- (817) -- (817) Translation adjustment.... -- -- -- -- -- -- -- (382) (382) ------- (1,199) Adjustment to estimated redemption value of mandatorily redeemable common stock warrants..... -- -- -- -- -- -- (4,320) -- (4,320) Issuance of cumulative convertible preferred stock, net................ 8,301 -- -- -- -- -- -- -- 8,301 Mandatorily redeemable common stock warrants issued pursuant to anti-dilution provisions................ -- -- -- -- -- -- (7) -- (7) Stock option compensation expense................... -- -- 158 -- -- -- -- -- 158 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Balance, December 31, 1996...................... 13,850 85,593 216 -- -- -- (12,951) 121 1,236 ------- Comprehensive income Net income................ -- -- -- -- -- -- 3,176 -- 3,176 Translation adjustment.... -- -- -- -- -- -- -- (260) (260) ------- 2,916 Delaware reorganization and reverse stock split....... -- (85,593) (216) 85,593 1 215 -- -- -- Adjustment to estimated redemption value of mandatorily redeemable common stock warrants..... -- -- -- -- -- -- (2,203) -- (2,203) The accompanying notes are an integral part of the consolidated financial statements. F-5 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED) COMMON STOCK ----------------------------------- ACCUMULATED NO PAR VALUE $.01 PAR VALUE OTHER CUMULATIVE --------------- ----------------- COMPRE- CONVERTIBLE NUMBER NUMBER ADDITIONAL ACCUM- HENSIVE PREFERRED OF OF PAID-IN ULATED INCOME STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Recapitalization Conversion of preferred stock into common stock................... (13,850) -- -- 1,941,804 19 13,831 -- -- -- Cashless exercise and conversion of warrants................ -- -- -- 524,293 6 6,097 -- -- 6,103 Cancellation of mandatorily redeemable common stock warrants... -- -- -- -- -- -- 1,143 -- 1,143 Initial Public Offering Proceeds from the offering, net........... -- -- -- 2,700,000 27 28,229 -- -- 28,256 Cancellation of mandatorily redeemable common stock warrants upon debt repayment and reclassification of warrants no longer redeemable.............. -- -- -- -- -- 1,836 -- -- 1,836 Common shares issued pursuant to anti-dilution provisions.............. -- -- -- 50,743 -- 609 (609) -- -- Cashless exercise of common stock warrants............ -- -- -- 16,130 -- -- -- -- -- Stock option compensation expense................... -- -- -- -- -- 240 -- -- 240 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Balance, December 31, 1997...................... -- -- -- 5,318,563 53 51,057 (11,444) (139) 39,527 ------- Comprehensive income Net income (Unaudited).... -- -- -- -- -- -- 3,189 -- 3,189 Translation adjustment (Unaudited)............. -- -- -- -- -- -- -- 94 94 ------- 3,283 Exercise of stock options (Unaudited)............... -- -- -- 575,692 6 8,206 -- -- 8,212 Sale of common stock (Unaudited)............... -- -- -- 2,206,177 22 34,793 -- -- 34,815 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- Balance, August 31, 1998 (Unaudited)............... $ -- -- $-- 8,100,432 $81 $ 94,056 $ (8,255) $ (45) $85,837 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- SUCCESSOR: - ------------------------------ Sale of common stock (Unaudited)............... $ -- -- $-- 100 -- $ 99,000 $ -- $-- $99,000 ------- Comprehensive income Net loss (Unaudited)...... -- -- -- -- -- -- (776) -- (776) Translation adjustment (Unaudited)............. -- -- -- -- -- -- -- 138 138 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- (638) ------- Balance, September 30, 1998 (Unaudited)............... $ -- -- $-- 100 -- $ 99,000 $ (776) $ 138 $98,362 ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- ----------- ------- ------ --------- ------ ---------- -------- ----------- ------- The accompanying notes are an integral part of the consolidated financial statements. F-6 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) ONE MONTH YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ENDED EIGHT MONTHS SEPTEMBER 30, --------------------------- SEPTEMBER 30, ENDED AUGUST 1998 1995 1996 1997 1997 31, 1998 (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) ------- -------- -------- ------------- ------------ ------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities Net income (loss)............................... $(3,446) $ (817) $ 3,176 $ 1,486 $ 3,189 $ (776) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization............... 4,542 4,343 5,372 3,856 4,454 1,252 Extraordinary loss from debt refinancing.... -- -- 2,078 2,078 -- 296 Deferred income taxes....................... 867 88 (1,281) 532 (1,247) (747) Other, net.................................. 70 188 654 122 (360) (61) Changes in assets and liabilities Accounts receivable.................... 2,256 (3,069) (3,159) (2,409) (3,621) (975) Inventories............................ (2,962) (2,665) (4,956) (2,418) (2,017) 1,492 Prepaid expenses and other assets...... 274 (3) (136) 1,179 (58) (650) Accounts payable....................... (1,004) 1,891 (361) 881 (1,127) 1,514 Accrued expenses....................... 682 2,477 (1,041) (1,443) 3,519 (1,525) Income taxes payable................... 178 525 4,295 86 282 (1,326) ------- -------- -------- ------------- ------------ ------------- Net cash provided by (used for) operating activities............ 1,457 2,958 4,641 3,950 3,014 (1,506) ------- -------- -------- ------------- ------------ ------------- Cash flows from investing activities Purchase of stock of Avtech Corporation, net of cash acquired................................. -- -- -- -- (83,599) -- Purchase of net assets of Dettmers Industries Inc., net of cash acquired.................... -- -- -- -- (2,209) -- Purchase of stock of Audio International, Inc., net of cash acquired.......................... -- -- (23,597) -- -- -- Purchase of net assets of Aerospace Display Systems....................................... -- (11,693) -- -- -- -- Purchase of minority stockholder's interest..... -- (5,207) -- -- -- -- Purchase of net assets and stock of Elsinore Engineering Services and Elsinore Aerospace Services, Inc., respectively.................. -- (1,300) -- -- -- -- Capital expenditures............................ (1,203) (5,821) (3,842) (2,842) (1,745) (307) Other, net...................................... (259) 5 (370) -- 175 -- ------- -------- -------- ------------- ------------ ------------- Net cash used for investing activities...................... (1,462) (24,016) (27,809) (2,842) (87,378) (307) ------- -------- -------- ------------- ------------ ------------- Cash flows from financing activities Acquisition of Predecessor Proceeds from senior credit facility and bridge notes................................ -- -- -- -- -- 185,400 Proceeds from sale of common stock............ -- -- -- -- -- 99,000 Proceeds from stock options exercised......... -- -- -- -- -- 4,314 Purchase of shares outstanding................ -- -- -- -- -- (186,310) Repayment of existing senior credit facility.................................... -- -- -- -- -- (93,000) Transaction fees and expenses................. -- -- -- -- -- (7,398) Common stock offerings and application of the net proceeds Proceeds from sale of common stock in the initial public offering, net of $3,467 for underwriting discounts, commissions and expenses paid in 1997....................... -- -- 28,933 28,770 -- -- Proceeds from the sale of common stock in the follow-on equity offering, net.............. -- -- -- -- 34,815 -- Borrowings under new credit facility, net of deferred financing costs of $463............ -- -- 12,312 12,775 -- -- Repayment of debt............................. -- -- (42,160) (42,160) (34,815) -- Financing of acquisitions Revolving line of credit borrowings........... -- 6,399 23,597 -- 85,808 -- Proceeds from issuance of cumulative convertible preferred stock and mandatorily redeemable common stock warrants, net....... -- 8,805 -- -- -- -- Senior term loan borrowings................... -- 5,000 -- -- -- -- Convertible subordinated note borrowings from related parties............................. -- 3,000 -- -- -- -- Promissory note principal payments............ -- -- (1,095) (1,095) -- -- Net borrowings under revolving line of credit agreements.................................... 1,972 1,191 2,906 2,387 5,453 (1,519) Principal payments on capitalized lease and other long-term obligations................... (1,665) (2,001) (1,675) (1,356) (1,317) (129) Proceeds from issuance of cumulative convertible preferred stock, net.......................... -- 112 -- -- -- -- Payment of deferred financing costs and stock offering...................................... -- (851) -- -- -- -- Other, net...................................... (266) (604) 139 (367) (73) -- ------- -------- -------- ------------- ------------ ------------- Net cash provided by (used for) financing activities............ 41 21,051 22,957 (1,046) 89,871 358 ------- -------- -------- ------------- ------------ ------------- Effect of foreign currency translation on cash.... 33 22 97 (43) 26 (17) ------- -------- -------- ------------- ------------ ------------- Net increase (decrease) in cash and cash equivalents...................................... 69 15 (114) 19 5,533 (1,472) Cash and cash equivalents at beginning of period........................................... 236 305 320 320 206 5,739 ------- -------- -------- ------------- ------------ ------------- Cash and cash equivalents at end of period........ $ 305 $ 320 $ 206 $ 339 $ 5,739 $ 4,267 ------- -------- -------- ------------- ------------ ------------- ------- -------- -------- ------------- ------------ ------------- The accompanying notes are an integral part of the consolidated financial statements. F-7 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company") manufactures avionics components and provides avionics systems integration services in certain niche markets of the commercial, regional and high-end corporate jet aircraft industries. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to conform to the 1997 presentation. Preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. INTERIM FINANCIAL STATEMENTS The consolidated financial information as of September 30, 1998 and for the nine months ended September 30, 1997, the eight months ended August 31, 1998 and the one month ended September 30, 1998 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. REORGANIZATION AND REVERSE STOCK SPLIT On February 19, 1997, the Company reorganized as a Delaware corporation. In conjunction with the reorganization, the Company established a $.01 par value for its cumulative convertible preferred stock and common stock and increased the number of common shares and preferred shares authorized to 9,924,950 and 18,314,018 shares (which includes 10,000,000 shares of a newly designated series of preferred stock), respectively. Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock split. All common share information set forth in the consolidated financial statements and notes thereto has been restated to reflect the reverse stock split. THE DLJ ACQUISITION (UNAUDITED) In July 1998, DeCrane Holdings Co. ("Holdings") and two other holding companies were organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") to carry out a tender offer for all the shares of the Company's common stock (including options to F-8 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) purchase shares) for $23.00 per share (the "DLJ Acquisition"). At the completion of the tender offer in August 1998, the two other holding companies merged with the Company. All of the Company's old outstanding shares were cancelled, non-tendering shareholders were paid out, and as a result the Company became a wholly-owned subsidiary of Holdings. This transaction resulted in a predecessor entity and a successor entity for purposes of reporting the financial results included in the accompanying financial statements. As a result of the tender offer, the Company terminated a debt offering which was in process at that time and recorded a $600,000 pre-tax charge as of June 30, 1998 for the estimated costs incurred. The gross purchase price for the Company's shares and options was $186.3 million. The excess of the purchase price over the historical value of the net assets acquired was $127.9 million and was allocated as follows: (i) $4.7 million to inventory; (ii) $3.0 million to fixed assets; (iii) $50.0 million to certain identifiable intangible assets; and (iv) $70.2 million to goodwill. The inventory step-up will be expensed completely during the remainder of 1998. The intangible assets, other than goodwill, will be amortized on a straight-line basis over periods between five and fifteen years. Goodwill will be amortized on a straight-line basis over a period of thirty years. At the completion of the tender offer, the Company was required to repay all of its borrowings under its previous Senior Credit Facility (Note 11). In order to fund the purchase of the shares in the tender offer, repay the Senior Credit Facility and pay expenses incurred in connection therewith, the Company: (i) issued $100.0 million of senior subordinated increasing rate notes (the "Bridge Notes") which were subsequently replaced by $100.0 million of 12% Senior Subordinated Notes due 2008 (the "Notes") from the Company's "Units" offering (Note 24), (ii) entered into a syndicated senior secured loan facility (the "New Credit Facility"), and (iii) received a $99.0 million equity contribution from Holdings. The Bridge Notes were purchased by an affiliate of DLJ and accrued interest at 10%. The terms of the issue called for floating rate increases to the prime rates plus 2.5% after six months, and increases 0.5% every three months subject to a 17.0% maximum, as long as the Bridge Notes remained outstanding. The Bridge Notes were to mature on August 28, 1999, but were refinanced in October 1998 (Note 24). The New Credit Facility provides for term loan borrowings in the aggregate principal amount of $80.0 million and revolving loan borrowings up to an aggregate principal amount of $50.0 million. Principal payments under the term loan borrowings are due in increasing amounts over the next seven years and all borrowings under the revolving loan facility must be repaid within six years. Loans under the New Credit Facility generally bear interest based on a margin over, at the Company's option, the prime rate or the Euro-Dollar rate. Currently, the applicable margins are 1.00%-1.25% for prime rate borrowings and 2.25%-2.50% for Euro-Dollar borrowings. The Company is subject to certain commitment fees under the facility as well as the maintenance of certain financial ratios and cash flow results. The equity contribution from Holdings represents the net proceeds from Holdings selling all of the shares of its common stock for $65.0 million and shares of its senior redeemable exchangeable preferred stock due 2009 for $34.0 million to the DLJMB Funds. Preferred stock dividends are payable quarterly at a rate of 14% per annum. Prior to September 30, 2003, dividends are not paid in cash but instead accrete in liquidation value which, in turn, increases the redemption obligation. On or after September 30, 2003, F-9 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) preferred stock dividends are paid in cash. Since the Company is Holdings' only operating subsidiary and source of cash, the Company may be required to fund Holdings' preferred stock dividend and redemption requirements in the future. The Company incurred non-recurring charges totaling approximately $3.6 million (pre-tax) during the eight months ended August 31, 1998 in conjunction with the tender offer and acquisition. INVENTORIES Inventories are stated at the lower of cost, as determined under the first-in, first-out ("FIFO") method, or market. Costs include materials, labor and manufacturing overhead. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from two to twenty years. Building and building improvements are depreciated using the straight-line method over their estimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or remaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred. The costs for improvements are capitalized. Upon retirement or disposal, the cost and accumulated depreciation of property and equipment are reduced and any gain or loss is recorded in income or expense. OTHER ASSETS Goodwill is amortized on a straight-line basis over periods ranging from fifteen to thirty years. Other intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from ten to twenty years. Revolving credit agreement deferred financing costs are amortized on a straight-line basis over the term of the agreement. Term debt deferred financing costs are amortized using the interest method over the terms of their respective agreements. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. The Company has recognized no such losses. DERIVATIVES Market value gains and losses on forward foreign exchange contracts are recognized currently in the consolidated statements of operations. F-10 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes. FAIR VALUE OF FINANCIAL INSTRUMENTS All financial instruments are held for purposes other than trading. The estimated fair values of all nonderivative financial instruments approximate their carrying amounts at December 31, 1996 and 1997. The estimated fair value of foreign currency forward exchange contracts is based on quotes obtained from various financial institutions that deal in this type of instrument. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's U.K. and Swiss subsidiaries have been translated into U.S. dollars from their functional currencies, pounds sterling and Swiss francs, respectively, in the consolidated financial statements. Assets and liabilities have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is reflected as a component of stockholders' equity (deficit). Realized foreign currency exchange gains (losses) included in other expenses (income) in the consolidated statements of operations were $(314,000), $71,000 and $(72,000) for the years ended December 31, 1995, 1996 and 1997, respectively. STOCK OPTION PLAN As permitted under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Refer to Note 16 for information concerning the pro forma effect on results of operations assuming the fair value method of measuring compensation expense was utilized. REVENUE RECOGNITION Revenues from the sale of manufactured products, except for products manufactured under long-term contracts, are recorded when products are shipped. Revenues on long-term contracts are recognized using the percentage-of-completion method based on costs incurred to date compared with total estimated costs at completion. Unbilled accounts receivable were $465,000 and $654,000 at December 31, 1996 and 1997, respectively. Unbilled accounts receivable are expected to be billed during the succeeding twelve-month period. F-11 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss and the change in the foreign currency translation adjustment during a period. The Company adopted SFAS 130 for the year ending December 31, 1998 and has reclassified earlier periods to reflect application of the statement. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about operating segments. Under SFAS No. 131, information pertaining to the Company's operating segments will be reported on the basis that is used internally for evaluating segment performance and making resource allocation determinations. Management is currently studying the potential effects of adoption of this statement, which is required for the fiscal year ending December 31, 1998. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning January 1, 2000. Management believes the adoption of SFAS No. 133 will not have a material impact on our consolidated financial position or results of operations. NOTE 2 - RECAPITALIZATION, CONSUMMATION OF INITIAL PUBLIC OFFERING AND FOLLOW-ON EQUITY OFFERING RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING In January and March 1997, the holders of certain securities agreed to a plan for the recapitalization of the Company (the "Recapitalization"). Completion of the Recapitalization was a condition to the consummation of the Company's initial public offering (the "IPO") and, was effective concurrent therewith. The IPO was consummated on April 16, 1997. The Recapitalization provided for: (i) the conversion of all 6,847,705 shares of issued and outstanding cumulative convertible preferred stock ("Preferred Stock") into 1,941,804 shares of common stock; (ii) the F-12 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 2 - RECAPITALIZATION, CONSUMMATION OF INITIAL PUBLIC OFFERING AND FOLLOW-ON EQUITY OFFERING (CONTINUED) cashless exercise and conversion of all 52,784 and 9,355 issued and outstanding Preferred Stock warrants and common stock warrants, respectively, into a total of 16,585 shares of common stock; (iii) the cashless exercise of 508,497 mandatorily redeemable common stock warrants (the "Redeemable Warrants") into a total of 507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable Warrants. Redeemable Warrants exercisable into 208,968 common shares remained after the Recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled upon the consummation of the IPO and repayment of the Company's senior subordinated debt and convertible notes in accordance with the terms of the respective warrant agreements. Redeemable Warrants exercisable into 70,893 common shares remained after the Recapitalization and the IPO and application of the net proceeds therefrom. Concurrent with the consummation of the IPO, the mandatory redemption feature of these warrants was terminated and, as a result, the value ascribed thereto was reclassified to stockholders' equity as additional paid-in capital. On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net of $2,268,000 for underwriting discounts and commissions, together with approximately $12,775,000 of proceeds from borrowings under a new credit facility were used to repay amounts due under the Company's senior revolving line of credit, senior term notes, senior subordinated notes and convertible notes. FOLLOW-ON EQUITY OFFERING (UNAUDITED) In April 1998, the Company sold 2,206,177 shares of common stock for $17.00 per share ("Follow-On Equity Offering"). Net proceeds from the offering of $34,815,000 were used to partially repay borrowings outstanding under the Company's senior credit facility. NOTE 3 - ACQUISITIONS AUDIO INTERNATIONAL On November 14, 1997, the Company purchased all of the outstanding stock of Audio International, Inc. ("Audio International"). Audio International provides premium, customized aircraft entertainment and cabin management products and systems for the high-end corporate jet market. The total purchase price was $24,726,000 in cash at closing, including $726,000 in acquisition related costs, plus contingent consideration Aggregating a maximum of $6,000,000 payable over two years based on future attainment of defined performance criteria. The acquisition was funded with borrowings under the Company's revolving line of credit facility. The acquisition was accounted for as a purchase and the $20,110,000 difference between the purchase price, excluding the contingent consideration, and the fair value of the net assets acquired was recorded as goodwill and is being amortized over 30 years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial 30-year term. F-13 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 3 - ACQUISITIONS (CONTINUED) The consolidated results of operations for the year ended December 31, 1997 include the operating results of Audio International subsequent to November 13, 1997. MINORITY STOCKHOLDER'S 25% INTEREST On February 20, 1996, the Company purchased the remaining 25% of a subsidiary's stock it did not already own from the subsidiary's minority stockholder (the "Minority Stockholder") for a total purchase price of $5,748,000, including $334,000 of acquisition related costs and expenses (the "Minority Interest Acquisition"). The purchase price consisted of $4,873,000 paid in cash at closing and a $600,000 non-interest bearing obligation payable to the Minority Stockholder. The cash portion of the purchase price was funded with the proceeds from the sale of Preferred Stock and Redeemable Warrants. The acquisition was accounted for as a purchase and the $5,498,000 difference between the purchase price and 25% of the fair value of the net assets acquired was recorded as goodwill and is being amortized over 26 years, representing the remaining useful life of the goodwill recorded upon the initial 75% acquisition in October 1991. The consolidated results of operations for the year ended December 31, 1996 include 100% of the operating results of the subsidiary subsequent to February 20, 1996. For the periods prior to February 20, 1996, the consolidated results of operations include a charge for the Minority Stockholder's 25% ownership interest. For the periods prior to February 20, 1996, the Minority Stockholder, who is also President of the subsidiary, was compensated pursuant to an employment agreement. The employment agreement was cancelled as of February 20, 1996. For the years ended December 31, 1995 and 1996, the Minority Stockholder earned compensation of $851,000 and $22,000, respectively. AEROSPACE DISPLAY SYSTEMS On September 18, 1996, the Company purchased for cash substantially all of the assets, subject to certain liabilities assumed, of the Aerospace Display Systems division ("ADS") of Allard Industries, Inc. ("Allard"). The total purchase price was $13,395,000, including $402,000 in acquisition related costs. ADS develops and manufactures dichroic liquid crystal displays and modules for commercial and military avionics systems. The acquisition was funded with the proceeds from the sale of Preferred Stock, convertible subordinated notes and Redeemable Warrants, borrowings under the Company's revolving line of credit and a $2,000,000 non-interest bearing obligation payable to certain Allard stockholders. The acquisition was accounted for as a purchase and the $7,425,000 difference between the purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized over 30 years. The consolidated results of operations for the year ended December 31, 1996 include the operating results of ADS subsequent to September 18, 1996. F-14 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 3 - ACQUISITIONS (CONTINUED) ELSINORE On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc. and the Elsinore Engineering Services Division of Elsinore, L.P. (collectively, "Elsinore"). Elsinore provides engineering services to the commercial aircraft industry. The total purchase price was $2,443,000, including $300,000 of acquisition related costs. The purchase price consisted of $1,000,000 paid in cash at closing and a $1,250,000 15% promissory note payable to the sellers. The purchase agreement provided for an adjustment of the purchase price should the amount of working capital decline as of the closing date. The purchase price was allocated to the assets acquired and liabilities assumed using estimated fair values and $2,585,000 was assigned to goodwill, subject to final determination of the purchase price. During 1997, the Company and the sellers agreed to reduce the purchase price by $155,000 to reflect the decline in working capital as of the closing date and, as a result, goodwill was decreased by a corresponding amount during 1997. PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION AND IPO Unaudited pro forma consolidated results of operations are presented in the table below for each of the two years in the period ended December 31, 1997 and are pro forma for the Recapitalization, the IPO and the application of the net proceeds therefrom (Note 2). For 1996, the results are also pro forma as if the Audio International, Minority Interest and ADS acquisitions were consummated on January 1, 1996; the pro forma effect of the Elsinore acquisition is not material and, accordingly, is not reflected. For 1997, the results are pro forma as if the Audio International acquisition was consummated on January 1, 1997. PRO FORMA FOR THE YEAR ENDED DECEMBER 31, --------------------- 1996 1997 --------- ---------- Revenues................................................................................ $ 82,939 $ 121,334 Income before extraordinary item........................................................ 2,284 5,252 The above information reflects adjustments for depreciation, amortization, general and administrative expenses, minority interest and interest expense based on the new cost basis and debt structure of the Company. In 1997, income excludes the effect of a $2,078,000 extraordinary loss incurred in connection with the Company's debt refinancing (Note 11). RECENT ACQUISITIONS (UNAUDITED) AVTECH On June 26, 1998, the Company purchased substantially all of the common stock of Avtech Corporation ("Avtech"). Avtech is a manufacturer of avionics components and an avionics systems integrator for the commercial and high-end corporate jet aircraft industries. The total purchase price was $84,693,000 in cash at closing, including an estimated $1,250,000 of acquisition related costs. The acquisition was financed with borrowings under the Company's senior credit facility. The acquisition was accounted for as a purchase and the $57,911,000 difference between the F-15 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 3 - ACQUISITIONS (CONTINUED) purchase price and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The consolidated balance sheet as of September 30, 1998 reflects the Avtech assets and liabilities acquired and the consolidated results of operations include the operating results of Avtech subsequent to June 25, 1998. DETTMERS On June 30, 1998, the Company purchased certain assets, subject to certain liabilities assumed, of Dettmers Industries Inc. ("Dettmers"). Dettmers is a manufacturer of seats for high-end corporate jet aircraft. The total purchase price was $2,314,000 in cash at closing, including an estimated $141,000 of acquisition related costs, plus contingent consideration aggregating a maximum of $2,000,000 payable over four years based on future attainment of defined performance criteria during each of the years in the four- year period ending December 31, 2002. The acquisition was financed with borrowings under the Company's senior credit facility. The acquisition was accounted for as a purchase and the $2,068,000 difference between the purchase price, excluding the contingent consideration, and the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 30 years. The amount of contingent consideration paid in the future, if any, will increase goodwill and will be amortized prospectively over the remaining period of the initial 30-year term. The consolidated balance sheet as of September 30, 1998 reflects the Dettmers assets and liabilities acquired and the consolidated results of operations include the operating results of Dettmers subsequent to June 29, 1998. PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION, IPO, FOLLOW-ON EQUITY OFFERING AND DLJ ACQUISITION Unaudited pro forma consolidated results of operations are presented in the table below for the year ended December 31, 1997 and the nine months ended September 30, 1997 and 1998. For all periods presented, the results of operations are pro forma for the Recapitalization, the IPO, the Follow-On Equity Offering, the DLJ Acquisition and the application of the net proceeds therefrom (Notes 1 and 2). For the year ended December 31, 1997 and nine months ended September 30, 1997, the results are also pro forma as if the Audio International, Avtech and Dettmers acquisitions were consummated on January 1, 1997. For the nine months ended September 30, 1998, the results are pro forma as if the Avtech and Dettmers acquisitions were consummated on January 1, 1997. F-16 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 3 - ACQUISITIONS (CONTINUED) PRO FORMA ------------------------------------ YEAR NINE MONTHS ENDED ENDED SEPTEMBER 30, DECEMBER 31, ---------------------- 1997 1997 1998 ------------ ---------- ---------- Revenues................................................................... $ 160,054 $ 120,103 $ 128,953 Loss before extraordinary item............................................. (10,000) (5,800) (1,456) The above information reflects adjustments for inventory step-up, depreciation, amortization, general and administrative expenses and interest expense based on the new cost basis and debt structure of the Company. In 1997 and 1998, income excludes the effect of a $2,078,000 and $296,000 extraordinary loss, respectively, incurred in connection with the Company's debt refinancing (Note 11). NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS ACCOUNTS RECEIVABLE Accounts receivable is net of an allowance for doubtful accounts of $379,000 and $487,000 at December 31, 1996 and 1997, respectively. The Company is potentially subject to concentrations of credit risk as the Company relies heavily on customers operating in the domestic and foreign commercial and high-end corporate jet aircraft industries. Generally, the Company does not require collateral or other security to support accounts receivable subject to credit risk. Under certain circumstances, deposits or cash on delivery terms are required. The Company maintains reserves for potential credit losses and generally, such losses have been within management's expectations. SIGNIFICANT CUSTOMERS Three customers each accounted for more than 10% of the Company's consolidated revenues, as follows: YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Customer A........................................................................... 8.9% 15.8% 19.0% Customer B........................................................................... 25.4% 7.7% 1.1% Customer C........................................................................... 8.7% 7.2% 11.2% Complete loss of either Customer A or C could have a significant adverse impact on the results of operations expected in future periods. During the year ended December 31, 1997, Customer A acquired another customer of the Company. The above amounts for Customer A include the Company's revenue from the acquired customer after its acquisition. For the year ended December 31, 1997, revenue from Customer A would have been 20.9% had the acquisition been consummated on January 1, 1997. F-17 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 5 - INVENTORIES Inventories are comprised of the following (amounts in thousands): DECEMBER 31, SEPTEMBER -------------------- 30, 1998 1996 1997 (SUCCESSOR) ----------- (PREDECESSOR) (UNAUDITED) Raw material.................................................. $ 12,350 $ 14,224 $ 19,691 Work-in process............................................... 2,717 4,655 10,622 Finished goods................................................ 4,506 7,097 7,030 --------- --------- ----------- Total inventories........................................... $ 19,573 $ 25,976 $ 37,343 --------- --------- ----------- --------- --------- ----------- Included above are costs relating to long-term contracts recognized on the percentage of completion method of $1,378,000 and $125,000 at December 31, 1996 and 1997, respectively. NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment includes the following (amounts in thousands): DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Machinery and equipment................................................................... $ 16,637 $ 18,151 Tooling................................................................................... 2,944 3,133 Computer equipment, furniture and fixtures................................................ 2,462 3,660 Land, buildings and leasehold improvements................................................ 1,676 3,580 ---------- ---------- Total cost.............................................................................. 23,719 28,524 Accumulated depreciation and amortization............................................... (11,532) (14,470) ---------- ---------- Net property and equipment............................................................ $ 12,187 $ 14,054 ---------- ---------- ---------- ---------- Property and equipment under capital leases included above consists of the following (amounts in thousands): DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Machinery and equipment................................................................... $ 920 $ 1,160 Computer equipment, furniture and fixtures................................................ 306 455 ---------- ---------- Total cost.............................................................................. 1,226 1,615 Accumulated depreciation and amortization................................................. (347) (523) ---------- ---------- Net property and equipment............................................................ $ 879 $ 1,092 ---------- ---------- ---------- ---------- Depreciation of machinery and equipment under capital leases is included in cost of sales in the consolidated financial statements. F-18 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 6 - PROPERTY AND EQUIPMENT (CONTINUED) On December 12, 1996, the Company purchased all of the manufacturing assets and inventory relating to the cold-heading manufacturing facility of the Qualitronix Division of AMP, Inc. (the "AMP Facility"). The purchase price of $6,802,000 (including $2,433,000 of inventory purchased) consisted of $5,399,000 paid in cash at closing with the balance paid in January 1997. The $2,213,000 difference between the purchase price and the fair value of the individual assets acquired was recorded as an intangible asset and is being amortized over 15 years. NOTE 7 - OTHER ASSETS Other assets includes the following and is net of accumulated amortization for the respective periods as parenthetically noted (amounts in thousands): DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Goodwill (net of $808 and $1,682)......................................................... $ 19,756 $ 38,592 Deferred financing costs (net of $1,368 and $64) (Note 11)................................ 2,296 399 Other intangibles (net of $164 and $194).................................................. 274 596 Other non-amortizable assets.............................................................. 863 380 ---------- ---------- Other assets, net....................................................................... $ 23,189 $ 39,967 ---------- ---------- ---------- ---------- NOTE 8 - ACCRUED EXPENSES Accrued expenses are comprised of the following (amounts in thousands): DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Salaries, wages, compensated absences and payroll related taxes........................... $ 2,842 $ 3,410 Other accrued expenses.................................................................... 4,399 3,501 ---------- ---------- Total accrued expenses.................................................................. $ 7,241 $ 6,911 ---------- ---------- ---------- ---------- NOTE 9 - SHORT-TERM BORROWINGS Short-term borrowings outstanding as of December 31, 1996 and 1997 includes the following (amounts in thousands): DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Promissory note, 15% interest and principal payable as described below.................... $ 1,250 $ -- Short-term revolving line of credit....................................................... 724 568 ---------- ---------- Total short-term borrowings............................................................. $ 1,974 $ 568 ---------- ---------- ---------- ---------- F-19 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 9 - SHORT-TERM BORROWINGS (CONTINUED) The promissory note was issued on December 5, 1996 in conjunction with the Elsinore acquisition and was payable to the former owners. The promissory note, as adjusted (Note 3), was repaid during 1997. The Company's Swiss subsidiary has a short-term revolving line of credit with a Swiss bank under which Swiss franc denominated borrowings of $724,000 and $568,000 were outstanding at December 31, 1996 and 1997, respectively. Interest on the line accrues at the bank's prime rate (5.25% at December 31, 1997) plus 0.25%. The line of credit is guaranteed by the Company. NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES In conjunction with the ADS acquisition, the Company sold 15% convertible subordinated notes ("Convertible Notes") and Redeemable Warrants to a group of investors, who are also related parties (Note 21). As described in Note 14, $124,000 of the aggregate $3,000,000 proceeds was allocated to Redeemable Warrants in the consolidated financial statements. The corresponding reduction in the recorded principal amount of the notes was treated as debt discount and amortized as interest expense over the life of the notes. The principal balance of the notes, plus accrued interest, was paid with a portion of the IPO proceeds. F-20 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 11 - LONG-TERM OBLIGATIONS Long-term obligations outstanding includes the following (amounts in thousands): DECEMBER 31, SEPTEMBER -------------------- 30, 1998 1996 1997 (SUCCESSOR) ----------- (PREDECESSOR) (UNAUDITED) Senior Credit Facility (Note 1)............................... $ -- $ 36,000 $ 83,800 12% Senior Subordinated Notes due 2008, with interest payable semi-annually commencing on March 30, 1999 (Notes 1 and 24)......................................................... -- -- 100,000 Note payable to Arkansas Development Finance Authority, principal and interest at rates ranging from 5.25% to 6.0%, secured by land, building and equipment..................... -- 712 -- Capital lease obligations and equipment term financing, with interest at 4.34 % to 18.08%, secured by equipment.......... 662 547 430 Acquisition financing payable to sellers Payable to Allard stockholders (for the ADS acquisition), due in monthly installments of $56,000 through August 18, 1999...................................................... 1,531 1,011 583 Payable to Minority Stockholder (for the Minority Interest acquisition), due in monthly installments of $33,000 through December 15, 1997................................. 383 -- -- Debt repaid with IPO proceeds Senior revolving line of credit............................. 11,982 -- -- Senior term notes........................................... 16,769 -- -- Senior subordinated debt payable to related parties (Note 21)....................................................... 6,027 -- -- --------- --------- ----------- Total long-term obligations............................... 37,354 38,270 184,813 Less current portion...................................... (3,004) (858) (1,267) --------- --------- ----------- Long-term obligations, less current portion............. $ 34,350 $ 37,412 $ 183,546 --------- --------- ----------- --------- --------- ----------- DEBT REPAID WITH IPO PROCEEDS In April 1997, the Company used the net proceeds from the IPO (Note 2), together with approximately $12,775,000 of proceeds from borrowings under a new credit facility, to repay the following: (i) senior revolving line of credit borrowings of $15,356,000; (ii) senior term notes aggregating $16,531,000; (iii) senior subordinated notes payable to related parties aggregating $7,000,000; and (iv) Convertible Notes payable to related parties aggregating $3,000,000. In conjunction with the debt repayment, the Company incurred a $3,436,000 extraordinary charge, before an income tax benefit of $1,358,000, which is comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a $1,149,000 write-off of unamortized original issued discounts; and (iii) a $344,000 charge for a prepayment penalty and other related expenses. SENIOR CREDIT FACILITY Concurrent with the completion of the IPO, the Company obtained a new credit agreement with a group of banks for a $40 million senior revolving line of credit, expiring in April 2002 (the "Senior Credit F-21 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED) Facility"). The Senior Credit Facility was amended in November 1997 in conjunction with the Audio International acquisition to provide a $60 million revolving line of credit. Borrowings under the Senior Credit Facility are secured by assets totaling $96,122,000 as of December 31, 1997. At December 31, 1997, additional borrowings of $24,000,000 were available under the Senior Credit Facility. In February 1998, the Senior Credit Facility was further amended to provide for a $75 million revolving line of credit. The Company, at its option, may elect to pay interest on Senior Credit Facility borrowings based on either the prime rate or interbank offered rate ("IBOR") plus defined margins. The Company is required to pay a commitment fee, up to a maximum 0.375%, on the unused portion of the Senior Credit Facility. The weighted-average interest rate on borrowings outstanding was 7.03% as of December 31, 1997. Interest rate margins and commitment fee rates are reset quarterly, based upon a defined leverage ratio. The maximum interest rate margins are 0.75% above the prime rate or 2.00% above the IBOR rate. The Senior Credit Facility contains certain restrictive covenants which require the Company to: (i) maintain certain defined financial ratios such as interest coverage, leverage and working capital, and minimum levels of net worth; and (ii) limit capital expenditures, including capital lease obligations, and additional indebtedness which may be incurred. The Senior Credit Facility also prohibits the Company from paying any cash dividends on its common stock. SENIOR CREDIT FACILITY AMENDMENT (UNAUDITED) In May 1998, the Senior Credit Facility was amended to provide for a $105 million revolving line of credit. The revolving line of credit is subject to automatic reductions of up to $45 million upon the incurrence of additional indebtedness permitted under the loan plus $500,000 per month from October 31, 1998 through May 31, 1999 and $1 million per month thereafter. The maximum interest rate margins were increased 0.25% to 1.00% above the prime rate or 2.25% above the IBOR rate and the maximum commitment fee was increased to 0.425% on the unused portion of the Senior Credit Facility. In connection with the completion of the DLJ Acquisition, the Company was required to repay all of its borrowings under the Senior Credit Facility and entered into the New Credit Facility (Note 1). ARKANSAS DEVELOPMENT FINANCE AUTHORITY The note was assumed in conjunction with the Audio International acquisition and is guaranteed by its former stockholders. The acquisition agreement provides that the Company must obtain a release of the former stockholders' guarantees. The Company is evaluating various alternatives including repayment of the note by borrowing under the Senior Credit Facility. The note is classified as a long-term obligation as of December 31, 1997. REPAYMENT AND RELEASE OF GUARANTEES (UNAUDITED) On April 28, 1998, the Company repaid the note with borrowings under the Senior Credit Facility and the former stockholders were released from their guarantees. F-22 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED) ACQUISITION FINANCING PAYABLE TO SELLERS In conjunction with the Minority Interest Acquisition and the ADS acquisition, the sellers provided financing that is payable in monthly installments over an eighteen-month and a three-year period, respectively. The Minority Stockholder and ADS payment obligations are non-interest bearing; original issue discounts of 9.75% and 11.5%, respectively, are being amortized over the payment obligation terms. Unamortized debt discounts were $264,000 and $100,000 as of December 31, 1996 and December 31, 1997, respectively. AGGREGATE MATURITIES The aggregate maturities of long-term obligations are as follows as of December 31, 1997 (amounts in thousands): YEAR ENDING DECEMBER 31, 1998................................................................................................. $ 942 1999................................................................................................. 