AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
REGISTRATION NO. 333-70365
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
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
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.
JAMES BRYCE CLARK, ESQ.
SPOLIN & SILVERMAN LLP
100 Wilshire Boulevard, Suite 940
Santa Monica, California 90401
(310) 576-1221
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE.
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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. / /
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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(2)
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), Tri-Star Electronics International,
Inc. (a California corporation, EIN 34-1687242), PATS, Inc. (a Maryland
corporation, EIN 52-1067232), Flight Refueling (a Maryland corporation, EIN
52-1112836), Patrick Aircraft Tank Systems (a Maryland corporation, EIN
52-1185155), PATS Aircraft and Engineering Corporation (a Maryland
corporation, EIN 52-1096518) and PATS Support, Inc. (a Maryland corporation,
EIN 52-2010611).
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457; fee previously paid.
(3) The 12% Series B Senior Subordinated Notes due 2008 are unconditionally,
jointly and severally guaranteed by the guarantors on an unsecured, senior
subordinated basis. No separate consideration will be paid in respect of the
guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8, MAY DETERMINE.
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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 MARCH 3, 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 15 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 March , 1999.
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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 AVTECH CORPORATION,
DETTMERS INDUSTRIES, INC. AND PATS, 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 $206.6
million for the twelve months ended December 31, 1998, and Adjusted EBITDA of
$44.5 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");
- auxiliary fuel tank systems, which extend the flight range of commercial
and corporate aircraft, and auxiliary power systems for ground power;
- 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
2
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.
By successfully combining and growing complementary businesses, we have
achieved strong revenue growth. From 1994 to 1998, our revenues increased from
$47.1 million to $150.5 million on a historical basis. That increase resulted in
a compound annual growth rate of 33.7%. During the same period, DeCrane
Aircraft's EBITDA increased from $5.2 million to $26.9 million on a historical
basis, representing a combined annual growth rate of 50.8%. 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 twelve acquisitions, most recently Avtech
Corporation and Dettmers Industries, Inc. in June 1998, and PATS, Inc. in
January 1999.
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 January
1999, we acquired 100% of the stock of PATS, Inc., a manufacturer of auxiliary
fuel tank systems and other products. See "Recent Developments--PATS, Inc."
RISK FACTORS
Investing in the notes involves certain risks. See the section on "Risk
Factors."
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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 p.m. 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 December 31, 1998, on a pro forma basis, DeCrane Aircraft
and its subsidiary guarantors would have had approximately
$124.4 million of senior indebtedness outstanding, and the
non-guarantor subsidiaries would have had approximately $2.2
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 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.
TWELVE MONTHS
ENDED
DECEMBER 31,
1998(1)
-------------
(DOLLARS IN
THOUSANDS)
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues........................................................................................... $ 206,645
Gross profit (2)................................................................................... 65,614
Operating income................................................................................... 21,570
Provision for income taxes......................................................................... 1,056
Loss before extraordinary item..................................................................... (4,269)
OTHER PRO FORMA FINANCIAL DATA:
EBITDA (3)......................................................................................... $ 41,283
EBITDA margin...................................................................................... 20.0%
Adjusted EBITDA (4)................................................................................ $ 44,476
Adjusted EBITDA margin............................................................................. 21.5%
Depreciation and amortization (5).................................................................. $ 15,265
Capital expenditures............................................................................... 6,314
Cash interest expense.............................................................................. 22,927
Adjusted EBITDA to cash interest expense........................................................... 1.9x
Ratio of earnings to fixed charges (6)............................................................. --
OTHER OPERATING DATA:
Bookings (7)....................................................................................... $ 212,962
Backlog at end of period (8)....................................................................... 115,057
AS OF
DECEMBER 31,
1998 (1)
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(DOLLARS IN
THOUSANDS)
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 6,022
Working capital.................................................................................... 53,503
Total assets....................................................................................... 383,315
Total debt (9)..................................................................................... 224,715
Stockholder's equity............................................................................... 97,921
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, 1998: (i)
the Avtech, Dettmers and PATS acquisitions; (ii) the DLJ acquisition; and
(iii) the initial offering. See "Recent Developments," "The Initial
Offering" and "Unaudited Pro Forma Consolidated Financial Data."
(2) Net of $4.4 million of non-cash acquisition related charges 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:
TWELVE MONTHS
ENDED
DECEMBER 31,
1998
-------------
(DOLLARS IN
THOUSANDS)
EBITDA (See Note 3 above).......................................................... $ 41,283
Adjustment for nonrecurring charges:
Workforce reductions............................................................. 2,430
Engineering costs................................................................ 350
Reduction of corporate expenses.................................................. 310
Non-cash stock option compensation expense....................................... 73
Expiration of employment contract for a former shareholder of a previously
acquired company............................................................... 30
-------------
Total adjustments.............................................................. 3,193
-------------
Adjusted EBITDA.................................................................... $ 44,476
-------------
-------------
(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) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent 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. There was a pro forma deficiency of earnings to fixed charges for
the year ended December 31, 1998 of $3.1 million.
(7) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(8) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of the Company's receipt of orders
and the speed with which those orders are filled. See "Business-- Backlog."
(9) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below presents summary historical consolidated financial data for
DeCrane Aircraft. The summary historical financial data for the years ended
December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four
months ended December 31, 1998 were derived from audited financial statements of
DeCrane Aircraft. 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 -----------
MONTHS FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------ AUGUST 31, DECEMBER
1994 1995 1996(1) 1997(2) 1998(3) 31, 1998(3)
--------- --------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077 $ 60,356
Gross profit(4)......... 10,685 12,376 15,707 28,656 29,976 17,617
Operating income........ 1,760 1,835 4,251 11,995 9,278 4,195
Interest expense........ 3,244 3,821 4,248 3,154 2,350 6,852
Provision for income
taxes (benefit)(5).... 613 1,078 712 3,344 2,892 (2,668)
Income (loss) before
extraordinary item.... (2,429) (3,446) (817) 5,254 3,189 (324)
Extraordinary loss from
debt refinancing(6)... (264) -- -- (2,078) -- (2,229)
Net income (loss)....... (2,693) (3,446) (817) 3,176 3,189 (2,553)
OTHER FINANCIAL DATA:
EBITDA(7)............... $ 5,196 $ 5,471 $ 7,602 $ 16,915 $ 13,636 $ 13,247
EBITDA margin........... 11.0% 9.8% 11.7% 15.5% 15.1% 21.9%
Depreciation and
amortization(8)....... $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604
Capital
expenditures(9)....... 1,016 1,203 5,821 3,842 1,745 1,813
Ratio of earnings to
fixed charges(10)..... -- -- 1.0x 3.3x 3.0x --
OTHER OPERATING DATA:
Bookings(11)............ $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 94,439 $ 54,021
Backlog at end of
period(12)............ 24,493 19,761 44,433 49,005 84,184 75,388
AS OF
DECEMBER
31,
BALANCE SHEET DATA: 1998(13)
-----------
Cash and cash equivalents....................................................... $ 3,518
Working capital................................................................. 46,033
Total assets.................................................................... 330,927
Total debt(14).................................................................. 186,765
Stockholders' equity............................................................ 97,921
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) 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 periods subsequent to their
acquisitions. The results of operations for the four months ended December
31, 1998 also reflect the DLJ acquisition.
(4) Net of $4.4 million of non-cash charges for the four months ended December
31, 1998 to reflect cost of sales based on the fair value of inventory
acquired in connection with the DLJ acquisition.
(5) 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.
(6) 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; (ii) the write-offs, 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 and the refinancing of
the bridge notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization and non-cash
acquisition related charges described in Note 4 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.
(8) 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.
(9) Includes $4.4 million for the year ended December 31, 1996 related to the
acquisition of a manufacturing facility. See "Business--Acquisition
History."
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent 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. There was a deficiency of earnings to fixed charges for the
13
years ended December 31, 1994 and 1995 and the four months ended December
31, 1998 of $1.8 million, $2.3 million and $2.9 million, respectively.
(11) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(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
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 that affect many businesses, such as:
- - fuel prices and general economic conditions that 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;
- - risks associated with Year 2000 performance standards; 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 December 31, 1998, on a pro forma basis, we would have had total consolidated
indebtedness of approximately $224.7 million, and would have available $26.7
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.
15
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 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 December 31, 1998, on a pro forma basis, DeCrane Aircraft and the
guarantor subsidiaries would have had outstanding about $124.4 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.
16
- 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 December 31, 1998, on a pro forma basis, our non-guarantor
subsidiaries would have had $2.2 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.
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, we would have had a $4.3 million loss before
extraordinary item for the twelve months ended December 31, 1998. 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.
17
- 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.
- 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, 1998, were
Boeing (including McDonnell Douglas) and Matsushita Avionics Systems
("Matsushita"). Boeing accounted for approximately 29.6% of our consolidated
revenues for that year, and Matsushita for approximately 5.0%, 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. Boeing recently announced internal studies indicating that about
one-fourth of its product lines are not likely to be profitable as currently
conducted. Boeing did not disclose which lines fail to return break-even or
positive returns; however, it has previously acknowledged that some of its
commercial airplane programs were not meeting expectations. Boeing plans to
announce specific growth and profit information for its commercial aircraft
product lines later in 1999.
We generally sell components and services to Matsushita pursuant to purchase
orders, rather than under long-term contracts. However, we do have a supply
agreement for connectors through September 1999. On a pro forma basis, in the
twelve months ended December 31, 1998 as compared to the same period in 1997,
our sales to Boeing increased $25.5 million while our sales to Matsushita
declined by $1.8 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. Boeing has characterized the
economic situation in Asia as a risk to its deliveries over the next few
18
years. It has previously announced scheduled production slowdowns for 747s (from
five aircraft per month to three and a half, in the second quarter of 1999) and
777s (from seven aircraft per month to five, in the fourth quarter of 1999).
Boeing continues to reassess its production rates based on Asian demand and
expects to make downward revisions based on its customer requirements. 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 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
19
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 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 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."
CHANGES TO TECHNOLOGY
Some of our products, and some of the systems in which our products are
used, may be subject to competition from other technologies, including
alternative products or systems that have not been invented or are not currently
used on aircraft.
20
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 DLJ Merchant
Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (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 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
21
- 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 DLJMB and 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 initial offering of the old notes in October 1998
to the initial purchaser 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 stock") for
$34.0 million. In connection with the latter, DeCrane Holdings also issued to
the DLJMB Funds warrants to acquire an additional 5.0% 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 all of this
amount and used the cash to reduce our indebtedness.
23
PATS, INC.
In January 1999, we acquired 100% of the stock of PATS, Inc. for a purchase
price of approximately $41.5 million (including the assumption of debt), subject
to adjustments for changes to its net working capital, and reserves for certain
environmental and other indemnities made by the selling 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. See "Business--Products and Services--Auxiliary
Fuel Systems." PATS also is a supplier of auxiliary power units which supply
ground power to aircraft.
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 December 31, 1998 and on a
pro forma basis. This table should be read in conjunction with DeCrane
Aircraft's consolidated financial statements and related notes, the "Unaudited
Pro Forma Consolidated Financial Statements" and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in the Prospectus.
AS OF
DECEMBER 31, 1998
-------------------------
ACTUAL PRO FORMA(1)
---------- -------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents.............................................................. $ 3,518 $ 6,022
---------- -------------
---------- -------------
Total debt:
Bank credit facility
Term facility...................................................................... $ 79,888 $ 99,888
Revolving credit facility.......................................................... 5,800 23,300
Senior Subordinated Notes due 2008................................................... 100,000 100,000
Other debt........................................................................... 1,077 1,527
---------- -------------
Total debt............................................................................. 186,765 224,715
Stockholder's equity................................................................... 97,921 97,921
---------- -------------
Total capitalization................................................................... $ 284,686 $ 322,636
---------- -------------
---------- -------------
- ------------------------
(1) Pro forma reflects the additional borrowings required to fund the PATS
acquisition.
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 of two types: the "Acquisition Adjustments" and the
"Offering Adjustments." The Acquisition Adjustments reflect the 1998 Avtech,
Dettmers and DLJ acquisitions and the 1999 PATS acquisition. For additional
information on these acquisitions, see the notes to DeCrane Aircraft's
consolidated financial statements included elsewhere in this Prospectus. 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 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 the notes to DeCrane Aircraft's consolidated
financial statements.
An unaudited pro forma consolidated statement of operations is presented for
the year ended December 31, 1998. The statement reflects the Acquisition
Adjustments and the Offering Adjustments as if they had occurred as of January
1, 1998. The unaudited pro forma consolidated balance sheet reflects the 1999
Acquisition Adjustments as of December 31, 1998; all of the 1998 Acquisition and
Offering Adjustment events had occurred by that date and are therefore reflected
in historical amounts.
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 financial statements and related notes
of DeCrane Aircraft, Avtech and PATS 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
DECEMBER 31, 1998
DECRANE ACQUISITION ADJUSTMENTS(2)
AIRCRAFT ---------------------------
HISTORICAL PATS, INC.
(SUCCESSOR)(1) HISTORICAL(3) ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 3,518 $ 2,504 $-- $ 6,022
Accounts receivable, net............................................... 30,441 3,273 -- 33,714
Inventories............................................................ 34,281 11,916 -- 46,197
Deferred income taxes.................................................. 4,300 132 -- 4,432
Prepaid expenses and other current assets.............................. 3,897 58 -- 3,955
-------------- ------------- ----------- ---------
Total current assets................................................. 76,437 17,883 -- 94,320
-------------- ------------- ----------- ---------
Property and equipment, net.............................................. 28,160 4,855 -- 33,015
-------------- ------------- ----------- ---------
Other assets, principally intangibles, net...............................
Goodwill and other intangibles......................................... 216,544 -- 27,376(4) 243,920
Deferred financing costs............................................... 8,787 -- 875(5) 9,662
Other assets........................................................... 999 1,399 -- 2,398
-------------- ------------- ----------- ---------
Net other assets, principally intangibles............................ 226,330 1,399 28,251 255,980
-------------- ------------- ----------- ---------
$330,927 $24,137 $28,251 $383,315
-------------- ------------- ----------- ---------
-------------- ------------- ----------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term borrowings.................................................. $ 283 $-- $-- $ 283
Current portion of long-term obligations............................... 1,529 6,226 (6,226)(6) 1,529
Accounts payable....................................................... 6,383 2,559 -- 8,942
Accrued expenses....................................................... 18,466 5,633 975(7) 25,074
Income taxes payable................................................... 3,743 1,246 -- 4,989
-------------- ------------- ----------- ---------
Total current liabilities............................................ 30,404 15,664 (5,251) 40,817
-------------- ------------- ----------- ---------
Long-term liabilities
Revolving credit facility.............................................. 5,800 -- 17,500(8) 23,300
Term facility.......................................................... 79,000 -- 20,000(8) 99,000
Senior subordinated notes.............................................. 100,000 -- -- 100,000
Other long-term obligations............................................ 153 3,501 (3,051)(6) 603
Deferred income taxes.................................................. 16,990 -- -- 16,990
Other long-term liabilities............................................ 659 -- 4,025(7) 4,684
-------------- ------------- ----------- ---------
Total long-term liabilities.......................................... 202,602 3,501 38,474 244,577
-------------- ------------- ----------- ---------
Stockholder's equity..................................................... 97,921 4,972 (4,972)(9) 97,921
-------------- ------------- ----------- ---------
$330,927 $24,137 $28,251 $383,315
-------------- ------------- ----------- ---------
-------------- ------------- ----------- ---------
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
TWELVE MONTHS ENDED DECEMBER 31, 1998
ACQUISITION ADJUSTMENTS
---------------------------------------------------
DECRANE AIRCRAFT HISTORICAL COMPANIES ACQUIRED (10)
(1) -------------------------------------
--------------------------- AVTECH DETTMERS OFFERING
(PREDECESSOR) (SUCCESSOR) CORPORATION INDUSTRIES PATS, INC. ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Revenues.............. $90,077 $ 60,356 $20,984 $2,013 $ 33,348 $ (133)(11) $-- $206,645
Cost of sales......... 60,101 42,739 13,267 1,454 24,321 (851)(12) -- 141,031
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
Gross profit.......... 29,976 17,617 7,717 559 9,027 718 -- 65,614
Selling, general and
administrative
expenses............ 15,719 10,274 3,695 760 4,906 (1,728)(13) -- 33,626
Nonrecurring
acquisition
expenses............ 3,632 -- 1,229 -- 250 (5,111)(14) -- --
Nonrecurring bonuses
and employment
contract termination
expenses............ -- -- 3,592 -- 480 (4,072)(15) -- --
ESOP contribution..... -- -- 300 -- 230 (530)(16) -- --
Amortization of
intangible assets... 1,347 3,148 -- -- -- 5,923(17) -- 10,418
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
Operating income
(loss).............. 9,278 4,195 (1,099) (201) 3,161 6,236 -- 21,570
Interest expense
(income)............ 2,350 6,852 (60) 13 296 12,918(18) 1,867(21) 24,236
Other expenses
(income)............ 847 335 (35) -- -- (600)(19) -- 547
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
Income (loss) before
provision for income
taxes and
extraordinary
item................ 6,081 (2,992) (1,004) (214) 2,865 (6,082) (1,867) (3,213)
Provision for income
taxes (benefit)..... 2,892 (2,668) (322) -- 1,013 874(20) (733)(22) 1,056
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
Income (loss) before
extraordinary item
(23)................ $ 3,189 $ (324) $ (682) $ (214) $ 1,852 $ (6,956) $(1,134) $ (4,269)
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
------------- ----------- ----------- ---------- ---------- ----------- ----------- ---------
OTHER FINANCIAL DATA:
EBITDA (24)........... $13,636 $ 13,247 $ (837) $ (197) $ 3,640 $ 11,794 $-- $ 41,283
Depreciation and
amortization (25)... 4,358 4,604 262 4 479 5,558 -- 15,265
Capital
expenditures........ 1,745 1,813 1,145 4 1,607 -- -- 6,314
Cash interest
expense............. 2,378 6,474 -- 13 319 12,033 1,710 22,927
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data.
28
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) As of December 31, 1998, reflects DeCrane Aircraft's financial position
subsequent to the DLJ acquisition and the initial offering. For the year
ended December 31, 1998, reflects DeCrane Aircraft's historical results of
operations for the eight months ended August 31, 1998 (Predecessor) and the
four months ended December 31, 1998 (Successor).
(2) Reflects DeCrane Aircraft's purchase of all of the outstanding stock of
PATS in January 1999. Sources and uses of funds for the acquisition, had it
occurred on December 31, 1998, are as follows (dollars in thousands):
SOURCES:
Senior credit facility borrowings:
Term B facility................................................ $ 20,000
Acquisition facility........................................... 16,500
Working capital facility....................................... 1,000
Customer prepayment.............................................. 5,000
---------
Total Sources................................................ $ 42,500
---------
---------
USES:
Purchase of common stock......................................... $ 31,212
PATS debt repaid upon acquisition................................ 9,277
Estimated acquisition fees and expenses.......................... 1,136
Credit facility amendment fees and expenses...................... 875
---------
Total Uses................................................... $ 42,500
---------
---------
(3) Reflects the financial position of PATS as of December 31, 1998.
(4) Reflects the excess purchase price of the PATS acquisition over the fair
value of net assets acquired. For purposes of the Pro Forma Consolidated
Financial Data, we allocated the excess purchase price to goodwill which is
being amortized on a straight-line basis over 30 years. Such allocation is
preliminary and may change upon the completion of the final valuation of
the net assets acquired.