633 2000................................................................................................. 46 2001................................................................................................. 17 2002................................................................................................. 36,728 Thereafter........................................................................................... 4 --------- Total aggregate maturities......................................................................... 38,370 Less unamortized debt discount..................................................................... (100) --------- Total long-term obligations...................................................................... $ 38,270 --------- --------- NOTE 12 - INCOME TAXES Income (loss) before income taxes and extraordinary item was taxed under the following jurisdictions (amounts in thousands): YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Domestic............................................................................ $ (2,534) $ (855) $ 7,509 Foreign............................................................................. 166 750 1,089 --------- --------- --------- Total............................................................................. $ (2,368) $ (105) $ 8,598 --------- --------- --------- --------- --------- --------- F-23 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 12 - INCOME TAXES (CONTINUED) The provisions for income taxes are as follows (amounts in thousands): YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Current U.S. federal................................................................ $ 60 $ 269 $ 3,231 State and local............................................................. 24 194 968 Foreign..................................................................... 127 161 426 ---------- ---------- ---------- Total current............................................................. 211 624 4,625 ---------- ---------- ---------- Deferred U.S. federal................................................................ 751 70 (1,021) State and local............................................................. 226 21 (279) Foreign..................................................................... (110) (3) 19 ---------- ---------- ---------- Total deferred............................................................ 867 88 (1,281) ---------- ---------- ---------- Total provision U.S. federal................................................................ 811 339 2,210 State and local............................................................. 250 215 689 Foreign..................................................................... 17 158 445 ---------- ---------- ---------- Total provision........................................................... $ 1,078 $ 712 $ 3,344 ---------- ---------- ---------- ---------- ---------- ---------- Deferred tax liabilities (assets) are comprised of the following (amounts in thousands): YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Gross deferred tax liabilities Tax effect on earnings of subsidiary not consolidated for tax purposes...... $ 2,431 $ 2,688 $ 2,688 Depreciable and amortizable assets.......................................... 781 991 996 Other....................................................................... 367 279 409 ---------- ---------- ---------- Gross deferred tax liabilities............................................ 3,579 3,958 4,093 ---------- ---------- ---------- Gross deferred tax (assets) Inventory................................................................... (1,376) (1,798) (2,811) Loss carryforwards.......................................................... (1,391) (1,238) (865) Accrued expenses............................................................ (220) (605) (697) State income taxes.......................................................... -- -- (194) Allowance for doubtful accounts............................................. (41) (68) (159) Other....................................................................... (122) -- (184) ---------- ---------- ---------- Gross deferred tax (assets)............................................... (3,150) (3,709) (4,910) ---------- ---------- ---------- Deferred tax assets valuation allowance....................................... 2,681 3,063 2,575 ---------- ---------- ---------- Net deferred tax liability.................................................. $ 3,110 $ 3,312 $ 1,758 ---------- ---------- ---------- ---------- ---------- ---------- F-24 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 12 - INCOME TAXES (CONTINUED) The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes and extraordinary item as a result of the following differences (amounts in thousands): YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Income tax (benefit) at U.S. statutory rates.................................. $ (805) $ (36) $ 2,923 Increase (decrease) resulting from Tax on earnings of subsidiary not consolidated for tax purposes............. 977 92 -- Book benefit not provided (provided) for net operating loss carryforwards... 773 172 (488) Amortization of assets and other expenses not deductible for income tax purposes.................................................................. 68 137 441 State income taxes, net of federal benefit.................................. 16 157 482 Lower tax rates on earnings of foreign subsidiaries......................... (11) (65) (116) Other, net.................................................................. 60 255 102 ---------- ---------- ---------- Income tax at effective rates............................................. $ 1,078 $ 712 $ 3,344 ---------- ---------- ---------- ---------- ---------- ---------- Approximately $2,543,000 of the Company's loss carryforwards remained at December 31, 1997 for federal income tax purposes. The carryforwards expire in varying amounts through 2012. No benefit for the remaining loss carryforwards has been recognized in the consolidated financial statements. The amount of loss carryforwards that may be utilized in the future are subject to limitations because of the occurrence of a change in control of the Company, as defined in the Internal Revenue Code. A change in control occurred during 1996 as a result of certain equity transactions and upon completion of the IPO. The amount of loss carryforwards that may be used in the future is limited to approximately $800,000 in each year for federal income tax purposes until fully utilized. The deferred tax asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount of federal and state tax loss carryforwards that has been utilized to reduce 1997 current income taxes. Undistributed earnings of foreign subsidiaries are not material to the consolidated financial statements. As such, foreign taxes that may be due, net of U.S. foreign tax credits, have not been provided. EIGHT MONTHS ENDED AUGUST 31, 1998 AND ONE MONTH ENDED SEPTEMBER 30, 1998 (UNAUDITED) For the eight months ended August 31, 1998 and the one month ended September 30, 1998, the difference between the actual tax provision and the amount obtained by applying the U.S. statutory rates is primarily attributable to the effect of nondeductible expense relating to goodwill. In addition, during the eight months ended August 31, 1998 and one month ended September 30, 1998, the Company reduced its deferred tax asset valuation allowance by $182,000 and $63,000, respectively, to reflect the book benefit of federal net operating loss carryforwards not previously recognized. Approximately $1,823,000 of the Company's loss carryforwards remained at September 30, 1998 for federal income tax purposes. No benefit for the remaining loss carryforwards has been recognized in the consolidated financial statements. F-25 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 12 - INCOME TAXES (CONTINUED) The amount of loss carryforwards that may be utilized in the future are subject to limitations due to the occurrence of a change in control of the Company, as defined in the Internal Revenue Code. A change in control occurred as a result of certain equity transactions that occurred during 1996, the Offering and the DLJ Acquisition. The amount of loss carryforwards that may be utilized is limited to approximately $800,000 per year for both federal and state income tax purposes. NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use derivative financial instruments for trading purposes but only to manage well-defined foreign exchange rate risks. The Company enters into Swiss franc ("CHF") forward exchange contracts to purchase Swiss francs as a general economic hedge against foreign inventory procurement and manufacturing costs. Market value gains and losses on forward foreign exchange contracts are recognized in the consolidated statements of operations and aggregated a realized net loss of $316,000 and $487,000 for the years ended December 31, 1996 and 1997, respectively (none in the year ended December 31, 1995). At December 31, 1997, the Company has twelve open forward exchange contracts with one of its senior lenders to purchase a total of CHF 9,836,000 for $7,200,000 at rates ranging between 1.341 and 1.391 CHF per U.S. dollar. Settlement of the contracts is to occur in twelve equal monthly amounts of $600,000 from January 15, 1998 through December 15, 1998. As of December 31, 1997, the Company has recognized in cost of sales an unrealized market value loss of $469,000 on the open contracts. The Company believes exposure to derivative credit losses is minimal in the event of nonperformance by the senior lender because any amounts due, but not paid, to the Company by the senior lender could be offset against the Company's principal and interest payments to the lender. F-26 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 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 1997, all Redeemable Warrants were either exercised or cancelled in conjunction with the Recapitalization and IPO (Note 2). The table below summarizes the transactions during the three-year period ended December 31, 1997 (amounts in thousands, except share data). REDEEMABLE WARRANTS ---------------------- NUMBER OF COMMON AMOUNT SHARES --------- ----------- Balance, December 31, 1994................................................................. $ 2,329 446,296 Adjustment to estimated redemption value................................................... (696) -- --------- ----------- Balance, December 31, 1995................................................................. 1,633 446,296 Issued in conjunction with sale of Preferred Stock to finance Minority Interest acquisition.............................................................................. 492 194,618 Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS acquisition.............................................................................. 248 98,158 Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock............... 7 2,868 Issued in conjunction with debt agreement amendment........................................ 179 70,893 Adjustment to estimated redemption value................................................... 4,320 -- --------- ----------- Balance, December 31, 1996................................................................. 6,879 812,833 Adjustment to redemption value to reflect the IPO per share price.......................... 2,203 -- Cashless exercise and conversion pursuant to the Recapitalization.......................... (6,103) (508,497) Cancelled pursuant to the Recapitalization................................................. (1,143) (95,368) Cancelled upon debt repayment with IPO proceeds............................................ (1,657) (138,075) Reclassification of warrants no longer mandatorily redeemable to additional paid-in capital.................................................................................. (179) (70,893) --------- ----------- Balance, December 31, 1997................................................................. $ -- -- --------- ----------- --------- ----------- Prior to the IPO, the warrant holders had the right, after various dates and contingent upon certain events, to require the Company to redeem the warrants and, in certain instances, to purchase the common stock issued upon exercise of the warrants. In all instances, the redemption or purchase price, was equal to the greater of either fair market value, book value, or a value based upon a defined formula which included, in part, an earnings multiple. During the years ended December 31, 1995 and 1996, the Company increased (decreased) by $(696,000) and $4,320,000, respectively, the amount ascribed to the Redeemable Warrants to reflect estimated redemption value. Concurrent with the consummation of the Recapitalization and IPO, the Company increased the redemption value by $2,203,000 to reflect the $12.00 per share IPO price. The adjustments to redemption value were charged (credited) to accumulated deficit. F-27 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 15 - CUMULATIVE CONVERTIBLE PREFERRED STOCK As of December 31, 1996, the number of cumulative convertible preferred shares authorized to be issued consisted of 8,314,018 shares in various series ("Preferred Stock"). All Preferred Stock was without par value. As of December 31, 1994, 1995 and 1996, there were 4,022,705, 4,022,705 and 6,847,705 shares outstanding, respectively. At December 31, 1996, the Company also had Preferred Stock warrants outstanding to purchase a total of 52,784 preferred shares at an exercise price of $1.263 per share. On February 19, 1997, the Company reorganized as a Delaware corporation. In conjunction with the reorganization, the Company established a $.01 par value for its Preferred Stock and increased the number of preferred shares authorized to 18,314,018 shares, which includes 10,000,000 shares of a newly designated series of preferred stock. As part of the Recapitalization, which occurred concurrent with the IPO, all issued and outstanding shares of Preferred Stock were converted into .28357 of a share of common stock. The Recapitalization also provided for the cashless exercise and conversion of all Preferred Stock warrants into 10,206 common shares. There were no shares of Preferred Stock or warrants to purchase Preferred Stock outstanding as of December 31, 1997. On February 9, 1996, certain members of Company management purchased for $112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable Warrants to purchase 194,618 common shares to a related party (Note 21). Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable Warrants to reflect their estimated fair market value on the issuance date. The proceeds from the sale, net of issuance costs of $558,000, were used to fund the Minority Interest Acquisition. On September 18, 1996, the Company sold 750,000 preferred shares at $4.00 per share and issued Redeemable Warrants to purchase 49,079 common shares to related parties (Note 22). Proceeds from the sale aggregating $124,000 were ascribed to the Redeemable warrants to reflect their estimated fair market value on the issuance date. The proceeds from the sale, net of issuance costs of $137,000, were used to fund the ADS acquisition. NOTE 16 - COMMON STOCK At December 31, 1996 the Company was authorized to issue 4,253,550 common shares, without par value and, in addition to the Redeemable Warrants, had issued non-redeemable warrants to purchase a total of 9,355 common shares at an exercise price of $4.454 per share. On February 19, 1997, in conjunction with reorganizing as a Delaware corporation, the Company established a $.01 par value for its common stock and increased to 9,924,950 the number of common shares authorized. As of December 31, 1997, a total of 527,156 common shares were reserved for issuance upon exercise of stock options outstanding under the Company's stock option plan. As part of the Recapitalization, the holders of the non-redeemable warrants agreed to the cashless exercise and conversion of all warrants outstanding into 6,379 common shares. As described in Note 2, Redeemable Warrants to purchase 70,893 common shares at an exercise price of $14.11 per share remained after the Recapitalization. Concurrent with the consummation of the IPO, the mandatory redemption feature of these warrants was terminated and, consequently, became non-redeemable warrants. In December 1997, the holders of these warrants elected to exercise all of the warrants on a cashless F-28 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 16 - COMMON STOCK (CONTINUED) basis and convert the warrants into 16,130 common shares. No non-redeemable warrants were outstanding as of December 31, 1997. The Company has a qualified stock option plan for key employees under which options to purchase common shares may be granted. The plan permits the granting of incentive stock options, as defined by Section 422 of the Internal Revenue Code, non-qualified stock options, restricted stock options and stock appreciation rights. The plan expires in 2003. Options generally vest in equal installments over five years from the date of grant and remain exercisable until December 31, 2002. The following table summarizes the status of the Company's stock option plan at December 31, 1995, 1996, and 1997 and the activity for the three years ended December 31, 1997: 1995 1996 1997 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ----------- --------- ----------- --------- ----------- Options outstanding at beginning of year......................................... 185,029 $ 0.529 208,423 $ 0.529 355,001 $ 1.724 Granted....................................... 37,573 0.529 147,031 3.413 163,662 15.574 Cancelled..................................... (14,179) 0.529 (453) 0.529 (17,403) 6.228 --------- --------- --------- Options outstanding at end of year............ 208,423 0.529 355,001 1.724 501,260 6.089 --------- --------- --------- --------- --------- --------- Options exercisable at end of year............ 85,581 0.529 141,845 0.633 200,444 0.921 --------- --------- --------- --------- --------- --------- The following table summarizes information about stock options outstanding and stock options exercisable at December 31, 1997: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ----------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE - ------------------ -------------- ---------------- ------------- -------------- ------------- $0.529 - $1.234 303,998 7.0 years $ 0.724 194,556 $ 0.622 7.053 - 16.75 197,262 9.7 years 14.357 5,888 10.802 ------- ------- 501,260 8.1 years 6.089 200,444 0.921 ------- ------- ------- ------- The Company believes the per share exercise price of options granted through February 1996 and subsequent to January 1997 approximated the fair market value of the underlying common stock on the grant date. The exercise price of certain options granted from February 1996 to January 1997 were deemed to be below the fair market value of the underlying common stock on the grant date and such difference is being recognized as additional compensation expense in the consolidated financial statements on a straight line basis over the vesting period of the underlying options. Compensation expense recognized was $158,000 and $240,000 for the years ended December 31, 1996 and 1997, respectively. F-29 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 16 - COMMON STOCK (CONTINUED) The Company measures compensation expense related to its employee stock option plan using the intrinsic value method as prescribed by APB Opinion No. 25. Had compensation cost for the Company's stock option plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net income (loss) would have been as follows (amounts in thousands): YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Net income (loss) As reported...................................................................... $ (3,446) $ (817) $ 3,176 Pro forma........................................................................ (3,446) (822) 3,129 Weighted-average fair value of options granted Compensatory stock options....................................................... -- 5.91 5.70 Non-compensatory stock options................................................... 0.10 0.10 5.08 For purposes of the pro forma presentation, the fair value for options granted subsequent to the IPO (April 16, 1997) was estimated on the dates of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend yield of 0%; expected life of 2.5 years; and expected stock price volatility of 39.9%. The fair value for options granted prior to the IPO was estimated on the dates of grant using a minimum value method, assuming a risk-free interest rate of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option pricing models, the minimum value method excludes stock price volatility, which could not be reasonably estimated for the Company prior to the IPO. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models, as well as the minimum value method, do not necessarily provide a reliable single measure of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options granted in fiscal years after December 31, 1994 is amortized to expense over the options' vesting period. The effects of applying SFAS 123 in providing the pro forma disclosures are not likely to be representative of the effects on the reported consolidated financial statements in future years. NOTE 17 - COMMITMENTS AND CONTINGENCIES LITIGATION The Company is a party to a license agreement with McDonnell Douglas Corporation (now part of The Boeing Company) pursuant to which the Company may request certain data in order to design and market modifications to aircraft manufactured by McDonnell Douglas. The agreement provides that the Company will pay McDonnell Douglas a royalty of five percent of the net sales price of all modifications F-30 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED) sold by the Company for which the Company has requested data from McDonnell Douglas. The Company has requested data for a single modification, which modification the Company believes is exempt from the obligation to pay royalties under the agreement. In 1996, McDonnell Douglas made a demand for $650,000 for royalties. The Company does not believe that it is obligated to McDonnell Douglas in any amount. However, there can be no assurance that the Company will not be required to pay royalties to McDonnell Douglas. Certain subsidiaries of the Company have recently been served in an action filed in federal court by American International Airways, Inc., relating to the conversion and modification of two Boeing 747 aircraft from passenger to freighter configuration. No specific amount of damages is sought. The events in question occurred prior to the Company's purchase of the relevant businesses from its prior owner; the Company intends to deny any liability, and further believes that it is indemnified with respect to any such liabilities. The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of these matters, as well as the matters discussed in the preceding paragraphs, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. LEASE COMMITMENTS The Company leases certain facilities and equipment under various capital and operating leases. Certain leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 1997 (amounts in thousands): CAPITAL OPERATING LEASES LEASES ----------- ----------- Year ending December 31, 1998....................................................................................... $ 318 $ 2,909 1999....................................................................................... 203 2,732 2000....................................................................................... 50 2,274 2001....................................................................................... 21 1,855 2002....................................................................................... 17 1,771 2003 and thereafter........................................................................ 9 5,547 ----- ----------- Total minimum payments required............................................................ 618 $ 17,088 ----------- ----------- Less amount representing future interest cost.............................................. (71) ----- Recorded obligation under capital leases................................................. $ 547 ----- ----- Total rental expense charged to operations for the years ended December 31, 1995, 1996 and 1997 was $1,531,000, $1,614,000 and $2,065,000, respectively. F-31 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 18 - CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION During the three years ended December 31, 1997, the Company paid the following amounts in cash (amounts in thousands): YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Interest............................................................................. $ 3,275 $ 2,983 $ 2,842 Income taxes......................................................................... 33 132 300 INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES Certain noncash investing and financing transactions occurred during the three years ended December 31, 1997, as follows (amounts in thousands): YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Debt incurred for the acquisition of machinery and equipment......................... $ 33 $ 414 $ 182 Financing provided by sellers in connection with acquisitions........................ -- 3,492 -- Liabilities assumed in connection with acquisitions.................................. -- 2,687 2,581 The Recapitalization and IPO described in Note 2 included a series of noncash transactions. F-32 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 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): YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Revenues Gross revenues United States............................................................ $ 54,394 $ 64,383 $ 109,490 Western Europe........................................................... 9,388 10,882 12,240 ---------- ---------- ---------- Total gross revenues................................................... 63,782 75,265 121,730 ---------- ---------- ---------- Less interarea transfers United States............................................................ (814) (1,496) (2,448) Western Europe........................................................... (7,129) (8,670) (10,379) ---------- ---------- ---------- Total interarea transfers.............................................. (7,943) (10,166) (12,827) Net revenues United States............................................................ 53,580 62,887 107,042 Western Europe........................................................... 2,259 2,212 1,861 ---------- ---------- ---------- Total net revenues..................................................... $ 55,839 $ 65,099 $ 108,903 ---------- ---------- ---------- ---------- ---------- ---------- Income from operations United States.............................................................. $ 1,354 $ 3,727 $ 10,833 Western Europe............................................................. 501 746 1,572 Interarea eliminations..................................................... (20) (222) (410) ---------- ---------- ---------- Total income from operations............................................. $ 1,835 $ 4,251 $ 11,995 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated assets United States.............................................................. $ 34,425 $ 67,889 $ 98,076 Western Europe............................................................. 6,490 6,015 6,421 Interarea eliminations..................................................... (4,586) (4,638) (5,360) ---------- ---------- ---------- Total consolidated assets................................................ $ 36,329 $ 69,266 $ 99,137 ---------- ---------- ---------- ---------- ---------- ---------- Interarea sales are accounted for at prices that the Company believes would be equivalent to unaffiliated customer sales. Interarea transfers and eliminations reflect the shipment of raw component parts between areas. Operating income excludes net interest expense, other income (expense) and minority interests that are directly attributable to the related operations. Corporate assets are included with United States assets. F-33 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 19 - FOREIGN OPERATIONS AND EXPORT REVENUES (CONTINUED) EXPORT REVENUES Consolidated revenues include export revenues of $5,161,000, $6,484,000 and $12,430,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Export revenues are primarily derived from sales to customers located in Western Europe, the Far East and Canada. 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 $148,000, $151,000 and $157,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Substantially all of the Company's domestic employees are eligible to participate in a 401(k) defined contribution plan (the "Plan"). Participation in the Plan is at the discretion of each individual employee who is eligible to participate. Each participating employee is permitted to contribute up to a maximum amount defined in the Plan. The Company and its subsidiaries may make periodic discretionary matching contributions to the Plan. The Company made matching contributions of $41,000 during the year ended December 31, 1997. No matching contributions were made to the plan during the years ended December 31, 1995 and 1996. The costs associated with administering the plan were not significant for any period presented. F-34 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 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, ------------------------------- 1995 1996 1997 --------- --------- --------- Senior Subordinated Lenders Interest and advisory fees Earned during the period......................................................... $ 912 $ 983 $ 358 Accrued and payable as of year end............................................... -- 43 -- Purchase of Convertible Notes, Preferred Stock and Redeemable Warrants in conjunction with ADS acquisition................................................. -- 2,000 -- Fees and expenses earned........................................................... -- 36 -- Debt repaid with IPO proceeds Senior subordinated debt......................................................... -- -- 7,000 Convertible Notes................................................................ -- -- 1,000 Investors Purchases of debt and equity securities Preferred Stock and Redeemable Warrants in conjunction with Minority Interest acquisition.................................................................... -- 6,500 -- Convertible Notes, Preferred Stock and Redeemable Warrants in conjunction with ADS acquisition................................................................ -- 4,000 -- Fees and expenses earned........................................................... -- 74 -- Convertible Notes Interest earned during the period................................................ -- 86 98 Interest accrued and payable as of year end...................................... -- 86 -- Repaid with IPO proceeds......................................................... -- -- 2,000 Each related party is described below: Senior Subordinated Lenders - Own 8.9% of the Company's issued and outstanding common stock at December 31, 1997, were represented on the Company's Board of Directors in 1995 and 1996, and provided a portion of the Company's Convertible Notes financing and the Subordinated Debt (Notes 10, 11, 14, 15 and 16). The ownership percentage reflects the cashless exercise and conversion of all Preferred Stock, Preferred Stock warrants, common stock warrants and Redeemable Warrants into 451,370 common shares in conjunction with the Recapitalization (Note 2). Investors - Own 16.4% of the Company's issued and outstanding common stock at December 31, 1997, are represented on the Company's Board of Directors, and provided a portion of the Company's Convertible Notes and Preferred Stock financing (Notes 10, 14, 15 and 16). The ownership percentage reflects the cashless exercise and conversion of all Preferred Stock and Redeemable Warrants into 840,808 common shares in conjunction with the Recapitalization (Note 2). F-35 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 21 - RELATED PARTY TRANSACTIONS (CONTINUED) DLJ ACQUISITION (UNAUDITED) In connection with the DLJ Acquisition, the Company and its affiliates incurred fees payable to DLJ related entities of approximately $12.0 million. In addition, subsequent to the DLJ Acquisition, the majority of the Company's interest expense has been payable to DLJ related entities. NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) In conjunction with the Notes, Bridge Notes and New Credit Facility described in Note 1, the following summarized condensed consolidating financial information is presented for the Company, segregating guarantor subsidiaries and non-guarantor subsidiaries. The accompanying financial information in the "Guarantor Subsidiaries" column reflects the financial position, results of operations and cash flows for those subsidiaries which will guarantee the Notes, Bridge Notes and New Credit Facility. The guarantor subsidiaries are wholly-owned subsidiaries of the Company and the guarantees will be full, unconditional, and joint and several. Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors. Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following: (1) Elimination of investments in subsidiaries. (2) Elimination of intercompany accounts. (3) Elimination of intercompany sales between guarantor and non-guarantor subsidiaries. (4) Elimination of equity in earnings of subsidiaries. F-36 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) BALANCE SHEETS (AMOUNTS IN THOUSANDS) DECEMBER 31, 1996 (PREDECESSOR) ----------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------ ASSETS Current assets Cash and cash equivalents........ $ 37 $ 87 $ 196 $ -- $ 320 Accounts receivable, net......... -- 12,341 844 -- 13,185 Inventories...................... -- 18,434 1,139 -- 19,573 Other current assets............. 134 556 122 -- 812 ------- ------------ ------------- -------------- ------------ Total current assets........... 171 31,418 2,301 -- 33,890 Property and equipment, net........ 104 10,454 1,629 -- 12,187 Other assets, principally intangibles, net.................. 3,036 19,906 247 -- 23,189 Investments in subsidiaries........ 14,226 2,379 -- (16,605)(1) -- Intercompany receivables........... 35,664 394 3,109 (39,167)(2) -- ------- ------------ ------------- -------------- ------------ $53,201 $64,551 $ 7,286 $(55,772) $69,266 ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations........... $ 3,102 $ 1,094 $ 782 $ -- $ 4,978 Convertible subordinated notes... 2,922 -- -- -- 2,922 Other current liabilities........ 3,366 10,225 1,913 -- 15,504 ------- ------------ ------------- -------------- ------------ Total current liabilities...... 9,390 11,319 2,695 -- 23,404 ------- ------------ ------------- -------------- ------------ Long-term liabilities Long-term obligations............ 32,929 1,349 72 -- 34,350 Intercompany payables............ -- 38,773 394 (39,167)(2) -- Other long-term liabilities...... 2,888 85 424 -- 3,397 ------- ------------ ------------- -------------- ------------ Total long-term liabilities.... 35,817 40,207 890 (39,167) 37,747 ------- ------------ ------------- -------------- ------------ Mandatorily redeemable common stock warrants.......................... 6,879 -- -- -- 6,879 ------- ------------ ------------- -------------- ------------ Stockholders' equity Paid-in capital.................. 14,066 12,622 1,194 (13,816)(1) 14,066 Retained earnings (deficit)...... (12,951) 403 2,386 (2,789)(1) (12,951) Accumulated comprehensive income......................... -- -- 121 -- 121 ------- ------------ ------------- -------------- ------------ Total stockholders' equity..... 1,115 13,025 3,701 (16,605) 1,236 ------- ------------ ------------- -------------- ------------ $53,201 $64,551 $ 7,286 $(55,772) $69,266 ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------ F-37 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) BALANCE SHEETS (CONTINUED) DECEMBER 31, 1997 (PREDECESSOR) ----------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------ ASSETS Current assets Cash and cash equivalents........ $ 16 $ 109 $ 81 $ -- $ 206 Accounts receivable, net......... -- 17,101 1,051 -- 18,152 Inventories...................... -- 24,399 1,577 -- 25,976 Other current assets............. 98 505 179 -- 782 ------- ------------ ------------- -------------- ------------ Total current assets........... 114 42,114 2,888 -- 45,116 Property and equipment, net........ 290 12,928 836 -- 14,054 Other assets, principally intangibles, net.................. 472 39,257 238 -- 39,967 Investments in subsidiaries........ 20,414 3,378 -- (23,792)(1) -- Intercompany receivables........... 60,946 659 4,357 (65,962)(2) -- ------- ------------ ------------- -------------- ------------ $82,236 $98,336 $ 8,319 $(89,754) $99,137 ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations........... $ 4 $ 801 $ 621 $ -- $ 1,426 Other current liabilities........ 4,333 12,780 1,805 -- 18,918 ------- ------------ ------------- -------------- ------------ Total current liabilities...... 4,337 13,581 2,426 -- 20,344 ------- ------------ ------------- -------------- ------------ Long-term liabilities Long-term obligations............ 36,027 1,372 13 -- 37,412 Intercompany payable............. 873 64,430 659 (65,962)(2) -- Other long-term liabilities...... 1,333 96 425 -- 1,854 ------- ------------ ------------- -------------- ------------ Total long-term liabilities.... 38,233 65,898 1,097 (65,962) 39,266 ------- ------------ ------------- -------------- ------------ Stockholders' equity Paid-in capital.................. 51,110 12,418 1,194 (13,612)(1) 51,110 Retained earnings (deficit)...... (11,444) 6,439 3,741 (10,180)(1) (11,444) Accumulated comprehensive income (loss)......................... -- -- (139) -- (139) ------- ------------ ------------- -------------- ------------ Total stockholder's equity..... 39,666 18,857 4,796 (23,792) 39,527 ------- ------------ ------------- -------------- ------------ $82,236 $98,336 $ 8,319 $(89,754) $99,137 ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------ F-38 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) BALANCE SHEETS (CONTINUED) SEPTEMBER 30, 1998 (SUCCESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- --------------- ------------ ASSETS Current assets Cash and cash equivalents........ $ 3,067 $ 1,067 $ 133 $ -- $ 4,267 Accounts receivable, net......... -- 27,208 1,409 -- 28,617 Inventories...................... -- 35,320 2,023 -- 37,343 Other current assets............. 2,426 1,707 339 -- 4,472 -------- ------------ ------------- --------------- ------------ Total current assets........... 5,493 65,302 3,904 -- 74,699 Property and equipment, net........ 289 26,394 1,532 -- 28,215 Other assets, principally intangibles, net.................. 9,524 206,977 13,885 -- 230,386 Investments in subsidiaries........ 240,961 18,501 -- (259,462)(1) -- Intercompany receivables........... 57,407 788 3,422 (61,617)(2) -- -------- ------------ ------------- --------------- ------------ $313,674 $317,962 $22,743 $(321,079) $333,300 -------- ------------ ------------- --------------- ------------ -------- ------------ ------------- --------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term obligations........... $ 455 $ 789 $ 103 $ -- $ 1,347 Other current liabilities........ 8,379 17,011 1,279 -- 26,669 -------- ------------ ------------- --------------- ------------ Total current liabilities...... 8,834 17,800 1,382 -- 28,016 -------- ------------ ------------- --------------- ------------ Long-term liabilities Long-term obligations............ 183,373 173 -- -- 183,546 Intercompany payables............ 873 59,956 788 (61,617)(2) -- Other long-term liabilities...... 22,370 532 474 -- 23,376 -------- ------------ ------------- --------------- ------------ Total long-term liabilities.... 206,616 60,661 1,262 (61,617) 206,922 -------- ------------ ------------- --------------- ------------ Stockholders' equity Paid-in capital.................. 99,000 213,335 15,890 (229,225)(1) 99,000 Retained earnings (deficit)...... (776) 26,166 4,071 (30,237)(1) (776) Accumulated comprehensive income (loss)......................... -- -- 138 -- 138 -------- ------------ ------------- --------------- ------------ Total stockholders' equity..... 98,224 239,501 20,099 (259,462) 98,362 -------- ------------ ------------- --------------- ------------ $313,674 $317,962 $22,743 $(321,079) $333,300 -------- ------------ ------------- --------------- ------------ -------- ------------ ------------- --------------- ------------ F-39 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1995 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- Revenues........................... $-- $52,685 $10,283 $(7,129)(3) $55,839 Cost of sales...................... -- 42,284 8,308 (7,129)(3) 43,463 ------- ------------ ------------- ------- ------------- Gross profit..................... -- 10,401 1,975 -- 12,376 Selling, general and administrative expenses.......................... 1,431 7,083 912 -- 9,426 Amortization of intangible assets............................ -- 1,101 14 -- 1,115 Interest expense................... 3,659 31 131 -- 3,821 Intercompany charges............... (783) 583 200 -- -- Equity in earnings of subsidiaries...................... (1,347) (149) -- 1,496(4) -- Other expenses..................... 1 176 205 -- 382 Provision for income taxes......... 485 576 17 -- 1,078 ------- ------------ ------------- ------- ------------- Net income (loss).................. $(3,446) $ 1,000 $ 496 $(1,496) $(3,446) ------- ------------ ------------- ------- ------------- ------- ------------ ------------- ------- ------------- TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR) ----------------------------------------------------------------------------------- DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------ Revenues........................... $-- $61,835 $11,934 $ (8,670)(3) $65,099 Cost of sales...................... -- 48,542 9,520 (8,670)(3) 49,392 ------- ------------ ------------- -------------- ------------ Gross profit..................... -- 13,293 2,414 -- 15,707 Selling, general and administrative expenses.......................... 2,461 7,240 1,046 -- 10,747 Amortization of intangible assets............................ -- 695 14 -- 709 Interest expense................... 4,032 129 87 -- 4,248 Intercompany charges............... (2,182) 2,002 180 -- -- Equity in earnings of subsidiaries...................... (2,820) (594) -- 3,414(4) -- Other expenses (income)............ (3) 204 (93) -- 108 Provisions for income taxes........ (671) 1,225 158 -- 712 ------- ------------ ------------- -------------- ------------ Net income (loss).................. $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817) ------- ------------ ------------- -------------- ------------ ------- ------------ ------------- -------------- ------------ F-40 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- Revenues........................... $-- $106,154 $13,128 $(10,379)(3) $108,903 Cost of sales...................... -- 81,115 9,511 (10,379)(3) 80,247 ------- ------------ ------------- -------------- ------------- Gross profit..................... -- 25,039 3,617 -- 28,656 Selling, general and administrative expenses.......................... 