(5) Reflects credit facility amendment fees and expenses capitalized as
deferred financing costs.
(6) Reflects the repayment of PATS' debt upon acquisition.
(7) Reflects a customer prepayment for product to be delivered by PATS through
2001 used by DeCrane Aircraft to finance the acquisition. The prepayment
will be offset semiannually against future amounts receivable and has a
7.5% effective interest rate.
(8) Reflects senior credit facility borrowings for the PATS acquisition. The
terms of the senior credit facility are described in the DeCrane Aircraft
historical consolidated financial statements and related notes included
elsewhere in this Prospectus.
(9) Reflects the elimination of PATS' stockholders' equity upon acquisition.
(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
January 1, 1998 to: (i) June 25, 1998 for Avtech; (ii) June 29, 1998 for
Dettmers; and (iii) December 31, 1998 for PATS.
(11) Reflects the elimination of intercompany sales.
29
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):
Decrease in depreciation expense (a)................................. $ (658)
Elimination of intercompany sales.................................... (133)
Work force reductions attributable to merging the companies
acquired........................................................... (60)
---------
Net increase (decrease) in cost of sales............................. $ (851)
---------
---------
- ------------------------
(a) 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):
Decrease in compensation expense (a)............................... $ (1,775)
Decrease in investor relations expenses (b)........................ (221)
Other, net (c)..................................................... 268
---------
Net decrease in selling, general and administrative expenses....... $ (1,728)
---------
---------
- ------------------------
(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 and PATS on behalf of their stockholders related to their
respective acquisitions 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 acquisitions of Avtech and PATS by DeCrane Aircraft.
(16) Reflects a reduction in expense attributable to the termination of the
Employee Stock Ownership Plans in conjunction with the acquisitions of
Avtech and PATS.
30
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(17) Reflects a net increase in amortization expense pertaining to the
amortization of goodwill and other intangible assets related to the DLJ and
PATS acquisitions on a straight-line basis as follows (dollars in
thousands):
AMOUNT YEAR
---------- ---------
Elimination of Predecessor amortization................................... $ (1,347)
DLJ acquisition amortization:
Goodwill................................................................ $ 166,674 30 3,704
FAA certifications...................................................... 30,391 15 1,351
Engineering drawings.................................................... 9,138 15 406
Assembled workforce..................................................... 6,588 7 627
Tradenames, trademarks and patents...................................... 3,908 5 to 12 269
PATS acquisition amortization (a)
Goodwill................................................................ 27,376 30 913
-----------
Net increase in amortization.......................................... $ 5,923
-----------
-----------
- ------------------------
(a) Amortization expense may change upon completion of the final purchase
price allocation (see Note 4).
31
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):
INTEREST
RATE OR TERM AMOUNT EXPENSE
--------------------- --------- ---------
Elimination of historical net interest expense (a):
Pertaining to debt refinanced (b):
Interest expense............................................. $ (2,524)
Deferred financing cost amortization, commitment fees and
expenses................................................... (191)
Interest income (c)............................................ 207
Successor net interest expense................................. (6,794)
Pro forma interest expense (d):
Interest expense:
Revolving credit facility:
Working capital facility................................... LIBOR (e) +2.75% $ 8,112 630
Acquisition facility....................................... LIBOR (e) +2.75% 16,500 1,282
Term facility:
Term A..................................................... LIBOR (e) +2.75% 35,000 2,720
Term B..................................................... LIBOR (e) +3.00% 65,000 5,213
Bridge notes................................................. Prime + (f) 100,000 10,625
Customer prepayment interest................................. 7.50% 5,000 375
Deferred financing cost amortization:
Revolving credit facility.................................... 6 years (g) 1,277 213
Term facility:
Term A..................................................... 6 years (h) 894 200
Term B..................................................... 7 years (h) 2,025 315
Bridge notes................................................. 7.5 years (g) 3,180 424
Commitment fees and expenses................................... 223
---------
Net increase in interest expense............................. $ 12,918
---------
---------
- --------------------------
(a) Excludes interest expense pertaining capital lease obligations and other
debt obligations not refinanced.
(b) Includes DeCrane Aircraft Predecessor debt refinanced in conjunction
with the DLJ acquisition and Dettmers debt not acquired and PATS debt
refinanced in conjunction with their acquisitions by DeCrane Aircraft.
See the notes to the DeCrane Aircraft and PATS consolidated financial
statements included elsewhere in this Prospectus for a description of the
debt refinanced.
(c) Interest income earned from invested surplus cash balances prior to
acquisition.
(d) Pro forma for the DLJ and PATS acquisitions as if they had occurred on
January 1, 1998.
(e) Calculations based on LIBOR at 5.02%.
(f) Calculations based on Prime at 8.5%, the rate in effect during the
period the bridge notes were issued and outstanding, plus 2.125%.
(g) Deferred financing costs are amortized on a straight-line basis over the
term of the agreement.
(h) 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 an increase in the provision for income taxes as a result of a
change in pro forma taxable income and elimination of the $2.6 million one
time benefit caused by reversal of DeCrane Aircraft's
32
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
deferred tax valuation allowance. The effective tax rate differs from the
U.S. federal statutory rate due to goodwill amortization related to
acquisitions not deductible for income tax purposes.
(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):
INTEREST
RATE OR TERM AMOUNT EXPENSE
--------------------- --------- ---------
Elimination of bridge notes interest expense:
Interest expense.............................................. Prime + (a) $ 100,000 $ (10,625)
Deferred financing cost amortization.......................... 7.5 years (b) 3,180 (424)
Senior subordinated notes due 2008:
Interest expense.............................................. 12.00% 100,000 12,000
Deferred financing cost amortization (c)...................... 10 years (d) 5,810 581
Revolving credit facility:
Interest expense.............................................. LIBOR (e) + 2.75% 4,610 358
Commitment fees and expenses.................................. (23)
---------
Net increase in interest expense.............................. $ 1,867
---------
---------
- --------------------------
(a) Calculations based on Prime at 8.50%, the rate in effect during the
period the bridge notes were issued and outstanding, plus 2.125%.
(b) Deferred financing costs are amortized on a straight-line basis over the
term of the agreement.
(c) Includes $1.2 million for the value ascribed to the warrants issued by
DeCrane Holdings in conjunction with the sale of the units in the initial
offering.
(d) Deferred financing costs are amortized using the effective interest
method.
(e) Calculations based on LIBOR at 5.02%.
(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 the DLJ acquisition, deferred financing costs of
$347,000, 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, were 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.
(24) EBITDA equals operating income plus depreciation, amortization and non-cash
acquisition related charges to reflect cost of sales based on the fair
value of inventory acquired in connection with the DLJ acquisition. 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.
33
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents historical consolidated financial data of
DeCrane Aircraft as of and for each of the four years in the period ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998 derived from the audited financial statements. 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)
-----------------------------------------------------------
EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- AUGUST 31,
1994 1995 1996(1) 1997(2) 1998(3)
--------- --------- ----------- --------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077
Cost of sales(5)............................................... 36,407 43,463 49,392 80,247 60,101
--------- --------- ----------- --------- -------------
Gross profit................................................... 10,685 12,376 15,707 28,656 29,976
Selling, general and administrative expenses................... 7,716 9,426 10,747 15,756 15,719
Nonrecurring charges(6)........................................ -- -- -- -- 3,632
Amortization of intangible assets.............................. 1,209 1,115 709 905 1,347
--------- --------- ----------- --------- -------------
Operating income............................................... 1,760 1,835 4,251 11,995 9,278
Interest expense............................................... 3,244 3,821 4,248 3,154 2,350
Terminated debt offering expenses.............................. -- -- -- -- 600
Other expenses, net............................................ 332 382 108 243 247
--------- --------- ----------- --------- -------------
Income (loss) before provision for income taxes and
extraordinary item........................................... (1,816) (2,368) (105) 8,598 6,081
Provision for income taxes (benefit)(7)........................ 613 1,078 712 3,344 2,892
--------- --------- ----------- --------- -------------
Income (loss) before extraordinary item........................ (2,429) (3,446) (817) 5,254 3,189
Extraordinary loss from debt refinancing(8).................... (264) -- -- (2,078) --
--------- --------- ----------- --------- -------------
Net income (loss).............................................. $ (2,693) $ (3,446) $ (817) $ 3,176 $ 3,189
--------- --------- ----------- --------- -------------
--------- --------- ----------- --------- -------------
OTHER FINANCIAL DATA:
Cash flows from operating activities........................... $ (2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,014
Cash flows from investing activities........................... (993) (1,462) (24,016) (27,809) (87,378)
Cash flows from financing activities........................... 3,028 41 21,051 22,957 89,871
EBITDA(9)...................................................... 5,196 5,471 7,602 16,915 13,636
EBITDA margin.................................................. 11.0% 9.8% 11.7% 15.5% 15.1%
Depreciation and amortization(10).............................. $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358
Capital expenditures(11)....................................... 1,016 1,203 5,821 3,842 1,745
Ratio of earnings to fixed charges(12)......................... -- -- 1.0x 3.3x 3.0x
OTHER OPERATING DATA:
Bookings(13)................................................... $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 94,439
Backlog at end of period(14)................................... 24,493 19,761 44,433 49,005 84,184
(SUCCESSOR)
-------------
FOUR MONTHS
ENDED
DECEMBER 31,
1998(4)
-------------
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 60,356
Cost of sales(5)............................................... 42,739
-------------
Gross profit................................................... 17,617
Selling, general and administrative expenses................... 10,274
Nonrecurring charges(6)........................................ --
Amortization of intangible assets.............................. 3,148
-------------
Operating income............................................... 4,195
Interest expense............................................... 6,852
Terminated debt offering expenses.............................. --
Other expenses, net............................................ 335
-------------
Income (loss) before provision for income taxes and
extraordinary item........................................... (2,992)
Provision for income taxes (benefit)(7)........................ (2,668)
-------------
Income (loss) before extraordinary item........................ (324)
Extraordinary loss from debt refinancing(8).................... (2,229)
-------------
Net income (loss).............................................. $ (2,553)
-------------
-------------
OTHER FINANCIAL DATA:
Cash flows from operating activities........................... $ 1,008
Cash flows from investing activities........................... (1,813)
Cash flows from financing activities........................... (1,597)
EBITDA(9)...................................................... 13,247
EBITDA margin.................................................. 21.9%
Depreciation and amortization(10).............................. $ 4,604
Capital expenditures(11)....................................... 1,813
Ratio of earnings to fixed charges(12)......................... --
OTHER OPERATING DATA:
Bookings(13)................................................... $ 54,021
Backlog at end of period(14)................................... 75,388
34
AS OF DECEMBER 31,
-------------------------------------------------------
(PREDECESSOR) (SUCCESSOR)
------------------------------------------ -----------
1994 1995 1996(1) 1997(2) 1998(15)
--------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 236 $ 305 $ 320 $ 206 $ 3,518
Working capital................................ 11,459 12,583 10,486 24,772 46,033
Total assets................................... 37,685 36,329 69,266 99,137 330,927
Total debt(16)................................. 23,874 24,672 42,250 38,838 186,765
Mandatorily redeemable preferred stock and
common stock warrants........................ 2,329 1,633 6,879 -- --
Stockholders' equity (deficit)................. 766 (1,697) 1,236 39,527 97,921
- ------------------------
(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) 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.
(4) Reflects the results of operations subsequent to the DLJ acquisition
(Successor).
(5) Includes $4.4 million of non-cash charges for the four months ended December
31, 1998 to reflect cost of sales based on the fair value of inventory
acquired in connection with the DLJ acquisition.
(6) Represents non-capitalizable transaction costs associated with the DLJ
acquisition.
(7) 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. For the four months ended December 31, 1998,
includes a $2.6 million benefit from the reduction of the deferred tax
valuation allowance.
(8) Represents: (i) the write-offs 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-offs, 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-offs, 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 and the refinancing of the bridge notes during the four months
ended December 31, 1998.
(9) 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
35
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.
(10) 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.
(11) Includes $4.4 million for the year ended December 31, 1996 related to the
acquisition of a manufacturing facility. See "Business--Acquisition
History."
(12) 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 four months ended
December 31, 1998 of $1.8 million, $2.3 million and $2.9 million,
respectively.
(13) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(14) 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."
(15) Reflects the financial position of Avtech and Dettmers and the DLJ
acquisition.
(16) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
36
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 twelve acquisitions of businesses
or assets, the most recent of which, PATS, was acquired in January 1999. 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
aircraft 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.
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 and DLJMB Warrants 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. Assets acquired and liabilities assumed have been recorded at
their estimated fair values based on an independent appraisal. The purchase
price was allocated to the assets acquired based on their estimated fair values
as follows: (i) $4.4 million to inventory; (ii) $2.6 million to fixed assets;
and (iii) $50.0 million to certain identifiable intangible assets. The excess of
the purchase price over the fair value of the net assets acquired totalling
$70.0 million was allocated to goodwill. The inventory step-up was expensed as
the goods were sold during the four months ended December 31, 1998. The
intangible assets, other than goodwill, are being amortized on a straight-line
basis over periods between five and fifteen years. Goodwill is being 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 $65.0
million amortizing loan maturing in seven years (the "Term B loan"), which was
increased from $45.0 to $65.0 million at the time of the PATS acquisition. An
amount of $112,500 was amortized in 1998. Scheduled aggregate amortization is
$1,087,500 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."
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 1.50% for
37
base rate borrowings and 2.75% for Euro-Dollar borrowings for the first six
months following the January 1999 amendment (other than the Term B loan, which
has a margin of 1.75% for base rate borrowings and 3.00% for Euro-Dollar
borrowings). After the first six months, the applicable margin 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, DeCrane Holdings
preferred stock and DLJMB Warrants to the DLJMB Funds. The proceeds of those
sales were contributed to DeCrane Aircraft. The DeCrane Holdings preferred stock
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 stock 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.
RESULTS OF OPERATIONS
The following table sets forth the items in our consolidated statements of
operations as percentages of its revenues for the periods indicated. The
percentages for the years ended December 31, 1996 and 1997 reflect the
historical results of operations prior to the DLJ acquisition (Predecessor). The
percentages for the year ended December 31, 1998 reflects the combined
historical results of operations for the eight months ended August 31, 1998
prior to the DLJ acquisition (Predecessor) and the four months ended December
31, 1998 subsequent to the DLJ acquisition (Successor).
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Revenues............................................................................. 100.0% 100.0% 100.0%
Cost of sales........................................................................ 75.9 73.7 68.4
--------- --------- ---------
Gross profit......................................................................... 24.1 26.3 31.6
Selling, general and administrative expenses......................................... 16.5 14.5 19.7
Amortization of intangible assets.................................................... 1.1 0.8 3.0
--------- --------- ---------
Operating income..................................................................... 6.5 11.0 8.9
Interest expense..................................................................... 6.5 2.9 6.1
Other expense, net................................................................... 0.2 0.2 0.8
--------- --------- ---------
Income (loss) before provision for income taxes,
and extraordinary item............................................................. (0.2) 7.9 2.0
Provision for income taxes........................................................... (1.1) (3.1) (0.1)
--------- --------- ---------
Income (loss) before extraordinary item.............................................. (1.3) 4.8 1.9
Extraordinary loss from debt refinancing............................................. -- (1.9) (1.5)
--------- --------- ---------
Net income (loss).................................................................... (1.3)% 2.9% 0.4%
--------- --------- ---------
--------- --------- ---------
38
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $41.6 million, or 38.2%, to $150.5 million for
the year ended December 31, 1998 from $108.9 million for the year ended December
31, 1997. Revenues increased primarily due to the inclusion of $20.2 million of
revenues from Audio International, which was acquired on November 14, 1997, the
inclusion of $25.2 million of revenues from Avtech Corporation, which was
acquired on June 26, 1998, and the inclusion of $3.3 million of revenues from
Dettmers Industries, Inc., which was acquired on June 30, 1998. These revenue
increases were somewhat offset by continued softness in the Company's electrical
contact markets, where we experienced a sales decline of approximately $8.6
million for the year ended December 31, 1998 compared with the same period last
year.
GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to $47.6
million for the year ended December 31, 1998 from $28.7 million for the year
ended December 31, 1997. Gross profit as a percent of revenues increased to
31.6% for the year ended December 31, 1998 from 26.3% for the year ended
December 31, 1997. The improvement in gross profit was attributable to increased
overall sales volume, particularly from recently acquired companies, which have
generally higher gross margins. The improvements in gross profit and gross
margin were somewhat offset by the decline in revenues from electrical contact
sales and the expensing during the period of the fair market value step-up to
inventory associated with the DLJ acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (referred to as SG&A herein) expenses increased $13.8 million, or
87.3%, to $29.6 million for the year ended December 31, 1998 from $15.8 million
for the year ended December 31, 1997. SG&A expenses as a percent of revenues
increased to 19.7% for the year ended December 31, 1998 from 14.5% for the year
ended December 31, 1997. SG&A expenses increased primarily due to the inclusion
of SG&A expenses from Audio, Avtech and Dettmers, the non-capitalizable
transaction costs associated with the DLJ acquisition, and the increase in
research and development costs related to new product introductions at Audio and
Dettmers.
OPERATING INCOME. Operating income increased $1.5 million to $13.5 million
for the year ended December 31, 1998 from $12.0 million for the year ended
December 31, 1997. Operating income as a percent of revenues decreased to 8.9%
for year ended December 31, 1998 from 11.0% for the year ended December 31,
1997. The increases in operating income during the first eight months of 1998,
and from the addition of Avtech and Dettmers, were more than offset by the
higher amortization expenses associated with those acquisitions as well as the
DLJ acquisition.
INTEREST EXPENSE. Interest expense increased $6.0 million, or 187.5%, to
$9.2 million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. This increase resulted primarily from the higher debt
levels associated with the DLJ acquisition.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1998 we
decreased our provision for income taxes by $3.2 million to $0.2 million from
$3.4 million for the year ended December 31, 1997, as a result of lower income
before taxes and the reduction of our deferred tax asset valuation allowance by
$2.6 million. This decrease was significantly offset by an increase in
non-deductible expenses, particularly the amortization of intangible assets,
during the same period. We have approximately $17.4 million and $0.6 million in
loss carry forwards available at December 31, 1998 for federal and state income
tax purposes.
EXTRAORDINARY LOSSES FROM DEBT REFINANCING. During the year ended December
31, 1998, we incurred a $2.2 million extraordinary charge, net of an estimated
$1.5 million income tax benefit, as a result of the refinancing of the bridge
notes with a units offering consisting of notes and warrants. During the year
ended December 31, 1997, we incurred a $2.1 million extraordinary charge, net of
an estimated
39
$1.4 million income tax benefit, as a result of a debt refinancing with the
proceeds from our initial public offering.
NET INCOME (LOSS). Net income decreased $2.6 million to $0.6 million for
the year ended December 31, 1998 compared to $3.2 million for the same period in
1997 primarily due to the higher amortization, interest and other expenses
associated with the DLJ acquisition.
BOOKINGS AND BACKLOG. Bookings increased $36.4 million, or 32.5%, to $148.5
million for the year ended December 31, 1998 compared to $112.1 million for the
same period in 1997. The increase in bookings for 1998 includes $21.0 million
attributable to Audio, $15.4 million attributable to Avtech and $2.9 million
attributable to Dettmers. As of December 31, 1998, we had a sales order backlog
of $75.4 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, 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
40
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.