3,646 10,720 1,390 -- 15,756 Amortization of intangible assets............................ -- 892 13 -- 905 Interest expense................... 2,888 220 46 -- 3,154 Intercompany charges............... (4,617) 4,432 185 -- -- Equity in earnings of subsidiaries...................... (6,392) (999) -- 7,391(4) -- Other expenses..................... -- 161 82 -- 243 Provision (benefit) for income taxes............................. (779) 3,678 445 -- 3,344 Extraordinary charge, net of tax... 2,078 -- -- -- 2,078 ------- ------------ ------------- -------------- ------------- Net income......................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176 ------- ------------ ------------- -------------- ------------- ------- ------------ ------------- -------------- ------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------- ------------- -------------- ------------ Revenues........................... $-- $78,916 $9,366 $(7,395)(3) $80,887 Cost of sales...................... -- 61,290 6,769 (7,395)(3) 60,664 ------- ------------- ------ ------- ------------ Gross profit..................... -- 17,626 2,597 -- 20,223 Selling, general and administrative expenses.......................... 2,625 7,383 1,004 -- 11,012 Amortization of intangible assets............................ -- 608 8 -- 616 Interest expense................... 2,389 167 42 -- 2,598 Intercompany charges............... (3,246) 3,102 144 -- -- Equity in earnings of subsidiaries...................... (4,319) (932) -- 5,251(4) -- Other expenses (income)............ 100 77 65 -- 242 Provision (benefit) for income taxes............................. (1,113) 2,902 402 -- 2,191 Extraordinary charge, net of tax... 2,078 -- -- -- 2,078 ------- ------------- ------ ------- ------------ Net income......................... $ 1,486 $ 4,319 $ 932 $(5,251) $ 1,486 ------- ------------- ------ ------- ------------ ------- ------------- ------ ------- ------------ F-41 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- Revenues........................... $-- $87,312 $ 8,503 $(5,738)(3) $90,077 Cost of sales...................... -- 59,252 6,587 (5,738)(3) 60,101 ------- ------------ ------------- ------- ------------- Gross profit..................... -- 28,060 1,916 -- 29,976 Selling, general and administrative expenses.......................... 3,949 11,041 729 -- 15,719 Nonrecurring charges............... 3,632 -- -- -- 3,632 Amortization of intangible assets............................ -- 1,337 10 -- 1,347 Interest expense (income).......... 2,343 7 -- -- 2,350 Intercompany charges............... (4,357) 4,229 128 -- -- Equity in earnings of subsidiaries...................... (6,824) (489) -- 7,313(4) -- Other expenses (income)............ 600 (164) 411 -- 847 Provision (benefit) for income taxes............................. (2,532) 5,275 149 -- 2,892 ------- ------------ ------------- ------- ------------- Net income......................... $ 3,189 $ 6,824 $ 489 $(7,313) $ 3,189 ------- ------------ ------------- ------- ------------- ------- ------------ ------------- ------- ------------- ONE MONTH ENDED SEPTEMBER 30, 1998 (SUCCESSOR) ------------------------------------------------------------------------------------ DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ---------------- ------------ ------------- -------------- ------------- Revenues........................... $-- $15,659 $ 1,096 $ (743)(3) $16,012 Cost of sales...................... -- 10,975 848 (743)(3) 11,080 ------- ------------ ------------- ------- ------------- Gross profit....................... -- 4,684 248 -- 4,932 Selling, general and administrative expenses.......................... 359 2,714 97 -- 3,170 Nonrecurring charges............... -- -- -- -- -- Amortization of intangible assets............................ 9 749 44 -- 802 Interest expense (income).......... 1,701 64 -- -- 1,765 Intercompany charges............... (576) 559 17 -- -- Equity in earnings of subsidiaries...................... (2) 62 -- (60)(4) -- Other expenses (income)............ -- (7) 188 -- 181 Provision for income taxes (benefit)......................... (1,011) 541 (36) -- (506) Extraordinary charge, net of tax... 296 -- -- -- 296 ------- ------------ ------------- ------- ------------- Net income (loss).................. $ (776) $ 2 $ (62) $ 60 $ (776) ------- ------------ ------------- ------- ------------- ------- ------------ ------------- ------- ------------- F-42 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 1995 (PREDECESSOR) --------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- --------------- ----------- ----------- Cash flows from operating activities Net income (loss).............. $ (3,446) $ 1,000 $ 496 $ (1,496) $ (3,446) Adjustments to net income (loss) Non-cash adjustments to net income (loss).............. 1,891 2,766 822 -- 5,479 Equity in earnings of subsidiaries............... (1,347) (149) -- 1,496(4) -- Changes in working capital... 2,860 (2,650) (786) -- (576) ------------- ----------- ----- ----------- ----------- Net cash provided by (used for) operating activities............... (42) 967 532 -- 1,457 ------------- ----------- ----- ----------- ----------- Cash flows from investing activities Capital expenditures and other........................ (309) (786) (367) -- (1,462) ------------- ----------- ----- ----------- ----------- Net cash used for investing activities............... (309) (786) (367) -- (1,462) ------------- ----------- ----- ----------- ----------- Cash flows from financing activities Principal payments on long-term debt and leases.............. (1,500) (105) (60) -- (1,665) Line of credit borrowings (repayments)................. 2,022 -- (50) -- 1,972 Other, net..................... (199) (67) -- -- (266) ------------- ----------- ----- ----------- ----------- Net cash provided by (used for) financing activities............... 323 (172) (110) -- 41 ------------- ----------- ----- ----------- ----------- Effect of foreign currency translation on cash............ -- -- 33 -- 33 ------------- ----------- ----- ----------- ----------- Net increase (decrease) in cash and equivalents................ (28) 9 88 -- 69 Cash and equivalents at beginning of period...................... 44 8 184 -- 236 ------------- ----------- ----- ----------- ----------- Cash and equivalents at end of period......................... $ 16 $ 17 $ 272 $ -- $ 305 ------------- ----------- ----- ----------- ----------- ------------- ----------- ----- ----------- ----------- F-43 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED) TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR) ------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- ------------- ----------- ----------- Cash flows from operating activities Net income (loss).............. $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817) Adjustments to net income (loss) Non-cash adjustments to net income (loss).............. 1,093 2,623 903 -- 4,619 Equity in earnings of subsidiaries............... (2,820) (594) -- 3,414(4) -- Changes in working capital... (864) 1,525 (1,505) -- (844) ------------- ----------- ------------- ----------- ----------- Net cash provided by (used for) operating activities............... (3,408) 5,946 420 -- 2,958 ------------- ----------- ------------- ----------- ----------- Cash flows from investing activities Acquisition of companies, net of cash acquired............. (18,200) -- -- -- (18,200) Capital expenditures and other........................ (97) (5,353) (366) -- (5,816) ------------- ----------- ------------- ----------- ----------- Net cash used for investing activities............... (18,297) (5,353) (366) -- (24,016) ------------- ----------- ------------- ----------- ----------- Cash flows from financing activities Net proceeds from sale of equity....................... 8,240 -- -- -- 8,240 Debt financing for acquisitions................. 13,548 -- -- -- 13,548 Principal payments on long-term debt and leases.............. (1,500) (438) (63) -- (2,001) Line of credit borrowings (repayments)................. 1,280 -- (89) -- 1,191 Other, net..................... 158 (85) -- -- 73 ------------- ----------- ------------- ----------- ----------- Net cash provided by (used for) financing activities............... 21,726 (523) (152) -- 21,051 ------------- ----------- ------------- ----------- ----------- Effect of foreign currency translation on cash............ -- -- 22 -- 22 ------------- ----------- ------------- ----------- ----------- Net increase (decrease) in cash and equivalents................ 21 70 (76) -- 15 Cash and equivalents at beginning of period...................... 16 17 272 -- 305 ------------- ----------- ------------- ----------- ----------- Cash and equivalents at end of period......................... $ 37 $ 87 $ 196 $ -- $ 320 ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- ----------- F-44 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED) TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR) ------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- ------------- ----------- ----------- Cash flows from operating activities Net income..................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176 Adjustments to net income Non-cash adjustments to net income..................... 1,307 4,687 829 -- 6,823 Equity in earnings of subsidiaries............... (6,392) (999) -- 7,391(4) -- Changes in working capital... 1,374 (4,530) (2,202) -- (5,358) ------------- ----------- ------------- ----------- ----------- Net cash provided by (used for) operating activities............... (535) 5,093 83 -- 4,641 ------------- ----------- ------------- ----------- ----------- Cash flows from investing activities Acquisition of companies, net of cash acquired............. (23,597) -- -- -- (23,597) Capital expenditures and other........................ (244) (3,823) (145) -- (4,212) ------------- ----------- ------------- ----------- ----------- Net cash used for investing activities............... (23,841) (3,823) (145) -- (27,809) ------------- ----------- ------------- ----------- ----------- Cash flows from financing activities Net proceeds from sale of equity....................... 28,933 -- -- -- 28,933 Net debt repaid with equity offering proceeds............ (29,848) -- -- -- (29,848) Debt financing for acquisitions................. 23,597 -- -- -- 23,597 Principal payments on long-term debt and leases.............. (474) (1,147) (54) -- (1,675) Line of credit borrowings (repayments)................. 1,907 -- (96) -- 1,811 Other, net..................... 240 (101) -- -- 139 ------------- ----------- ------------- ----------- ----------- Net cash provided by (used for) financing activities............... 24,355 (1,248) (150) -- 22,957 ------------- ----------- ------------- ----------- ----------- Effect of foreign currency translation on cash............ -- -- 97 -- 97 ------------- ----------- ------------- ----------- ----------- Net increase (decrease) in cash and equivalents................ (21) 22 (115) -- (114) Cash and equivalents at beginning of period...................... 37 87 196 -- 320 ------------- ----------- ------------- ----------- ----------- Cash and equivalents at end of period......................... $ 16 $ 109 $ 81 $ -- $ 206 ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- ----------- F-45 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 1997 (PREDECESSOR) ------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- ------------- ----------- ----------- Cash flows from operating activities Net income..................... $ 1,486 $ 4,319 $ 932 $ (5,251) $ 1,486 Adjustments to net income Non-cash adjustments to net income..................... 3,094 2,890 604 -- 6,588 Equity in earnings of subsidiaries............... (4,319) (932) -- 5,251(4) -- Changes in working capital... 82 (2,744) (1,462) -- (4,124) ------------- ----------- ------------- ----------- ----------- Net cash provided by operating activities..... 343 3,533 74 -- 3,950 ------------- ----------- ------------- ----------- ----------- Cash flows from investing activities Capital expenditures and other........................ (224) (2,551) (67) -- (2,842) ------------- ----------- ------------- ----------- ----------- Net cash used for investing activities............... (224) (2,551) (67) -- (2,842) ------------- ----------- ------------- ----------- ----------- Cash flows from financing activities Net proceeds from sale of equity....................... 28,770 -- -- -- 28,770 Net debt repaid with equity offering proceeds............ (29,385) -- -- -- (29,385) Principal payments on long-term debt and leases.............. (474) (842) (40) -- (1,356) Line of credit borrowings...... 1,254 -- 38 -- 1,292 Other, net..................... (266) (101) -- -- (367) ------------- ----------- ------------- ----------- ----------- Net cash used for financing activities............... (101) (943) (2) -- (1,046) ------------- ----------- ------------- ----------- ----------- Effect of foreign currency translation on cash............ -- -- (43) -- (43) ------------- ----------- ------------- ----------- ----------- Net increase (decrease) in cash and equivalents................ 18 39 (38) -- 19 Cash and equivalents at beginning of period...................... 37 87 196 -- 320 ------------- ----------- ------------- ----------- ----------- Cash and equivalents at end of period......................... $ 55 $ 126 $ 158 $ -- $ 339 ------------- ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- ----------- F-46 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) STATEMENTS OF CASH FLOWS (CONTINUED) EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) --------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- --------------- ----------- ----------- Cash flows from operating activities Net income..................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189 Adjustments to net income Non-cash adjustments to net income..................... (1,130) 3,420 557 -- 2,847 Equity in earnings of subsidiaries............... (6,824) (489) -- 7,313(4) -- Changes in working capital... 4,400 (7,393) (29) -- (3,022) ------------- ----------- ----- ----------- ----------- Net cash provided by (used for) operating activities............... (365) 2,362 1,017 -- 3,014 ------------- ----------- ----- ----------- ----------- Cash flows from investing activities Acquisition of companies, net of cash acquired............. (87,071) 1,263 -- -- (85,808) Capital expenditures and other........................ (44) (1,306) (220) -- (1,570) ------------- ----------- ----- ----------- ----------- Net cash used for investing activities............... (87,115) (43) (220) -- (87,378) ------------- ----------- ----- ----------- ----------- Cash flows from financing activities Net proceeds from sale of equity....................... 34,815 -- -- -- 34,815 Net debt repaid with equity offering proceeds............ (34,815) -- -- -- (34,815) Debt financing for acquisitions................. 85,808 -- -- -- 85,808 Principal payments on long-term debt and leases.............. (3) (1,280) (34) -- (1,317) Line of credit borrowings (repayments)................. 6,007 -- (554) -- 5,453 Other, net..................... 23 (96) -- -- (73) ------------- ----------- ----- ----------- ----------- Net cash provided by (used for) financing activities............... 91,835 (1,376) (588) -- 89,871 ------------- ----------- ----- ----------- ----------- Effect of foreign currency translation on cash............ -- -- 26 -- 26 ------------- ----------- ----- ----------- ----------- Net increase in cash and equivalents.................... 4,355 943 235 -- 5,533 Cash and equivalents at beginning of period...................... 16 109 81 -- 206 ------------- ----------- ----- ----------- ----------- Cash and equivalents at end of period......................... 4,371 $ 1,052 $ 316 $ -- $ 5,739 ------------- ----------- ----- ----------- ----------- ------------- ----------- ----- ----------- ----------- F-47 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 22 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) ONE MONTH ENDED SEPTEMBER 30, 1998 (SUCCESSOR) ----------------------------------------------------------------------- DECRANE AIRCRAFT HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL ------------- ----------- --------------- ------------- ----------- Cash flows from operating activities Net income..................... $ (776) $ 2 $ (62) $ 60 $ (776) Adjustments to net income Non-cash adjustments to net income..................... (342) 1,020 62 -- 740 Equity in earnings of subsidiaries............... (2) 62 -- (60)(4) -- Changes in working capital... (589) (711) (170) -- (1,470) ------------- ----------- ----- ----- ----------- Net cash provided by (used for) operating activities............... (1,709) 373 (170) -- (1,506) ------------- ----------- ----- ----- ----------- Cash flows from investing activities Capital expenditures and other........................ -- (240) (67) -- (307) ------------- ----------- ----- ----- ----------- Net cash used for investing activities............... -- (240) (67) -- (307) ------------- ----------- ----- ----- ----------- Cash flows from financing activities Acquisition of Predecessor, net.......................... 2,006 -- -- -- 2,006 Principal payments on long-term debt and leases.............. (1) (118) (10) -- (129) Line of credit borrowings (repayments)................. (1,600) -- 81 -- (1,519) ------------- ----------- ----- ----- ----------- Net cash provided by (used for) financing activities............... 405 (118) 71 -- 358 ------------- ----------- ----- ----- ----------- Effect of foreign currency translation on cash............ -- -- (17) -- (17) ------------- ----------- ----- ----- ----------- Net increase (decrease) in cash and equivalents................ (1,304) 15 (183) -- (1,472) Cash and equivalents at beginning of period...................... 4,371 1,052 316 -- 5,739 ------------- ----------- ----- ----- ----------- Cash and equivalents at end of period......................... $ 3,067 $ 1,067 $ 133 $ -- $ 4,267 ------------- ----------- ----- ----- ----------- ------------- ----------- ----- ----- ----------- NOTE 23 - LITIGATION (UNAUDITED) On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware Chancery Court on behalf of a purported class of stockholders of the Company against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and certain of its affiliates ("DLJ"), alleging, among other things, that the directors had breached their fiduciary duties by entering into the merger agreement related to the DLJ Acquisition without engaging in an auction or "active market check" and, therefore, agreed to terms that were unfair F-48 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 23 - LITIGATION (UNAUDITED) (CONTINUED) and inadequate from the standpoint of the Company's stockholders. On July 24, 1998, the plaintiffs amended the complaint by repeating the allegations in the initial complaint and adding allegations that: (i) the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "14D-9") contained material misstatements or omissions; (ii) the termination fees were unreasonable; and (iii) the directors who approved the DLJ Acquisition had conflicts of interest. The complaint sought a preliminary and permanent injunction barring defendants from proceeding with the transaction or, if the transaction is consummated, an order rescinding it or awarding damages, together with interest, and an award of attorneys' fees and litigation expenses. Without admitting any wrongdoing in the action, in order to avoid the burden and expense of further litigation, the Company, DLJ, and the individual defendants reached an agreement in principle with the plaintiffs which contemplates settlement of the action. The Company, DLJ and the individual defendants and the plaintiffs entered into a memorandum of understanding (the "Memorandum of Understanding"), pursuant to which the parties would, subject to certain facts being confirmed through discovery which has not been completed, enter into a settlement agreement which would be subject to approval by the Court of Chancery. The Memorandum of Understanding required the Company to provide additional disclosures in an amendment to the 14D-9 which has occurred, and for a complete release and settlement of all claims, whether asserted directly, derivatively or otherwise, against defendants, or any of their affiliates, directors, officers, employees or agents arising out of the facts set forth in the complaint. The Memorandum of Understanding contemplates that, in connection with the benefit conferred, plaintiffs' counsel will apply to the Court of Chancery for an award of attorney's fees and litigation expenses in an amount not exceeding $375,000, which application, the defendants have agreed not to oppose. On August 5, 1998, the Company and its chief executive officer were served in an action filed in state court in California by the Company's chief financial officer and secretary claiming that he is due additional compensation in the form of stock options, and claiming fraud, negligent misrepresentation and breach of contract in connection therewith. On September 22, 1998, the plaintiff amended the compliant by repeating the allegations in the initial compliant and adding allegations of fraudulent misrepresentation in violation of certain provisions of the California Labor Code (for which doubled damages are sought), promissory estoppel, and wrongful discharge as a violation of public policy (as a result of allegations made by the plaintiff of improprieties in connection with the fairness opinion with respect to the DLJ Acquisition). The action seeks not less than $1.5 million plus punitive damages and costs. The action is in its early stage of development and discovery has not been completed. The Company intends to vigorously defend against such claim. The plaintiff's employment with the Company has been terminated. The Canadian Transportation Safety Board ("TSB") has notified the Company that as part of its investigation of the crash of Swissair Flight 111 on September 2, 1998, the TSB has found burned wire which was attached to the in-flight entertainment system installed on certain Swissair aircraft by a subsidiary of the Company. The TSB has advised the Company that it does not have evidence that the system the Company installed malfunctioned or failed during the flight. The Company has been requested by attorneys for families of persons who died aboard the flight to put its insurance carrier on notice of a potential claim by such families. F-49 DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND THE ONE MONTH ENDED SEPTEMBER 30, 1998 IS UNAUDITED) NOTE 23 - LITIGATION (UNAUDITED) (CONTINUED) The Company and two of its subsidiaries have confirmed that they are indemnified for any liability in the action filed by American International Airways, Inc. referenced in Note 17; and for the further cost of defense of the action. The third defendant subsidiary is being defended by its insurance carrier and intends to deny any liability. NOTE 24 - SUBSEQUENT EVENTS (UNAUDITED) On October 5, 1998 (subsequent to the DLJ Acquisition and financing), the Bridge Notes were repaid with the net proceeds from the Units offering. Each Unit consists of $1,000 principal amount of the Notes and one warrant (collectively, the "Warrants") to purchase 1.55 shares of Common Stock, par value $0.01 per share ("Holdings Common Stock") of DeCrane Holdings Co. The Notes will mature on September 30, 2008. Interest on the Notes will be payable semi-annually on March 30 and September 30 of each year, commencing on March 30, 1999. The Notes are unsecured general obligations of the Company and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including indebtedness pursuant to the New Credit Facility. Each Warrant entitles the holder thereof, subject to certain conditions, to purchase 1.55 shares of Holdings Common Stock at an exercise price of $23.00 per share of Holdings Common Stock, subject to adjustment under certain circumstances. The Warrants will be exercisable at any time on or after the Separation Date and, unless earlier exercised, will expire on September 30, 2008. In December 1998, the Company signed an agreement with certain of the principal shareholders of PATS, Inc. to acquire 100% of its stock for a purchase price of $41.5 million, subject to adjustments for changes to its net working capital, and reserves for certain environmental and other indemnities made by the shareholders. However, our obligation to complete the purchase is subject to the resolution of various conditions, which may or may not be satisfied. PATS is a Maryland-based designer, manufacturer and installer of aircraft and avionics systems. Among other things, PATS is the principal supplier of auxiliary fuel tank systems to the Boeing Business Jet program. The transaction, if completed, will be accounted for as a purchase and the difference between the purchase price and the fair value of the net assets acquired will be recorded as goodwill and amortized on a straight-line basis over thirty years. F-50 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Avtech Corporation In our opinion, the accompanying balance sheets and the related statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Avtech Corporation at September 30, 1996 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Los Angeles, California June 12, 1998 F-51 AVTECH CORPORATION BALANCE SHEETS (DOLLARS IN THOUSANDS) SEPTEMBER 30, ---------------- 1996 1997 JUNE 25, 1998 ------- ------- ------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents....................... $ 1,052 $ 4,136 $ 1,093 Accounts receivable, net of allowance for doubtful accounts of $20, $20 and $20 at September 30, 1996 and 1997 and June 25, 1998, respectively.................................. 