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. Cash increased $3.3 million during 1998.
For the year ended December 31, 1998, we generated positive cash flow from
operating activities of $4.0 million. 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 $6.6 million for the year ended December 31, 1998 from
higher overall sales. Unbilled receivables comprised $3.5 million of this
increase. Inventories decreased $2.2 million for the year ended December 31,
1998, due to improved inventory management at several subsidiaries as well as
the sale of certain contact product lines and the disposal of certain obsolete
inventory items. Accounts payable decreased $2.9 million for the year ended
December 31, 1998 as a result of payment of various assumed transaction expenses
in the acquisitions of 1998 and an agreement with a new gold supplier for
significantly lower prices in exchange for shorter payment terms. Accrued
expenses, however, increased $5.9 million for the year ended December 31, 1998,
primarily as a result of significant interest accruals.
Net cash used in investing activities was $89.2 million during the year
ended December 31, 1998. Of this amount, $83.6 million was used for the Avtech
acquisition and $2.2 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 $3.6 million on capital expenditures during the
year ended December 31, 1998, which was lower than $4.5 million originally
anticipated because the actual cash outlays for our information systems upgrade
program were delayed until 1999. 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 provided by financing activities was $88.3 million for the year
ended December 31, 1998. In connection with the DLJ acquisition, we entered into
a new bank credit facility that initially provided for term loan borrowings in
the aggregate principal amount of $80.0 million, now increased to $99.9 million,
and revolving loan borrowings up to an aggregate principal amount of $50.0
million, including $25.0 million for working capital purposes which expires in
2004 (See Note 10 to the consolidated financial statements included elsewhere in
this Prospectus). In 1998, prior to the DLJ acquisition, we also completed a
follow-on common stock offering and used the $34.8 million of net proceeds to
reduce amount outstanding under our credit facility, and borrowed $85.8 million
under our then-existing senior credit facility to finance the Avtech and
Dettmers acquisitions.
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
41
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 PRONOUNCEMENT
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 January 1, 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
process which we began on a company-wide basis 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 whose
functioning is dependent upon computer-controlled systems is not
42
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 newly-discovered 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.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union 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 started on January 1, 1999. According to the
European Council Resolution of July 7, 1997, the transition 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) July 1, 2002, when 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, we do not know whether the adoption of the Euro will
affect the enforceability, or the denomination of payment obligations under, our
commercial agreements in currencies to be replaced by the Euro.
43
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 $206.6 million for the twelve months ended December 31, 1998, and Adjusted
EBITDA of $44.5 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");
- auxiliary fuel tank systems and auxiliary power systems;
- 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 1994 to 1998, our revenues increased from
$47.1 million to $150.5 million on a historical basis. That increase resulted in
a compound annual growth rate of 33.7%. During the same period, our EBITDA
increased from $5.2 million to $26.9 million on a historical basis, representing
a combined annual growth rate of 50.8%. 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 twelve acquisitions, most recently PATS, Inc. in
January 1999.
44
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 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 OEMs of regional and corporate aircraft (fewer than 100
passengers), including Bombardier, Dassault and Gulfstream and soon to include
the Boeing Business Jet and the Airbus A319 corporate jet. 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. 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 and a number 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. The aviation industry has been consolidating at an
increasing pace in recent years, and we expect that consolidation will continue
for the foreseeable future.
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 CURRENT MARKET
OUTLOOK released by Boeing in early 1998 (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. Boeing has, however, recently
announced production cutbacks in several of its lines for 1999 and 2000. Boeing
continues to re-evaluate its production schedules in response to instability in
its Asian markets, and to assess the profitability of its various product lines.
See "Risk Factors--Instability of Asian Market" and "Risk Factors--Dependence on
Key Customers."
45
INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. We believe that the total
commercial regional aircraft fleet will grow over the next ten years. The 1998
Boeing Report projects that worldwide revenue passenger kilometers (called
"RPKs") will increase at a compound annual growth rate of 5.0% over that period.
We believe that this increase will drive demand for regional aircraft production
as well, due to:
- 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. We believe that the following
factors will drive increased demand for new corporate aircraft:
- 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.
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
46
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
twelve 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
1999 PATS Auxiliary fuel & power systems
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;
- 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.
47
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 twelve 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 and other
similar 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;
- the primary supplier of cockpit audio control systems to Boeing; and
- the primary supplier of auxiliary fuel systems to the Boeing Business Jet
program.
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.
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 February 1, 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;
48
- 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 eight 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 SYSTEMS INTEGRATION SERVICES. Our systems integration services
began in the in-flight passenger telecommunications market. Beginning in 1995,
we expanded 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).
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 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 estimated 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
49
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 seven principal classes of
products and services are:
SHARE OF 1998 SALES
ON A PRO FORMA
CLASS BASIS
----------------------------- -------------------
- cockpit audio, About 22%
communications, lighting and
power and control devices
- electrical contacts About 17%
- auxiliary fuel systems and About 16%
auxiliary power units
- connectors and harness About 15%
assemblies
- integration of cabin and About 11%
flight deck systems
- entertainment and cabin About 10%
management products
- dichroic LCD devices About 7%
No other product or service accounted for more than 5% of our pro forma
revenues in 1998.
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 a variety of other commercial
aircraft safety system components, including warning tone generators,
temperature and de-icing monitoring systems, steep approach monitors and low
voltage power supplies for TCAS.
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.
AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. Through our newest
subsidiary, PATS, we manufacture and install auxiliary fuel tanks for commercial
and corporate aircraft. Our unique design and tank construction have made us a
leader in the auxiliary fuel tank market. We have a contract with Boeing's
Business Jet program ("BBJ") to supply 120 aircraft with multiple auxiliary fuel
tanks. In connection with our acquisition of PATS, Boeing agreed to make certain
modifications to the contract and to pre-pay $5.0 million against future
deliveries of the systems. We believe that the auxiliary fuel tanks will permit
the BBJ 737-700 to compete with long-range aircraft such as the Gulfstream G-V
and
50
Bombardier's Global Express. We also manufacture auxiliary power units which
provide ground power to aircraft.
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.
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.
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.
51
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 several hundred 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
February 1, 1999, we own and/or manage slightly over 200 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.
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 February 1, 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
52
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 February 1, 1999, we had eight
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
We estimate that in 1998, 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 aircraft repair and
modification companies. In 1998, on a pro forma basis, our two largest customers
were Boeing (including McDonnell Douglas) and Matsushita. Boeing accounted for
approximately 29.6%, and Matsushita for approximately 5.0%, of our 1998
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
53
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, 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
54
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.
55
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
- --------------------------------------------------- ---------------------------------------------------
- cockpit audio, - Becker Avionics, Inc.
communications, lighting and power - Crane ELDEC Corp.
and control devices - Diehl GmbH & Co.
- Gables Engineering Inc.
- Page Aerospace, Inc.
- electrical contacts - Amphenol Corporation
- Deutsch Engineered Connecting Devices (a division
of Deutsch Co.)
- ITT Cannon (a division of ITT Industries, Inc.)
- auxiliary fuel systems and auxiliary power units - Marshall Engineering
- connectors - AMP, Inc.
- ITT Cannon
- Radiall S.A.
- entertainment and cabin management products - Aerospace Lighting Corporation
- Baker Electronics
- DPI Labs
- Grimes Aerospace Company
- Nellcor Puritan Bennett Inc.
- Pacific Systems Corporation
- integration of cabin and flight deck avionics - Electronic Cable Specialists ("ECS")
systems - Engineering departments of airlines
- Numerous independent airframe maintenance and
modification companies
- dichroic LCD devices - Cristalloid, Inc.
BACKLOG
As of December 31, 1998, we had an aggregate sales order backlog of $115.1
million compared to $113.2 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 December 31, 1998, we had 1,451 employees (including 44 temporary
employees), of whom 206 were in engineering (including 4 temporary employees),
68 were in sales, 1,040 were in manufacturing operations (including 36 temporary
employees) and 137 were in finance and administration (including 4 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.
56
FACILITIES
We lease most of our principal facilities, as described in the following
table.
APPROX. LEASE
LOCATION DESCRIPTION SQ. FT. EXPIRATION
- ----------------------------------------------- ------------------------------------------- --------- -----------
Georgetown, DE................................. Manufacturing facility 85,000 2041
El Segundo, CA................................. Manufacturing and engineering facility 81,300 2005
Columbia, MD................................... Manufacturing facility and offices 65,923 2007
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 2002
Lugano, Switzerland............................ Manufacturing facility 21,000 2001
Irvine, CA..................................... Manufacturing facility 16,400 1999
Seattle, WA.................................... Storage facility 10,000 2001
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
We also 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. Additionally, 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.
57
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." Another facility, which has not
been cited, discovered volatile organic compounds during groundwater sampling in
1998, and has entered a voluntary cleanup program. We are indemnified for an
amount in excess of the estimated costs of the program.
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
in June 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.
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 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 provided for a complete release and settlement of all claims
arising out of the facts set forth
58
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 was terminated.
Two 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 the two subsidiaries are indemnified for any such
liability and for the further cost of defense of the action. A third subsidiary
was named as a defendant but has been dismissed from the case without prejudice.
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.
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.
59
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 Chairman of the Board of Directors
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
60
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.
61
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, 1998, 1997 and 1996.
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------- ------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
YEAR SALARY BONUS (1) AWARDS SAR(2) PAYOUT (3)
--------- --------- --------- ----------- ----------- ----------- --------- -----------
R. Jack DeCrane..... 1998 $ 281,761 $1,044,000 $ 30,151 50,000 --
Chief Executive 1997 244,744 220,000 -- 50,000 $ 29,411
Officer 1996 206,600 146,000 7,813 34,028 --
and Director(4)
Charles H. Becker... 1998 $ 206,948 $ 160,000 $ 14,678 -- --
President and Chief 1997 174,492 102,000 6,168 15,000 $ 18,000
Operating Officer(5) 1996 148,750 65,000 9,103 19,850 30,586
R.G. MacDonald(6)... 1998 $ 212,744 $ 107,000 $ 20,260 -- --
1997 184,859 102,000 10,536 4,000 --
1996 177,437 82,000 13,200 -- --
John R. Hinson ..... 1998 $ 136,155 $ 126,000 $ 3,872 -- --
Chief Financial 1997 108,400 33,500 2,112 -- --
Officer and 1996 88,273 28,500 2,083 -- --
Secretary
Robert A. 1998 $ 131,115 $ -- $ 9,856 -- --
Rankin(7)......... 1997 149,309 103,000 7,158 15,000 --
1996 139,375 65,000 12,838 19,850 --
- ------------------------
(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. 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.
(6) Mr. MacDonald served as President through December 1996 and Vice Chairman of
the Board of Directors through August 1998.
(7) Mr. Rankin served as Chief Financial Officer, Secretary and Treasurer until
August 1998.
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,
1998, pursuant to the share incentive plan
62
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
OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION ------------------------
NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10%
- ------------------------------------------- ------------ --------------- ----------- ------------- ---------- ------------
R. Jack DeCrane............................ 50,000 100% $ 16.875 2007 $ (1) $ (1)
Charles H. Becker.......................... -- --
R.G. MacDonald............................. -- --
John R. Hinson............................. -- --
Robert A. Rankin........................... -- --
- ------------------------
(1) DeCrane Aircraft cancelled all options for common stock, and all holders
thereof were paid $23.00 per share, shortly after the grant of these
options.
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,
1998.
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..................... -- $3,347,850 $ 0/0 $ 0/0
Charles H. Becker................... -- $ 811,419 0/0 0/0
R.G. MacDonald...................... -- $1,299,422 0/0 0/0
John R. Hinson...................... -- $ 107,092 0/0 0/0
Robert A. Rankin.................... -- $ 811,419 0/0 0/0
- ------------------------
(1) Based on the common stock share price of $23.00 per share as of August 28,
1998, 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 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 DeCrane Aircraft and R. Jack DeCrane
replacing his prior
63
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 in August 1998 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.
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.
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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 DeCrane Aircraft 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.
65
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 February 1, 1999 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, ----------------------------
PARTIALLY NUMBER OF
NAME OF BENEFICIAL OWNER (1) DILUTED(2) PERCENTAGE(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 holder of
warrants assumes that the particular holder, and no-one else, fully
exercises all rights 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
66
investors: DLJ Merchant Banking Partners II-A, L.P.; DLJ Offshore Partners
II, C.V. ("Offshore"); 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 305,000 reserved for issuance for outstanding warrants).
DeCrane Holdings is authorized to issue up to 2,500,000 shares of DeCrane
Holdings 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.
67
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.
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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 DeCrane Aircraft, 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 DeCrane Aircraft'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, DeCrane Aircraft 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
69
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, we extended our Share Incentive
Plan for employees to independent non-management directors of DeCrane Aircraft
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."
70
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 initially included 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 in the original amount of $35.0 million which
matures on August 28, 2004 and a Term B facility in the original amount of $45.0
million which matures on August 28, 2005. The Term B facility was increased to
$65.0 million in January 1999 by a First Amendment to the facility, in
connection with our acquisition of PATS. 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 generally bear interest based on a
margin over, at our option, the base rate or the Euro-Dollar rate. For the first
six months after the January 1999 amendment, the margin for the Term A loan and
revolving credit facility is 1.50% for base rate borrowings and 2.75% for
Euro-Dollar borrowings, and the margin for the Term B loan is 1.75% for base
rate borrowings and 3.00% for Euro-Dollar borrowings. Thereafter, the margin
will vary based upon DeCrane Aircraft's ratio of total debt to EBITDA (as
defined in the bank credit agreement): ranging from 0.0% to 1.50% over the
alternate base rate and from 1.00% to 2.75% over the reserve adjusted
Euro-Dollar rate, for the revolving credit facility and Term A facility, and
from 0% to 1.25% over the base rate and from 1.25% to 3.00% over the reserve
adjusted Euro-Dollar rate, for the Term B facility. The applicable margins and
commitment fees are 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 bank credit agreement). We will pay commitment
fees at a rate equal to 0.5% per annum on the unused portion of the working
capital facility and at a rate equal to 0.5% 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.
We 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 is 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, which was
amended as to the Term B loans by the January 1999 amendment:
TERM A LOAN TERM B LOAN
YEAR AMORTIZATION AMORTIZATION
- ------------------------------------------------------------------ ------------- -------------
1................................................................. 0.0% 0.9%
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................................................................. -- 94.1%
----- -----
100.0% 100.0%
----- -----
----- -----
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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,
- 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, 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 foregoing 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 foregoing 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."
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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 December 31, 1998,
DeCrane Aircraft and the Guarantors would have had outstanding approximately
$124.4 million of Senior Indebtedness and DeCrane Aircraft's non-Guarantor
subsidiaries would have had approximately $2.2 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
73
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.
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"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
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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
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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
77
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
78
(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;
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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.
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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
81
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;
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(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;
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(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
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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
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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."
86
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,
87
(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.
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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;
89
(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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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"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.
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"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
102
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.
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"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
104
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).
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"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
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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.
107
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.
108
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
109
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
110
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.
111
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 THIS 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.
112
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 COMPANY, EXCHANGE AGENT
BY MAIL: BY OVERNIGHT COURIER:
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
ATTENTION: Corporate Trust Department ATTENTION: Corporate Trust
Department
Kellie Mullen Kellie Mullen
BY HAND in New York to 4:30 p.m. BY HAND in Boston to 4:30 p.m.:
(as drop agent): Two International Place
61 Broadway Fourth Floor
15th Floor Corporation Trust
Corporate Trust Window Boston, Massachusetts 12110
New York, NY 10006
FOR INFORMATION CALL:
617-664-5587
Delivery to any other address or transmission in any other manner 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.
113
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;
- 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.
114
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, 1997 and 1998 and the
consolidated statements of operations, of stockholders' equity and of cash flows
for the years ended December 31, 1996 and 1997, the eight months ended August
31, 1998 and the four months ended December 31, 1998 of DeCrane Aircraft
Holdings, Inc., 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, and
the consolidated balance sheets as of June 30, 1997 and 1998 and the
consolidated statements of operations, of stockholders' equity and of cash flows
for the years then ended of PATS, Inc. 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.
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INDEX TO FINANCIAL STATEMENTS
PAGE
---------
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997, the eight months
ended August 31, 1998 and the four months ended December 31, 1998...................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997, the eight
months ended August 31, 1998 and the four months ended December 31, 1998............................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997, the eight months
ended August 31, 1998 and the four months ended December 31, 1998...................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
AVTECH CORPORATION
Report of Independent Accountants........................................................................ F-43
Balance Sheets as of September 30, 1996 and 1997 and June 25, 1998 (unaudited)........................... F-44
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-45
Statements of Stockholders' Equity for the years ended September 30, 1995, 1996 and 1997 and the nine
months ended June 25, 1998 (unaudited)................................................................. F-46
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-47
Notes to Financial Statements............................................................................ F-48
PATS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-55
Consolidated Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited)............... F-56
Consolidated Statements of Operations for the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited)................................................................. F-57
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and the six
months ended December 31, 1998 (unaudited)............................................................. F-58
Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited)................................................................. F-59
Notes to Consolidated Financial Statements............................................................... F-60
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 and of cash flows
present fairly, in all material respects, the financial position of DeCrane
Aircraft Holdings, Inc. and its subsidiaries at December 31, 1997 and 1998 and
the results of their operations and their cash flows for the years ended
December 31, 1996 and 1997, the eight months ended August 31, 1998 and the four
months ended December 31, 1998, 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 19, 1999
F-2
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER
31, DECEMBER 31,
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- ------------
ASSETS
Current assets
Cash and cash equivalents................................................ $ 206 $ 3,518
Accounts receivable, net................................................. 18,152 30,441
Inventories.............................................................. 25,976 34,281
Deferred income taxes.................................................... -- 4,300
Prepaid expenses and other current assets................................ 782 3,897
----------- ------------
Total current assets................................................... 45,116 76,437
Property and equipment, net................................................ 14,054 28,160
Other assets, principally intangibles, net................................. 39,967 226,330
----------- ------------
Total assets......................................................... $ 99,137 $ 330,927
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................................... $ 568 $ 283
Current portion of long-term obligations................................. 858 1,529
Accounts payable......................................................... 8,032 6,383
Accrued expenses......................................................... 6,911 18,466
Income taxes payable..................................................... 3,975 3,743
----------- ------------
Total current liabilities.............................................. 20,344 30,404
----------- ------------
Long-term liabilities
Long-term obligations.................................................... 37,412 184,953