7,398 4,928 5,321 Inventories..................................... 4,233 5,254 5,832 Prepaid expenses and other assets............... 69 183 57 Income taxes refundable......................... -- -- 4,368 Deferred income taxes........................... -- 247 1,613 ------- ------- ------------- Total current assets.......................... 12,752 14,748 18,284 ------- ------- ------------- Property, plant and equipment Land............................................ 431 791 791 Buildings and improvements...................... 2,411 4,685 5,176 Machinery and equipment......................... 2,764 3,005 3,477 Furniture, computer and other equipment......... 3,216 3,426 3,555 ------- ------- ------------- 8,822 11,907 12,999 Less: Accumulated depreciation.................. (6,523) (7,050) (7,380) ------- ------- ------------- 2,299 4,857 5,619 Other assets Patents, net of amortization.................... 5 4 4 Deferred income taxes........................... -- 629 3,239 ------- ------- ------------- Total assets.................................. $15,056 $20,238 $ 27,146 ------- ------- ------------- ------- ------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................................ $ 768 $ 1,388 $ 1,396 Accrued expenses................................ 2,120 4,043 1,955 Deferred income taxes........................... 389 -- -- ------- ------- ------------- Total current liabilities..................... 3,277 5,431 3,351 ------- ------- ------------- Long-term liabilities Deferred compensation........................... 1,229 1,385 -- Other........................................... 438 472 472 ------- ------- ------------- 1,667 1,857 472 ------- ------- ------------- Commitments and contingencies (Note 8)............ -- -- -- ------- ------- ------------- Stockholders' equity Common stock, no par value, 1,500,000 shares authorized; 323,541, 318,929 and 468,929 shares outstanding at September 30, 1996 and 1997 and June 25, 1998, respectively.......... 237 232 10,519 Retained earnings............................... 9,875 12,718 12,804 ------- ------- ------------- 10,112 12,950 23,323 ------- ------- ------------- $15,056 $20,238 $ 27,146 ------- ------- ------------- ------- ------- ------------- The accompanying notes are an integral part of these financial statements. F-52 AVTECH CORPORATION STATEMENTS OF INCOME (DOLLARS IN THOUSANDS) NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, -------------------- ------------------------------- JUNE 30, JUNE 25, 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) Sales...................................................... $ 21,020 $ 28,797 $ 32,619 $ 24,071 $ 30,634 Cost of sales.............................................. 12,333 15,967 20,422 14,667 19,643 --------- --------- --------- --------- --------- Gross profit........................................... 8,687 12,830 12,197 9,404 10,991 --------- --------- --------- --------- --------- Operating expenses General and administrative............................... 1,991 1,992 2,758 1,915 2,448 Selling expenses......................................... 1,257 1,559 1,295 880 1,180 Research, development and engineering.................... 2,853 2,697 2,707 2,040 2,013 Employee stock ownership plan............................ 1,200 1,000 1,200 900 600 Nonrecurring bonus and employment contract termination expenses............................................... -- -- -- -- 3,592 --------- --------- --------- --------- --------- 7,301 7,248 7,960 5,735 9,833 --------- --------- --------- --------- --------- Income from operations..................................... 1,386 5,582 4,237 3,669 1,158 --------- --------- --------- --------- --------- Other income (expense) Interest expense......................................... (8) (8) (6) -- -- Gain on disposal of equipment............................ -- 14 -- -- -- Interest income.......................................... 46 30 269 197 169 Rental income, net....................................... -- -- 32 -- 62 Stockholder transaction expenses......................... -- -- -- -- (1,229) --------- --------- --------- --------- --------- 38 36 295 197 (998) --------- --------- --------- --------- --------- Income before provision for federal income tax............. 1,424 5,618 4,532 3,866 160 Provision for federal income tax........................... 493 1,934 1,518 1,352 74 --------- --------- --------- --------- --------- Net income................................................. $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these financial statements. F-53 AVTECH CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) STATED NUMBER OF VALUE OF SHARES COMMON RETAINED OUTSTANDING STOCK EARNINGS ----------- --------- --------- Balance at September 30, 1994.................................................. 323,541 $ 237 $ 5,260 Net income..................................................................... -- -- 931 ----------- --------- --------- Balance at September 30, 1995.................................................. 323,541 237 6,191 Net income..................................................................... -- -- 3,684 ----------- --------- --------- Balance at September 30, 1996.................................................. 323,541 237 9,875 Stock redemption............................................................... (4,612) (5) (171) Net income..................................................................... -- -- 3,014 ----------- --------- --------- Balance at September 30, 1997.................................................. 318,929 232 12,718 Exercise of stock options (Unaudited).......................................... 150,000 2,683 -- Tax benefit of stock options exercised (Unaudited)............................. -- 7,604 -- Net income (Unaudited)......................................................... -- -- 86 ----------- --------- --------- Balance at June 25, 1998 (Unaudited)........................................... 468,929 $ 10,519 $ 12,804 ----------- --------- --------- ----------- --------- --------- The accompanying notes are an integral part of these financial statements. F-54 AVTECH CORPORATION STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, -------------------- ------------------------------- JUNE 30, JUNE 25, 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities Net income................................................ $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization........................... 587 582 528 363 405 Gain on sale of property and equipment.................. -- (14) -- -- -- Deferred income tax provision........................... 54 947 (1,265) (1,150) 334 Changes in assets and liabilities: Accounts receivable................................... (1,797) (2,990) 2,470 2,899 (393) Inventories........................................... (1,504) 198 (1,021) (1,216) (578) Prepaid and other current assets...................... 63 (20) (114) (86) 126 Accounts payable...................................... 400 (152) 620 678 8 Accrued expenses...................................... 1,620 (872) 2,153 1,209 (2,977) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities.................................. 354 1,363 6,385 5,211 (2,989) --------- --------- --------- --------- --------- Cash flows from investing activities Purchases of property and equipment....................... (735) (509) (3,085) (370) (1,167) Proceeds from sale of assets.............................. -- 15 -- -- -- --------- --------- --------- --------- --------- Net cash used in investing activities................... (735) (494) (3,085) (370) (1,167) --------- --------- --------- --------- --------- Cash flows from financing activities Exercise of stock options................................. -- -- -- -- 1,143 Stock redemption.......................................... -- -- (176) (176) -- Capital lease obligations................................. (36) (36) (40) (27) (30) --------- --------- --------- --------- --------- Net cash used in financing activities.................................. (36) (36) (216) (203) 1,113 --------- --------- --------- --------- --------- Net (decrease) increase in cash and equivalents............................................... (417) 833 3,084 4,638 (3,043) Cash and equivalents at beginning of the period............................................. 636 219 1,052 1,052 4,136 --------- --------- --------- --------- --------- Cash and equivalents at end of the period................................................ $ 219 $ 1,052 $ 4,136 $ 5,690 $ 1,093 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these financial statements. F-55 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE COMPANY Avtech Corporation (the "Company") is a custom design and manufacturing firm established in 1963 to produce high-quality equipment for the aircraft industry. In 1970, the Company began to produce engineered products and has since focused its engineering and product development efforts on responding to specifications from original equipment aircraft manufacturers (OEMs). The Company's products fall into five main categories: 1. Aircraft communication control equipment (including audio control units, multiplexed audio systems and audio amplifiers). 2. Aircraft lighting controls (including ballasts, dimmers and flood lighting). 3. Power systems (including transformer rectifier units, power inverters and battery chargers). 4. Airborne facsimile terminals (AvFax). 5. Special products (including PDX intercoms, liquid-gauging and fill control, and frequency units). FINANCIAL STATEMENT PRESENTATION The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At September 30, 1996 and 1997, the Company maintained $549,000 and $119,000, respectively, of its cash and cash equivalents balances at one bank. At September 30, 1996 and 1997, the Company maintained $503,000 and $4,017,000, respectively, in a money market funds and bankers' acceptances. RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK Accounts receivable from trade customers are generally due within thirty days. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. All of the Company's sales are to businesses directly associated with the aviation industry (airlines, aircraft manufacturers, etc.). Approximately 70% of the Company's sales are to customers based in the United States. F-56 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed using the straight-line and accelerated methods over the following estimated lives: YEARS --------- Buildings............................................................................. 20-39 Building improvements................................................................. 10-39 Machinery and equipment............................................................... 5 Furniture, computer and other equipment............................................... 5-7 Maintenance and repairs are charged to operations when incurred. Additions and improvements are capitalized. When property, plant and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. INVENTORIES Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market. Costs of manufactured inventories include all direct materials, labor and an allocation of overhead. Market represents the lower of replacement cost or estimated net realizable value. REVENUE RECOGNITION Revenues from the sale of manufactured products are recorded when shipped. Reimbursements for nonrecurring engineering costs, which are expensed as incurred, are included in revenues at the time a negotiated settlement is reached with the customer. The Company's nonrecurring engineering revenues for the years ended September 30, 1995, 1996 and 1997 were $1,257,000, $4,042,000 and $527,000, respectively. Included within accounts receivable at September 30, 1996 are $3,384,000 of unbilled receivables which were collected in fiscal year 1997. INCOME TAXES Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in the asset and/or liability for deferred taxes. STOCK OPTION PLAN As permitted under Statement of Financial Accounting Standards No., 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees". F-57 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCRUED WARRANTIES The Company sells a majority of its products to customers along with various repair or replacement warranties. The terms of the warranties vary according to the customer and/or the product involved. The most common warranty period is the earlier of: a. 36 months from the date of delivery to the operator, or; b. 42 months from the date of manufacture Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product. Classification between short and long-term warranty obligations is estimated based on historical trends. UNAUDITED INTERIM RESULTS The financial information as of June 25, 1998 and for the nine months ended June 30, 1997 and June 25, 1998 is unaudited. In the opinion of the Company, the unaudited financial information is presented on a basis consistent with the audited financial statements and contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim period. The results of operations for the interim periods are not necessarily indicative of results of operations for the full year. NOTE 2 - INVENTORIES Inventories at September 30, 1996 and 1997 and June 25, 1998 (unaudited) consist of the following (amounts in thousands): SEPTEMBER 30, -------------------- JUNE 25, 1996 1997 1998 --------- --------- ----------- (UNAUDITED) Raw materials and components..................................... $ 2,488 $ 2,617 $ 3,218 Work in process.................................................. 1,285 2,014 1,912 Finished goods................................................... 460 623 702 --------- --------- ----------- $ 4,233 $ 5,254 $ 5,832 --------- --------- ----------- --------- --------- ----------- NOTE 3 - PROPERTY AND EQUIPMENT The Company owns property located immediately adjacent to its main facility. The property is not currently used for any rental or productive activity. In 1990, the property was condemned by the local authorities and is considered unsuitable for habitation in its current state. The current carrying value of $62,000 represents the original cost of the land and is lower than its estimated net realizable value. In 1997, the Company purchased a 20,275 square foot office building and an adjacent vacant lot for investment purposes. The net book value of the property was $2,134,000 at September 30, 1997. The Company leases the office space to tenants under one to three-year noncancelable operating leases. At F-58 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED) March 31, 1998, the building was fully occupied. Minimum future rentals to be received on noncancelable leases are as follows (amounts in thousands): YEAR ENDING SEPTEMBER 30, - ------------------------------------------------------------------ 1998.............................................................. $ 128 1999.............................................................. $ 20 The Company leases equipment under a five-year lease term. Based on the provisions of Statement No. 13, issued by the Financial Accounting Standards Board, these leases meet the criteria of capital leases and, accordingly, have been recorded as such. These assets are stated on the balance sheet at their capitalized cost of $194,000. Depreciation of $161,000 has been recognized through September 30, 1997. NOTE 4 - ACCRUED EXPENSES Accrued expenses at September 30, 1996 and 1997 consist of the following (amounts in thousands): SEPTEMBER 30, -------------------- 1996 1997 --------- --------- Employee compensation and related taxes........................................................ $ 875 $ 2,556 Employee stock option plan contribution........................................................ 1,000 1,200 Current portion of warranty reserve............................................................ 204 240 Other.......................................................................................... 41 47 --------- --------- $ 2,120 $ 4,043 --------- --------- --------- --------- NOTE 5 - DEFINED CONTRIBUTION PLANS The Company sponsors an employee stock ownership plan (ESOP) for the benefit of employees with twelve or more months of continuous service. Contributions are made to the plan at the discretion of the Company's Board of Directors. The Company's contributions for the years ended September 30, 1995, 1996 and 1997 were $1,200,000, $1,000,000 and $1,200,000, respectively. The Company also sponsors a cash or deferred compensation (401k) plan for the benefit of eligible employees. Under the plan, employees may elect to defer a portion of their compensation (subject to statutory limitations). Discretionary contributions by the Company may be made when authorized by the Board of Directors. No such contributions were made during the years ended September 30, 1995, 1996 and 1997. NOTE 6 - FEDERAL INCOME TAXES The provision (benefit) for federal income taxes is comprised of the following (amounts in thousands): YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1996 1997 --------- --------- --------- Current................................................................................ $ 439 $ 987 $ 2,783 Deferred............................................................................... 54 947 (1,265) --------- --------- --------- $ 493 $ 1,934 $ 1,518 --------- --------- --------- --------- --------- --------- F-59 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - FEDERAL INCOME TAXES (CONTINUED) The provision for federal income tax expense approximates the federal statutory rate for all periods presented. The Company is not required to pay state income taxes. Deferred tax assets and liabilities at September 30, 1996 and 1997 include the following (amounts in thousands): SEPTEMBER 30, -------------------- 1996 1997 --------- --------- DEFERRED TAX ASSETS Reserves........................................................................................ $ 335 $ 393 Compensatory stock options...................................................................... 416 471 Capitalized inventories......................................................................... 10 12 --------- --------- 761 876 DEFERRED TAX LIABILITIES Deferred revenue................................................................................ (1,150) -- --------- --------- $ (389) $ 876 --------- --------- --------- --------- The classification in the balance sheet between current and noncurrent deferred tax assets is based on the classification of the related asset that gives rise to the temporary difference. A deferred tax asset that is not related to an asset is classified according to the expected reversal date of the temporary difference. NOTE 7 - COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS The Company has commitments based on open purchase orders arising out of its normal business operations. As of September 30, 1996 and 1997, these commitments were $5,080,000 and $6,760,000, respectively. TERMINATION FOR CONVENIENCE CLAUSES The Company routinely enters into contractual commitments with customers to design and manufacture parts. These contracts contain "termination for convenience" clauses that permit recovery of costs incurred by the Company if the customer terminates the contract prior to its completion. These recoveries are included in sales when billed. F-60 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED) LEASING ARRANGEMENTS The Company leases a building under a five-year operating lease. The lease calls for monthly payments of $5,000 plus utilities, taxes and maintenance and expires in April 2001. The lessor has the right to terminate the lease at anytime by giving the Company at least twelve months written notice. The Company subleases a portion of its facilities under an operating lease that expires December 1998. The following is net rental expense under operating leases for the years ended September 30, 1995, 1996 and 1997 (amounts in thousands): YEAR ENDED SEPTEMBER 30, ------------------------------- 1995 1996 1997 --------- --------- --------- Rent expense.............................................................................. $ 60 $ 60 $ 60 Less: Sublease rentals.................................................................... (7) (11) (10) --- --- --- $ 53 $ 49 $ 50 --- --- --- --- --- --- The following is a schedule by years of the future minimum rentals under this lease (amounts in thousands): YEAR ENDING SEPTEMBER 30, LESSEE SUBLEASE NET - ------------------------------------------------------------------- ----------- ----------- --------- 1998........................................................... $ 60 $ 10 $ 50 1999........................................................... 