Deferred income taxes.................................................... 1,758 16,990
Other long-term liabilities.............................................. 96 659
----------- ------------
Total long-term liabilities............................................ 39,266 202,602
----------- ------------
Commitments and contingencies (Note 15).................................... -- --
----------- ------------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value, 8,314,018 shares
authorized; none issued and outstanding as of December 31, 1997 and
1998................................................................... -- --
Undesignated preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding as of December 31, 1997 and
1998................................................................... -- --
Common stock, no par value, 4,253,550 shares authorized; none issued and
outstanding as of December 31, 1997 and 1998........................... -- --
Common stock, $.01 par value, 9,924,950 and 100 shares authorized as of
December 31, 1997 and 1998, respectively; 5,318,563 and 100 shares
issued and outstanding as of December 31, 1997 and 1998,
respectively........................................................... 53 --
Additional paid-in capital............................................... 51,057 100,200
Accumulated deficit...................................................... (11,444) (2,553)
Accumulated other comprehensive income (loss)............................ (139) 274
----------- ------------
Total stockholders' equity............................................. 39,527 97,921
----------- ------------
Total liabilities and stockholders' equity........................... $ 99,137 $ 330,927
----------- ------------
----------- ------------
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)
EIGHT
YEAR ENDED DECEMBER MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER
1998 31, 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
--------- --------- ----------- -----------
Revenues........................................ $ 65,099 $ 108,903 $ 90,077 $ 60,356
Cost of sales................................... 49,392 80,247 60,101 42,739
--------- --------- ----------- -----------
Gross profit.............................. 15,707 28,656 29,976 17,617
--------- --------- ----------- -----------
Operating expenses
Selling, general and administrative
expenses.................................... 10,747 15,756 15,719 10,274
Nonrecurring charges.......................... -- -- 3,632 --
Amortization of intangible assets............. 709 905 1,347 3,148
--------- --------- ----------- -----------
Total operating expenses.................... 11,456 16,661 20,698 13,422
--------- --------- ----------- -----------
Income from operations.......................... 4,251 11,995 9,278 4,195
Other expenses
Interest expense.............................. 4,248 3,154 2,350 6,852
Terminated debt offering expenses............. -- -- 600 --
Other expenses................................ 108 243 247 335
--------- --------- ----------- -----------
Income (loss) before provision for income taxes
and extraordinary item........................ (105) 8,598 6,081 (2,992)
Provision (benefit) for income taxes............ 712 3,344 2,892 (2,668)
--------- --------- ----------- -----------
Income (loss) before extraordinary item......... (817) 5,254 3,189 (324)
Extraordinary loss from debt refinancing, net of
income tax benefit............................ -- 2,078 -- 2,229
--------- --------- ----------- -----------
Net income (loss)............................... $ (817) $ 3,176 $ 3,189 $ (2,553)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
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
(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,
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
(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................ -- -- -- -- -- -- 3,189 -- 3,189
Translation adjustment.... -- -- -- -- -- -- -- 94 94
-------
3,283
Exercise of stock options... -- -- -- 575,692 6 8,206 -- -- 8,212
Sale of common stock........ -- -- -- 2,206,177 22 34,793 -- -- 34,815
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
Balance, August 31, 1998.... $ -- -- $-- 8,100,432 $81 $ 94,056 $ (8,255) $ (45) $85,837
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR:
- ------------------------------
Sale of common stock........ $ -- -- $-- 100 $-- $ 99,000 $ -- $-- $99,000
-------
Comprehensive loss
Net loss.................. -- -- -- -- -- -- (2,553) -- (2,553)
Translation adjustment.... -- -- -- -- -- -- -- 274 274
-------
(2,279)
Value of warrants issued in
connection with debt
offering.................. -- -- -- -- -- 1,200 -- -- 1,200
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
Balance, December 31,
1998...................... $ -- -- $-- 100 $-- $100,200 $ (2,553) $ 274 $97,921
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
----------- ------- ------ --------- ------ ---------- -------- ----------- -------
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)
YEAR ENDED DECEMBER
31, EIGHT MONTHS
-------------------- ENDED
AUGUST 31, 1998
1996 1997 (PREDECESSOR)
(PREDECESSOR)
--------- --------- ---------------
Cash flows from operating activities
Net income (loss)................................................................. $ (817) $ 3,176 $ 3,189
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities
Depreciation and amortization................................................. 4,343 5,372 4,454
Extraordinary loss from debt refinancing...................................... -- 2,078 --
Deferred income taxes......................................................... 88 (1,281) (2,339)
Other, net.................................................................... 188 654 (360)
Changes in assets and liabilities
Accounts receivable....................................................... (3,069) (3,159) (3,621)
Inventories............................................................... (2,665) (4,956) (2,017)
Prepaid expenses and other assets......................................... (3) (136) (58)
Accounts payable.......................................................... 1,891 (361) (1,127)
Accrued expenses.......................................................... 2,477 (1,041) 3,519
Income taxes payable...................................................... 525 4,295 1,374
--------- --------- -------
Net cash provided by operating activities............................. 2,958 4,641 3,014
--------- --------- -------
Cash flows from investing activities
Cash paid for acquisitions, net of cash acquired.................................. (18,200) (23,597) (85,808)
Capital expenditures.............................................................. (5,821) (3,842) (1,745)
Other, net........................................................................ 5 (370) 175
--------- --------- -------
Net cash used for investing activities................................ (24,016) (27,809) (87,378)
--------- --------- -------
Cash flows from financing activities
Acquisition of Predecessor
Proceeds from senior credit facility and bridge notes........................... -- -- --
Proceeds from sale of common stock.............................................. -- -- --
Proceeds from stock options exercised........................................... -- -- --
Purchase of shares outstanding.................................................. -- -- --
Repayment of existing senior credit facility.................................... -- -- --
Transaction fees and expenses................................................... -- -- --
Common stock offerings and application of the net proceeds
Net proceeds from sale of common stock.......................................... -- 28,933 34,815
Borrowings under credit facility................................................ -- 12,312 --
Repayment of debt............................................................... -- (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) --
Net borrowings under revolving line of credit agreements.......................... 1,191 2,906 5,453
Principal payments on capitalized lease and other long-term obligations........... (2,001) (1,675) (1,317)
Other, net........................................................................ (1,343) 139 (73)
--------- --------- -------
Net cash provided by (used for) financing activities.................. 21,051 22,957 89,871
--------- --------- -------
Effect of foreign currency translation on cash...................................... 22 97 26
--------- --------- -------
Net increase (decrease) in cash and cash equivalents................................ 15 (114) 5,533
Cash and cash equivalents at beginning of period.................................... 305 320 206
--------- --------- -------
Cash and cash equivalents at end of period.......................................... $ 320 $ 206 $ 5,739
--------- --------- -------
--------- --------- -------
FOUR MONTHS
ENDED
DECEMBER 31,
1998
(SUCCESSOR)
--------------
Cash flows from operating activities
Net income (loss)................................................................. $ (2,553)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities
Depreciation and amortization................................................. 4,983
Extraordinary loss from debt refinancing...................................... 2,229
Deferred income taxes......................................................... (5,072)
Other, net.................................................................... (97)
Changes in assets and liabilities
Accounts receivable....................................................... (2,929)
Inventories............................................................... 4,313
Prepaid expenses and other assets......................................... (562)
Accounts payable.......................................................... (1,754)
Accrued expenses.......................................................... 2,342
Income taxes payable...................................................... 108
--------------
Net cash provided by operating activities............................. 1,008
--------------
Cash flows from investing activities
Cash paid for acquisitions, net of cash acquired.................................. --
Capital expenditures.............................................................. (1,813)
Other, net........................................................................ --
--------------
Net cash used for investing activities................................ (1,813)
--------------
Cash flows from financing activities
Acquisition of Predecessor
Proceeds from senior credit facility and bridge notes........................... 191,722
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................................................... (15,726)
Common stock offerings and application of the net proceeds
Net proceeds from sale of common stock.......................................... --
Borrowings under credit facility................................................ --
Repayment of debt............................................................... --
Financing of acquisitions
Revolving line of credit borrowings............................................. --
Proceeds from issuance of cumulative convertible preferred stock and mandatorily
redeemable common stock warrants, net.......................................... --
Senior term loan borrowings..................................................... --
Convertible subordinated note borrowings from related parties................... --
Promissory note principal payments.............................................. --
Net borrowings under revolving line of credit agreements.......................... (1,103)
Principal payments on capitalized lease and other long-term obligations........... (458)
Other, net........................................................................ (36)
--------------
Net cash provided by (used for) financing activities.................. (1,597)
--------------
Effect of foreign currency translation on cash...................................... 181
--------------
Net increase (decrease) in cash and cash equivalents................................ (2,221)
Cash and cash equivalents at beginning of period.................................... 5,739
--------------
Cash and cash equivalents at end of period.......................................... $ 3,518
--------------
--------------
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
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 wholly-owned and 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 current year presentation.
As a result of the DLJ Acquisition (Note 2) in August 1998, the Company has
presented its financial position, results of operations, changes in
stockholders' equity and cash flows on a predecessor/successor basis.
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.
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 the Company's allocated fair value for
assets acquired through purchase acquisitions and at cost for all new additions,
and are depreciated using the straight-line method over their estimated useful
lives. Useful lives for machinery and equipment range 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 thirty years. Other
intangibles are amortized on a straight-line basis over their estimated useful
lives, ranging from five to fifteen years. Deferred financing costs are
amortized using either a straight-line or effective interest method, over the
term of the related debt.
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
F-8
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
ACCRUED WARRANTIES
Two of the Company's subsidiaries sell a majority of their products to
customers 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. 12 to 60 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.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes. If necessary, valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized.
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, 1997 and 1998. 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 AND TRANSACTIONS
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 accumulated comprehensive income or
loss within stockholders' equity.
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $71,000, $(72,000),
$(411,000) and $(262,000) for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
F-9
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs were
$1,195,000 and $832,000 for the eight months ended August 31, 1998 and the four
months ended December 31, 1998, respectively. Research and development costs
were not significant for the years ended December 31, 1996 and 1997.
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," 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 14 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. 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. Unbilled accounts receivable
were $654,000 and $4,156,000 at December 31, 1997 and 1998, respectively.
Unbilled accounts receivable are expected to be billed and collected during the
succeeding twelve-month period.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." 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 period ended December 31, 1998 and has reclassified
earlier periods to reflect application of the statement.
In June 1997, the FASB also 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 an entity's operating segments
must be reported on the basis that is used internally for evaluating segment
performance and making resource allocation determinations. The Company adopted
SFAS 131 for the period ended December 31, 1998 and has restated disclosure
information in earlier periods to reflect application of the statement (Note
17).