60 11 49 2000........................................................... 60 11 49 2001........................................................... 60 11 49 ----- --- --------- $ 240 $ 43 $ 197 ----- --- --------- ----- --- --------- NOTE 8 - ECONOMIC DEPENDENCE A material part of the Company's business is dependent on one customer, the loss of which could have a material effect on the Company. For the years ended September 30, 1995, 1996 and 1997, approximately 29.5%, 24% and 46.9%, respectively, of revenues were attributable to this customer. At September 30, 1996 and 1997, accounts receivable from this customer represented approximately 41.1% and 23.4%, respectively, of total accounts receivable. NOTE 9 - STOCK OPTION PLANS Prior to 1993, the Company implemented a nonqualified compensatory stock option plan with the President. Under this Plan, options to purchase 90,000 shares of the Company's stock were granted at an option price of $2.70 per share. These options are currently exercisable by the President. During the year ended September 30, 1994, the Company and three key employees entered into employment contracts which voided all prior compensatory stock option plans other than that of the President's. Under these new contracts, the Company granted 20,000 shares to each of the three employees at an exercise price of $15 per share. Fair market value was $28 per share at the date of the grant. Each employee still employed at September 30, 1998, is entitled to exercise his option to purchase 20,000 fully F-61 AVTECH CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - STOCK OPTION PLANS (CONTINUED) vested shares. Accordingly, the Company has expensed $156,000 during each of the years ended September 30, 1995, 1996 and 1997. These shares, when exercised, cannot be sold until September 30, 2003. The Company has the first right to purchase the shares upon exercise but is not obligated to do so. The accumulated expense resulting from the difference between the exercise prices and fair market values at the respective date of grant has been classified as a long-term liability in deferred compensation. NOTE 10 - ADDITIONAL CASH FLOW INFORMATION Supplementary cash flow information for the years ended September 30, 1995, 1996 and 1997 is as follows (amounts in thousands): YEAR ENDED SEPTEMBER 30, ------------------------------ 1995 1996 1997 ------ ------ ------ Cash paid during the period for: Capital leases.................................. $ 36 $ 36 $ 40 ------ ------ ------ ------ ------ ------ Interest........................................ $ 10 $ 7 $ 5 ------ ------ ------ ------ ------ ------ Income taxes.................................... $-- $1,449 $2,900 ------ ------ ------ ------ ------ ------ NOTE 11 - SUBSEQUENT EVENT (UNAUDITED) In May 1998, the Company signed a definitive purchase agreement whereby all of the outstanding shares of the Company would be acquired by DeCrane Aircraft Holdings, Inc. The transaction was consummated on June 26, 1998. Prior to closing the transaction, all outstanding stock options were exercised and the income tax benefit resulting from the tax deduction allowed for the difference between the exercise price and the fair market value of the stock was recorded. The $7,604,000 income tax benefit from the stock options exercised is a noncash transaction for purposes of the statement of cash flows for the nine months ended June 25, 1998. Additionally, certain members of management were paid a one-time bonus at closing and the balance due pursuant to their employment contracts that were terminated immediately prior to closing. F-62 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Audio International, Inc. North Little Rock, Arkansas We have audited the accompanying consolidated balance sheets of Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits of the consolidated financial statements referred to in the preceding paragraph provide a reasonable basis for our opinion. In our previously issued auditors' reports dated April 4, 1996, and February 21, 1997, we did not express an opinion on the consolidated statements of income, stockholders' equity, or cash flows for the year ended December 31, 1995, since we had not audited such statements. In accordance with your subsequent instructions, we have now audited the consolidated statement of income, stockholders' equity, and cash flows for the year ended December 31, 1995, in accordance with generally accepted auditing standards. Accordingly, our present opinion on these financial statements, as presented herein, is different from that expressed in our previous reports. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Audio International, Inc. and subsidiary as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note 12, the Company prepared its financial statements for years prior to 1995 on the income tax basis of accounting. Effective January 1, 1995, the Company adopted generally accepted accounting principles for the preparation of its financial statements, and accordingly, appropriate adjustments have been made to retained earnings as of January 1, 1995. THOMAS & THOMAS Little Rock, Arkansas February 21, 1997 (Except for paragraph 3 above, as to which the date is December 17, 1997) F-63 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- ------------- (UNAUDITED) ASSETS Current assets Cash in financial institutions................................ $ 3 $ 46 $ 311 Repurchase agreements......................................... 471 1,543 467 Receivables Trade, net.................................................. 633 1,207 2,526 Employees and other......................................... 29 13 10 Inventories................................................... 831 1,503 1,538 Prepaid income taxes.......................................... 55 -- -- Deferred income taxes......................................... 30 38 350 --------- --------- ------ Total current assets........................................ 2,052 4,350 5,202 Property and equipment, net..................................... 1,243 1,299 1,538 Other assets Other investments............................................. -- 100 100 Utility deposits.............................................. 1 1 1 --------- --------- ------ Total assets................................................ $ 3,296 $ 5,750 $ 6,841 --------- --------- ------ --------- --------- ------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Construction contract payable................................. $ 269 $ -- $ -- Accounts payable, trade....................................... 438 426 272 Accrued expenses.............................................. 154 312 785 Income taxes payable.......................................... -- 817 471 Current portion of long-term debt............................. 39 44 45 --------- --------- ------ Total current liabilities................................... 900 1,599 1,573 --------- --------- ------ Long-term debt, excluding current portion....................... 579 724 702 Deferred income taxes........................................... 31 23 36 --------- --------- ------ Total liabilities........................................... 1,510 2,346 2,311 --------- --------- ------ Stockholders' equity Common stock, $1 par value, 1,000 shares authorized, 129 shares issued and outstanding............................... -- -- -- Additional paid-in capital.................................... 601 601 601 Contributed capital........................................... 90 90 90 Retained earnings............................................. 1,095 2,713 3,839 --------- --------- ------ Total stockholders' equity.................................. 1,786 3,404 4,530 --------- --------- ------ Total liabilities and stockholders' equity................ $ 3,296 $ 5,750 $ 6,841 --------- --------- ------ --------- --------- ------ The accompanying notes are an integral part of these financial statements. F-64 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) YEAR ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- (UNAUDITED) Sales and service revenues, net......................................... $ 5,182 $ 10,134 $ 7,535 $ 11,162 Cost of sales and service............................................... 2,710 4,667 3,527 6,180 --------- --------- --------- --------- Gross profit.......................................................... 2,472 5,467 4,008 4,982 Selling, general and administrative expenses............................ 2,174 2,926 1,959 3,230 --------- --------- --------- --------- Operating income...................................................... 298 2,541 2,049 1,752 Other income (expense) Investment income..................................................... 15 32 18 31 Interest expense...................................................... (28) (45) (34) (31) Gain (loss) on disposal of assets, net................................ (38) 11 5 (2) Other................................................................. -- 5 6 -- --------- --------- --------- --------- Income before income taxes.......................................... 247 2,544 2,044 1,750 Provision for income taxes.............................................. 66 926 733 624 --------- --------- --------- --------- Net income.......................................................... $ 181 $ 1,618 $ 1,311 $ 1,126 --------- --------- --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these financial statements. F-65 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE DATA) COMMON STOCK ----------------- NUMBER ADDITIONAL OF PAID-IN CONTRIBUTED RETAINED SHARES AMOUNT CAPITAL CAPITAL EARNINGS TOTAL ------- ------- --------- ----------- -------- ------ Balance, December 31, 1994................... 100 -- $ 1 $ 90 $ 853 $ 944 Restatement of beginning balance............. -- -- -- -- 61 61 Issuance of common stock..................... 29 -- 600 -- -- 600 Net income................................... -- -- -- -- 181 181 ------- ------- --------- --- -------- ------ Balance, December 31, 1995................... 129 -- 601 90 1,095 1,786 Net income................................... -- -- -- -- 1,618 1,618 ------- ------- --------- --- -------- ------ Balance, December 31, 1996................... 129 -- 601 90 2,713 3,404 ------- ------- --------- --- -------- ------ Net income (Unaudited)....................... -- -- -- -- 1,126 1,126 ------- ------- --------- --- -------- ------ Balance, September 30, 1997 (Unaudited)...... 129 -- $ 601 $ 90 $3,839 $4,530 ------- ------- --------- --- -------- ------ ------- ------- --------- --- -------- ------ The accompanying notes are an integral part of these financial statements F-66 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS YEAR ENDED DECEMBER ENDED 31, SEPTEMBER 30, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities Net income............................................................... $ 181 $ 1,618 $ 1,311 $ 1,126 --------- --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities (Gain) loss on disposal of assets, net................................. 38 (11) (2) 5 Depreciation........................................................... 94 151 81 104 (Increase) decrease in operating assets Accounts receivable, trade........................................... (103) (573) (763) (1,319) Accounts receivable, employee and other.............................. (22) 16 16 3 Inventories.......................................................... (472) (672) (578) (35) Prepaid income taxes................................................. (55) 55 55 -- Deferred income taxes................................................ -- (8) 30 (312) Increase (decrease) in operating liabilities Accounts payable..................................................... 353 (12) 110 (154) Accrued expenses..................................................... 22 158 144 473 Construction contract payable........................................ 269 (269) (269) -- Income taxes payable................................................. (137) 817 636 (346) Deferred income taxes................................................ 4 (8) (30) 13 --------- --------- --------- --------- Total adjustments, net............................................. (9) (356) (570) (1,568) --------- --------- --------- --------- Net cash provided by (used by) operating activities.................... 172 1,262 741 (442) --------- --------- --------- --------- Cash flows from investing activities Payments for purchase of property and equipment, net..................... (994) (197) (125) (348) Other investments........................................................ -- (100) -- -- Repayments of stockholder loans.......................................... (240) -- -- -- Other assets............................................................. (1) -- -- -- --------- --------- --------- --------- Net cash used by investing activities.................................. (1,235) (297) (125) (348) --------- --------- --------- --------- Cash flows from financing activities Proceeds from common stock issuance...................................... 600 -- -- -- Payments on long-term debt............................................... (15) (18) (14) (35) Proceeds from issuance of long-term debt................................. 597 168 152 14 --------- --------- --------- --------- Net cash provided by (used by) financing activities.................... 1,182 150 138 (21) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents................... 119 1,115 754 (811) Cash and cash equivalents, beginning of period............................. 355 474 474 1,589 --------- --------- --------- --------- Cash and cash equivalents, end of period................................... $ 474 $ 1,589 $ 1,228 $ 778 --------- --------- --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these financial statements F-67 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY Audio International, Inc. (the "Company"), an Arkansas Corporation, was incorporated January 2, 1987 for the primary purpose of designing, manufacturing and marketing audio and video systems for the aviation industry. On February 16, 1995, the Company formed a new corporation, Audio International Sales, Inc. (a Foreign Sales Corporation), in the Virgin Islands which is a wholly-owned subsidiary of the Company. Foreign sales accounted for approximately 7.2% and 6.9% of total revenues for the years ended December 31, 1995 and 1996, and approximately 6.2% and 13.9% of total revenues for the nine months ended September 30, 1996 and 1997, respectively. CONSOLIDATION The accompanying financial statements present the consolidated accounts of the Company and its wholly-owned subsidiary. Accordingly, the consolidated financial statements include all of the assets, liabilities, income, expenses, and cash flows for these companies. All significant intercompany transactions and balances have been eliminated. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. ALLOWANCE FOR DOUBTFUL ACCOUNTS Bad debts are provided on the allowance method based on historical experience and management's evaluation of outstanding accounts receivable. The balance of the allowance at December 31, 1995 and 1996, was $20,000, and at September 30, 1997 was $174,000. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Major renewals and betterments are capitalized while replacements, maintenance, and repairs which do not improve or extend the life of an asset are expensed. Property and equipment is depreciated over the estimated useful lives of the various assets using the straight-line method for financial statement purposes. INCOME TAXES Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Current income taxes are based on taxable income for federal and state tax reporting purposes. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, management considers all highly liquid debt instruments, including repurchase agreements, with an original maturity of three months or less to be cash equivalents. F-68 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Current operations are charged with all research, engineering, and product development expenses which amounted to approximately $376,000 and $640,000 for the years ended December 31, 1995 and 1996, and approximately $428,000 and $742,000 for the nine months ended September 30, 1996 and 1997, respectively. WARRANTY RESERVE The financial statements include product warranty reserves of approximately $25,000 and $62,000 at December 31, 1995 and 1996, and $109,000 at September 30, 1997. The reserve, which is classified as a current liability for financial statement purposes, is based upon estimates of future costs associated with fulfilling warranty obligations. ADVERTISING EXPENSE Advertising expenditures, including production cost related to various units utilized for demonstrations and display, are expensed as incurred. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash in financial institutions, repurchase agreements, and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. At times such deposits may be in excess of insurance limits. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts for the year ended December 31, 1995, have been reclassified to conform with the presentation of the December 31, 1996 amounts. The reclassifications have no effect on net income for the years ended December 31, 1995 or 1996. NOTE 2 - REPURCHASE AGREEMENTS The Company is party to a contract with a local bank under which all operating funds on deposit with the bank are invested in repurchase agreements on a daily basis. The bank maintains, as collateral for the F-69 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 2 - REPURCHASE AGREEMENTS (CONTINUED) benefit of the Company, certain securities in its investment portfolio. The collateral consists of United States government obligations, obligations of United States government agencies, or other obligations guaranteed by the United States government. The securities are held by an agent bank or registered in the agent's name as an owner or pledgee at the Federal Reserve Bank. Interest, at a rate determined by the bank, is paid on a daily basis. The agreements are repurchased by the bank upon presentation of any check or other withdrawal of funds from the Company's operating account. NOTE 3 - INVENTORIES Inventories consist of the following (amounts in thousands): DECEMBER 31, -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- ------------- (UNAUDITED) Raw materials $ 546 $ 863 $ 879 Work-in-process 147 403 492 Finished goods 138 237 167 --------- --------- ------ Total inventories $ 831 $ 1,503 $ 1,538 --------- --------- ------ --------- --------- ------ NOTE 4 - PROPERTY AND EQUIPMENT During 1995 the City of North Little Rock Industrial Development Corporation conveyed title to certain land to the Company for consideration of $10 and an agreement that the Company would locate its new facility on the property. This land, and the related contribution of capital, was recorded for financial statement purposes at its estimated fair market value of $90,000 at the date of receipt. The following is a summary of property and equipment (amounts in thousands): DECEMBER 31, ESTIMATED -------------- SEPTEMBER 30, USEFUL LIVES 1995 1996 1997 ------------ ------ ------ ------------- (UNAUDITED) Land, contributed....................... -- $ 90 $ 90 $ 90 Building and improvements............... 40 years 727 786 915 Machinery and equipment................. 3-7 years 536 658 846 Office furniture and equipment.......... 3-7 years 70 96 96 Motor vehicles.......................... 5 years 111 95 90 ------ ------ ------ 1,534 1,725 2,037 Accumulated depreciation.............. (291) (426) (499) ------ ------ ------ Net property and equipment.......... $1,243 $1,299 $1,538 ------ ------ ------ ------ ------ ------ The Company substantially completed construction of its new facility, and moved its operations from leased facilities, in December 1995. This change in facilities resulted in losses from abandonment of leasehold improvements of approximately $42,000. F-70 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 5 - OTHER INVESTMENTS In December 1996, the Company entered into a contract with an unrelated entity, whereby the Company advanced the entity $100,000 to be used to manufacture and develop certain products for the Company. The advance payment will be recovered through annual discounts on Company purchases of products from the entity over the term of the contract. NOTE 6 - BANK LINE OF CREDIT A revolving line of credit, which bears interest at the lender's prime rate, is provided to the Company under the terms of a credit agreement dated June 15, 1996. The terms of the agreement allow the Company to borrow up to $200,000. The line of credit is secured by amounts on deposit with the financial institution. There was no balance outstanding on this line of credit at December 31, 1995 or 1996, or at September 30, 1997. NOTE 7 - ACCRUED EXPENSES Accrued expenses consist of the following (amounts in thousands): DECEMBER 31, -------------- SEPTEMBER 30, 1995 1996 1997 ---- ---- ------------- (UNAUDITED) Payroll........................................... $ 52 $107 $366 Vacation.......................................... 36 54 54 Payroll taxes withheld and accrued................ 33 75 65 Reserve for warranties............................ 25 61 109 Other............................................. 8 15 191 ---- ---- ----- Total accrued expenses.......................... $154 $312 $785 ---- ---- ----- ---- ---- ----- NOTE 8 - LONG-TERM DEBT Long-term debt consists of the following (amounts in thousands): DECEMBER 31, -------------- SEPTEMBER 30, 1995 1996 1997 ---- ---- ------------- (UNAUDITED) Note payable to Arkansas Development Finance Authority; due in annual installments through May, 2011, including interest ranging from 5.25% to 6.0%, secured by property and equipment...... $597 $750 $724 Notes payable to bank; secured by vehicles; payable in monthly installments including interest at 7.3%, through February, 2000........ 21 18 23 ---- ---- ----- 618 768 747 Current portion................................... (39) (44) (45) ---- ---- ----- Long-term debt, excluding current portion....... $579 $724 $702 ---- ---- ----- ---- ---- ----- F-71 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 8 - LONG-TERM DEBT (CONTINUED) During the year ended December 31, 1996, the Company obtained permanent financing, which refinanced its interim note on its new facility. Thus, the note has been classified as long-term debt as of December 31, 1995 and 1996, for financial statement purposes. This debt requires a reserve account for monthly deposits to provide for the next installment of debt service. The balance in this account, which totaled $-0- and $43,000 at December 31, 1995 and 1996, respectively, and $43,000 at September 30, 1997, is included in Cash in Financial Institutions. The terms of the note also require the Company to meet certain restrictive debt covenants, which have been met as of December 31, 1995 and 1996 and September 30, 1997. Cash payments for interest on all debt amounted to $23,000 and $46,000 for the years ended December 31, 1995 and 1996, and $34,000 and $35,000 for the nine months ended September 30, 1996 and 1997, respectively. Maturities of long-term debt, based upon the Company's monthly sinking fund and other debt requirements, is as follows at December 31, 1996 (amounts in thousands): Year ending December 31, 1997.................................................................................................... $ 44 1998.................................................................................................... 39 1999.................................................................................................... 44 2000.................................................................................................... 41 2001.................................................................................................... 40 Thereafter.............................................................................................. 560 --------- Total................................................................................................. $ 768 --------- --------- Maturities of long-term debt based upon the Company's monthly sinking fund and other debt requirements, is as follows at September 30, 1997 (amounts in thousands): Twelve months ending September 30, 1998.................................................................................................... $ 45 1999.................................................................................................... 44 2000.................................................................................................... 43 2001.................................................................................................... 41 2002.................................................................................................... 40 Thereafter.............................................................................................. 534 --------- Total................................................................................................. $ 747 --------- --------- F-72 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 9 - INCOME TAXES Income tax expense (benefit) is summarized as follows (amounts in thousands): YEAR ENDED DECEMBER 31, --------------- 1995 1996 ---- ---- Current: Federal......................................... $61 $794 State........................................... 1 149 ---- ---- Total current................................. 62 943 ---- ---- Deferred: Federal......................................... 4 (14) State........................................... 0 (3) ---- ---- Total deferred................................ 4 (17) ---- ---- Total provision for income taxes............ $66 $926 ---- ---- ---- ---- The actual income tax expense differs from "expected" tax expense (computed by applying appropriate U.S. Federal corporate income tax rates to income before income taxes) primarily due to the effects of state income tax, Federal and state tax credits, nondeductible life insurance premiums, Foreign Sales Corporation income exclusions and entertainment expenses. Cash payments for income taxes amounted to $259,000 and $88,000 for the years ended December 31, 1995 and 1996, and $55,000 and $1,302,000 for the nine months ended September 30, 1996 and 1997, respectively. The Company's deferred tax assets and deferred tax liabilities are as follows (amounts in thousands): YEAR ENDED DECEMBER 31, --------------- 1995 1996 ---- ---- Current deferred tax assets, net.................. $30 $38 Noncurrent deferred tax liabilities, net.......... 31 23 ---- ---- Net deferred tax asset (liability).............. $(1) $15 ---- ---- ---- ---- The Company's deferred tax assets and deferred tax liabilities result primarily from the use of accelerated methods of depreciation for tax purposes; bad debt reserves, accrued warranty expense and accrued vacation expense being recorded for financial statement purposes; and different inventory valuations for tax and book purposes. In assessing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income, management believes it is more likely than not the Company will realize the benefits of these deductible differences. F-73 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 10 - EMPLOYEE BENEFIT PLAN The Company has adopted a retirement plan which qualifies under Section 401(k) of the Internal Revenue Code and therefore includes certain salary deferral features for eligible employees. Employees may elect to contribute up to fifteen percent of their gross earnings to the plan. The Company makes matching contributions equal to employee contributions up to 3% of each participating employee's salary. Matching contributions to the plan were approximately $25,000 and $40,000 for the years ended December 31, 1995 and 1996, and $29,000 and $41,000 for the nine months ended September 30, 1996 and 1997, respectively. NOTE 11 - BUSINESS CONCENTRATIONS The majority of the Company's sales and service revenues are generated through customers in the private aviation industry located throughout the United States. At any given time, certain customers may account for significant portions of the Company's business. The Company's largest six customers accounted for approximately 58% and 63% of net sales for the years ended December 31, 1995 and 1996, and 61% and 64% of net sales for the nine months ended September 30, 1996 and 1997, respectively. NOTE 12 - RESTATEMENT OF BALANCES Effective January 1, 1995, the Company adopted generally accepted accounting principles for the preparation of its financial statements. In previous years, the records and financial statements of the Company were prepared on the income tax basis of accounting. Certain adjustments have been applied to the beginning retained earnings in order to restate amounts in accordance with generally accepted accounting principles. An analysis of these adjustments, and the restated beginning retained earnings, is as follows (amounts in thousands): January 1, 1995 balance, as previously reported........................................................... $ 853 Adjustments for expense accruals and reserves............................................................. (70) Adjustments for inventory, property and equipment valuations.............................................. 131 --------- January 1, 1995 balance, as restated.................................................................... $ 914 --------- --------- NOTE 13 - COMMON STOCK ISSUANCE During 1995, the Company and its shareholders entered into an agreement under which twenty-nine shares of the Company's $1 par value capital stock were to be issued to a new shareholder in exchange for consideration of $600,000 deposited with the Company during 1995. In addition, the then existing shareholders of the Company each would sell seven shares of their capital stock to the new shareholder, creating a one-third interest for each of the three shareholders. This agreement was consummated February 20, 1996. For comparative financial statement purposes, certain reclassifications have been made to reflect this transaction as of December 31, 1995. Thus, at December 31, 1995 and 1996, one hundred and twenty-nine of the Company's one thousand authorized shares were considered to be issued and outstanding. F-74 AUDIO INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) NOTE 13 - COMMON STOCK ISSUANCE (CONTINUED) The stock acquisition agreement contained additional provisions requiring the employment of each of the three shareholders for a minimum of five years from the date of the agreement and various other provisions related to bonus arrangements and fringe benefits. NOTE 14 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT On November 14, 1997, the Company's stockholders entered into an acquisition agreement, under which all shares of the Company were acquired by DeCrane Aircraft Holdings, Inc. F-75 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS. ------------------------ TABLE OF CONTENTS PAGE ---- Summary................................................................... 2 Where You Can Get More Information........................................ 5 Summary Pro Forma Consolidated Financial Data............................. 10 Risk Factors.............................................................. 18 Recent Developments....................................................... 25 Use of Proceeds........................................................... 26 Capitalization............................................................ 27 Unaudited Pro Forma Consolidated Financial Data........................... 28 Selected Consolidated Financial Data...................................... 46 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 48 Business.................................................................. 57 Management................................................................ 73 Certain Relationships and Transactions.................................... 81 Description of Bank Credit Facility....................................... 84 Description of Notes...................................................... 86 The Initial Offering...................................................... 121 The Exchange Offer........................................................ 121 Certain Federal Income Tax Consequences................................... 127 Plan of Distribution...................................................... 128 Legal Matters............................................................. 128 Experts................................................................... 128 Index to Financial Statements............................................. F-1 SHARES DeCrane Aircraft Holdings, Inc. OFFER TO EXCHANGE 12% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 FOR 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED --------------------- PROSPECTUS --------------------- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS] PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER , 1998 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] DECRANE AIRCRAFT HOLDINGS, INC. 12% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 We issued the notes in exchange for our old 12% Series A Senior Subordinated Notes due 2008. The notes are identical to the old notes, except that certain transfer restrictions and registration rights relating to the old notes do not apply to the new notes. Interest on the notes is payable on March 30 and September 30 of each year, beginning March 30, 1999. We have the right to redeem any new notes at any time beginning September 30, 2003 at the redemption prices set forth on page [ ], plus accrued interest. In addition, before September 30, 2001, we may redeem up to 35% of the notes at a redemption price of 112% of their principal amount, plus interest, using proceeds from certain sales of our stock; PROVIDED that at least 65% of the principal amount of notes ever issued under the indenture remains outstanding immediately after such redemption. We will also have the right to redeem, and you will have the right to require us to purchase, the notes upon the occurrence of certain change of control events, at the prices set forth on page [ ]. The notes rank junior to our senior indebtedness and secured debt, including the debt owed under our bank credit facility. The notes rank equally with any future unsecured, senior subordinated debt. The notes are unconditionally guaranteed on a senior subordinated basis by all of our existing wholly-owned domestic subsidiaries, and rank junior to such grantors' senior and unsecured debt and equally with their future unsecured, senior debt. The notes will effectively rank junior to all liabilities of our subsidiaries that are not guarantors. As of September 30, 1998, on a pro forma basis, DeCrane Aircraft and its guarantor subsidiaries would have outstanding approximately $89.8 million of senior indebtedness, and the non-guarantor subsidiaries would have had approximately $1.9 million of outstanding liabilities, including trade payables. INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE [ ]. This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") in connection with offers and sales in market-making transactions at negotiated prices related to prevailing market prices. We do not intend to list the notes on any securities exchange. DLJSC has advised us that it intends to make a market in the notes; however, it is not obligated to do so and may stop at any time. We will not receive the proceeds of the sale of the notes but will bear the expenses of registration. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DONALDSON, LUFKIN & JENRETTE The date of this Prospectus is , 1999 [ALTERNATE RISK FACTOR FOR MARKET-MAKING PROSPECTUS] TRADING MARKET FOR THE NOTES There is no existing trading market for the notes. We cannot assure you that any market for the notes will develop, or about your ability to sell the notes or the price at which you may be able to sell them. If such a market were to develop, the notes could trade at prices that may be higher or lower than their initial offering price. That trading price could depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. We have also been advised by DLJSC that, subject to applicable laws and regulations, DLJSC currently intends to make a market in the new notes following completion of the exchange offer. However, DLJSC is not obligated to do so and it may discontinue or interrupt any such market-making at any time without notice. DLJSC may be deemed to be our "affiliate" (as defined in the Securities Act) and, as such, may be required to deliver a prospectus in connection with its market-making activities in the notes. Pursuant to the registration rights agreement we signed with DLJSC in connection with the initial offering of the old notes, we have agreed to use our best efforts to file and maintain a registration statement that would allow DLJSC to engage in market-making transactions in the notes for up to 90 days from the date on which we consummate the offer to exchange the notes for the old notes. We have agreed to bear substantially all the costs and expenses related to that registration. [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] USE OF PROCEEDS This Prospectus is delivered in connection with the sale of the notes by DLJSC in market-making transactions. We will not receive any of the proceeds from such transactions. [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] PLAN OF DISTRIBUTION This Prospectus is to be used by DLJSC in connection with offers and sales of the new notes in market-making transactions effected from time to time. DLJSC may act as a principal or agent for one party when acting as principal or as agent for both parties, and may receive compensation in the form of discounts and commissions, including from both parties when it acts as agent for both. Those sales will be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices. DLJ Merchant Banking Partners II, L.P. ("DLJMB") and certain of its affiliates beneficially own approximately 94% of the common stock of DeCrane Holdings. Thompson Dean, Susan C. Schnabel and Timothy J. White, each of whom is a principal of DLJMB, are members of the Board of Directors of DeCrane Holdings and the issuer of the notes, DeCrane Aircraft. DLJ Capital Funding, Inc. acted as syndication agent in connection with our bank credit facility, for which it received certain customary fees and expenses. DLJ Bridge Finance Inc. purchased the bridge notes which were refinanced by the initial offering of old notes, for which it received customary fees and expenses. DLJSC acted as dealer/ manager in connection with the tender offer in the DLJ acquisition, as arranger in connection with the bank credit facility, and as the initial purchaser of the old notes, and is the financial advisor to DeCrane Holdings and DeCrane Aircraft. See "Recent Developments--The DLJ Acquisition." DLJMB, DLJ Capital Funding, Inc. and DLJ Bridge Finance, Inc. are affiliates of DLJSC. DLJSC has informed us that it does not intend to confirm sales of the new notes to any accounts over which it exercises discretionary authority without the prior specific written approval of such transactions by the customer. We have also been advised by DLJSC that, subject to applicable laws and regulations, DLJSC currently intends to make a market in the new notes following completion of the exchange offer. However, DLJSC is not obligated to do so and it may discontinue or interrupt any such market-making at any time without notice. Any such market-making activity also will be subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934, as amended. We cannot assure you that any market for the notes will develop, or about your ability to sell their new notes or the price at which you may be able to sell them. See "Risk Factors--Trading market for the notes." DLJSC has, from time to time, provided investment banking and other financial advisory services to us, for which it has received customary compensation, and will provide such services and financial advisory services to us in the future. DLJSC was the initial purchaser in the initial offering of the old notes and received an underwriting discount of approximately $3.3 million in connection therewith. See "Certain Relationships and Related Transactions." We have entered into a Registration Rights Agreement with DLJSC regarding the use by DLJSC of this Prospectus. Pursuant to such agreement, we have agreed to bear all registration expenses incurred under that agreement, and to indemnify DLJSC against certain liabilities, including liabilities under the Securities Act. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COST AND CHARGED TO END OF CLASSIFICATION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD - -------------------------------------------- ------------ ------------ -------------- ----------- ------------ YEAR ENDED DECEMBER 31, 1995 Allowance of doubtful accounts.............. $ 243,000 $ 66,000 $ 62,000(A) $ 112,000 $ 259,000 Reserve for excess, slow moving and potentially obsolete material............. $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000 YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts............. $ 259,000 $ 68,000 $ 71,000(B) $ 19,000 $ 379,000 Reserve for excess, slow moving and potentially obsolete material............. $ 1,154,000 $ 1,055,000 -- $ 116,000 $ 2,093,000 YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts............. $ 379,000 $ 111,000 $ 174,000(C) $ 177,000 $ 487,000 Reserve for excess, slow moving and potentially obsolete material............. $ 2,093,000 $ 1,374,000 $ 59,000(D) $ 162,000 $ 3,364,000 - ------------------------ (A) Comprised of the following: Effect of foreign currency translation; $ 3,000 Recovery of amounts previously written off. 59,000 --------- $ 62,000 --------- --------- (B) Comprised of the following: Effect of foreign currency translation; $ (4,000) Recovery of amounts previously written off; 20,000 Attributable to companies acquired. 55,000 --------- $ 71,000 --------- --------- (C) Attributable to company acquired. (D) Attributable to companies acquired. S-1 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - --------- ---------------------------------------------------------------------------------------------- --------- 3.1.1 [reserved] 3.1.2 [reserved] 3.2.1 Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. 3.2.2 Bylaws of DeCrane Aircraft Holdings, Inc. 3.3.1 Certificate of Incorporation of Aerospace Display Systems, Inc. (formerly ADS Acquisition Inc.) 4.1 [reserved] 4.2 [reserved] 4.3 [reserved] 4.4 [reserved] 5.1 Opinion of Spolin & Silverman (re legality)* 10.1 [reserved] 10.2 Amended and Restated Investors' Agreement dated as of October 2, 1998 10.3 [reserved] 10.4 [reserved] 10.5 Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries and Hollingsead International 10.6 Employment Agreement dated July 17, 1998 between the Company and R. Jack DeCrane 10.7 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company 10.8 Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC. 10.9 [reserved] 10.10 Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc. 10.11 [reserved] 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 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation and Hollingsead International for real property in Garden Grove, California 10.14 [Reserved] 10.15.1 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number 6-5752-0002 10.15.2 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components, Number 6-5752-0004 10.15.3 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January 1, 1995 through December 31, 1999 10.16 Purchase Agreement dated as of October 1, 1998 between Matsushita Electronic Industrial Co., Ltd and Cory Components Inc. 10.17.1 1998 General Terms Agreement between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number BCA-6-5632-0032 10.17.2 Special business provisions between the Boeing Company and Tri-Star Electronics International, Inc. dated July 1, 1998, number STD-6-5632-0097 12.1 DeCrane Aircraft Holdings, Inc. Earnings to Fixed Charges Ratio 12.2 DeCrane Holdings Co. Earnings to Fixed Charges Ratio EXHIBIT NUMBER DESCRIPTION PAGE - --------- ---------------------------------------------------------------------------------------------- --------- 21.1 List of Subsidiaries of Registrant 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Spolin & Silverman LLP (included in Exhibit 5.1)* 23.3 Consent of Thomas & Thomas 24.1 Power of Attorney 27 Financial Data Schedule - ------------------------ * To be filed by Amendment.