In June 1998, the FASB 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
F-10
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the Company's consolidated financial position or
results of operations.
NOTE 2 - THE DLJ ACQUISITION
In July 1998, a newly incorporated entity, 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 purchase shares which became immediately
vested) 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 which were tendered 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 for the
eight months ended August 31, 1998 for the estimated costs incurred. The gross
purchase price for the Company's shares and options was $186.3 million. Assets
acquired and liabilities assumed have been recorded at their estimated fair
values based on an independent appraisal and, accordingly, historical values
were increased as follows: (i) $4.4 million to inventory; (ii) $2.6 million to
fixed assets; and (iii) $50.0 million to certain identifiable intangible assets.
The excess of the purchase price over the fair value of the net assets acquired
totalling $70.0 million was allocated to goodwill. The inventory step-up was
expensed as the goods were sold during the four months ended December 31, 1998.
The intangible assets, other than goodwill, are being amortized on a
straight-line basis over periods between five and fifteen years. Goodwill is
being 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 credit facility (Note 10). In order to fund
the purchase of the shares in the tender offer, repay the 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 10), (ii)
entered into a new syndicated senior secured loan facility, and (iii) received a
$99.0 million equity contribution from Holdings. In conjunction with the debt
repayment and refinancing of the Bridge Notes, the Company incurred a $2,229,000
extraordinary charge, net of income tax benefit of $1,494,000 for the four
months ended December 31, 1998.
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 of 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 10).
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, along with warrants to purchase 150,000 common shares, 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, preferred stock dividends are paid
in cash. Since
F-11
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - THE DLJ ACQUISITION (CONTINUED)
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 DLJ Acquisition.
NOTE 3 - ACQUISITIONS
AVTECH
On June 26, 1998, the Company purchased substantially all of the common
stock of Avtech Corporation ("Avtech"). Avtech is a manufacturer of avionics
components and an avionics systems integrator for the commercial and high-end
corporate jet aircraft industries.
The total purchase price was $84,693,000 in cash at closing, including
$1,250,000 of acquisition related costs. The acquisition was financed with
borrowings under the Company's credit facility. The acquisition was accounted
for as a purchase and the $57,911,000 difference between the purchase price and
the fair value of the net assets acquired was recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
The consolidated results of operations for the eight months ended August 31,
1998 and the four months ended December 31, 1998 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
$205,000 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 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 results of operations for the eight months ended August 31,
1998 and the four months ended December 31, 1998 include the operating results
of Dettmers subsequent to June 29, 1998.
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. During 1998, Audio International attained the
required
F-12
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
performance criteria and the Company increased the purchase price by $3,000,000,
resulting in a corresponding increase to goodwill. 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.
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.
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-13
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division of Elsinore, L.P. (collectively,
"Elsinore"). Elsinore provides engineering services to the commercial aircraft
industry. The total purchase price was $2,443,000, including $300,000 of
acquisition related costs. The purchase price consisted of $1,000,000 paid in
cash at closing and a $1,250,000 15% promissory note payable to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
NOTE 4 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for the years ended December 31, 1997 and 1998 and are pro forma for
the DLJ and other acquisitions as if they were consummated at the beginning of
each year.
PRO FORMA FOR THE
YEAR ENDED DECEMBER
31,
----------------------
1997 1998
---------- ----------
Revenues............................................................................... $ 160,054 $ 173,297
Loss before extraordinary item......................................................... (10,000) (3,548)
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 $2,229,000
extraordinary loss, respectively incurred in connection with the Company's debt
refinancings (Notes 2 and 14).
NOTE 5 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $487,000
and $581,000 at December 31, 1997 and 1998, 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.
F-14
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS (CONTINUED)
SIGNIFICANT CUSTOMERS
Two customers each accounted for more than 10% of the Company's consolidated
revenues, as follows:
YEAR ENDED DECEMBER FOUR MONTHS
31, EIGHT MONTHS ENDED
-------------------- ENDED AUGUST DECEMBER 31,
31, 1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
--------- --------- ------------- -------------
Customer A.......................................... 15.8% 19.0% 17.3% 20.1%
Customer B.......................................... 7.2% 11.2% 7.6% 5.6%
Complete loss of Customer A could have a significant adverse impact on the
results of operations expected in future periods. During the year ended December
31, 1997, Customer A acquired another customer of the Company. The above amounts
for Customer A include the Company's revenue from the acquired customer after
its acquisition. For the year ended December 31, 1997, revenue from Customer A
would have been 20.9% had the acquisition been consummated on January 1, 1997.
NOTE 6 - INVENTORIES
Inventories are comprised of the following as of December 31, 1997 and 1998
(amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- -----------
Raw material........................................................ $ 14,224 $ 19,221
Work-in process..................................................... 4,655 7,231
Finished goods...................................................... 7,097 7,829
----------- -----------
Total inventories................................................. $ 25,976 $ 34,281
----------- -----------
----------- -----------
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $125,000 and $897,000 at December 31, 1997
and 1998, respectively.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1997 and
1998 (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- -----------
Machinery and equipment............................................. $ 18,151 $ 12,576
Tooling............................................................. 3,133 2,162
Computer equipment, furniture and fixtures.......................... 3,660 3,230
Land, buildings and leasehold improvements.......................... 3,580 11,967
----------- -----------
Total cost........................................................ 28,524 29,935
Accumulated depreciation and amortization......................... (14,470) (1,775)
----------- -----------
Net property and equipment...................................... $ 14,054 $ 28,160
----------- -----------
----------- -----------
F-15
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment under capital leases included above consists of the
following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
------------- -------------
Machinery and equipment............................................. $ 1,160 $ 693
Computer equipment, furniture and fixtures.......................... 455 243
------ -----
Total cost........................................................ 1,615 936
Accumulated depreciation and amortization......................... (523) (204)
------ -----
Net property and equipment...................................... $ 1,092 $ 732
------ -----
------ -----
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
NOTE 8 - OTHER ASSETS
Other assets includes the following as of December 31, 1997 and 1998 and is
net of accumulated amortization for the respective periods as parenthetically
noted (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- -----------
Goodwill (net of $1,682 and $1,839)................................. $ 38,592 $ 167,836
Deferred financing costs (net of $64 and $343)...................... 399 8,787
Other intangibles (net of $194 and $1,317).......................... 596 48,708
Other non-amortizable assets........................................ 380 999
----------- -----------
Other assets, net................................................. $ 39,967 $ 226,330
----------- -----------
----------- -----------
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 1997 and
1998 (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
------------- -----------
Salaries, wages, compensated absences and payroll related taxes..... $ 3,410 $ 6,147
Additional acquisition consideration................................ -- 3,000
Accrued interest.................................................... 152 2,946
Other accrued expenses.............................................. 3,349 6,373
------ -----------
Total accrued expenses............................................ $ 6,911 $ 18,466
------ -----------
------ -----------
NOTE 10 - BORROWINGS
SHORT-TERM BORROWINGS--The Company's Swiss subsidiary has a short-term
revolving line of credit with a Swiss bank under which Swiss franc denominated
borrowings of $568,000 and $283,000 were outstanding at December 31, 1997 and
1998, respectively. Interest on the line accrues at the bank's prime rate (5.25%
F-16
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - BORROWINGS (CONTINUED)
and 4.875% at December 31, 1997 and 1998, respectively) plus 0.25%. The line of
credit is guaranteed by the Company.
LONG-TERM BORROWINGS--Long-term obligations outstanding include the
following as of December 31, 1997 and 1998 (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- -----------
Credit facilities
Revolving lines of credit......................................... $ 36,000 $ 5,800
Term debt......................................................... -- 79,888
12% Senior Subordinated Notes due 2008, with interest payable semi-
annually commencing on March 30, 1999............................. -- 100,000
Capital lease obligations and equipment term financing, with
interest at
4.34 % to 18.08%, secured by equipment.......................... 547 367
Other............................................................... 1,723 427
----------- -----------
Total long-term obligations................................... 38,270 186,482
Less current portion.......................................... (858) (1,529)
----------- -----------
Long-term obligations, less current portion................. $ 37,412 $ 184,953
----------- -----------
----------- -----------
PREDECESSOR CREDIT FACILITY
Prior to August 31, 1998, the Company had a credit facility with a group of
banks for a $105 million senior revolving line of credit. Borrowings under the
credit facility were secured by the Company's assets.
The Company, at its option, could elect to pay interest on the credit
facility borrowings based on either the prime rate or interbank offered rate
("IBOR") plus defined margins. The Company was required to pay a commitment fee,
up to a maximum 0.375%, on the unused portion of the credit facility. The
weighted-average interest rate on borrowings outstanding was 7.03% as of
December 31, 1997.
SUCCESSOR CREDIT FACILITY
In connection with the DLJ Acquisition, the Company was required to repay
all of its borrowings under the predecessor credit facility and entered into a
new credit facility. 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 1.50%-1.75% for prime rate borrowings and
2.75%-3.00% for Euro-Dollar borrowings. The Company is subject to certain
commitment fees under the facility as well as the maintenance of certain
financial ratios, cash flow results and other restrictive covenants.
In January 1999, term loan borrowings were increased to $99.9 million to
fund the acquisition of PATS, Inc. (Note 21).
F-17
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - BORROWINGS (CONTINUED)
12% SENIOR SUBORDINATED NOTES
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 shares of common stock of Holdings
("Holdings Common Stock"). The Notes will mature on September 30, 2008. Interest
on the Notes is 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 are subordinated in right of payment to all existing and future
senior indebtedness of the Company, including indebtedness pursuant to the
credit facility. Prior to the Notes maturing, the Company may redeem all or some
of the Notes at a redemption price which may include a premium. In the event of
a change in control, the holders may require the Company to repurchase the Notes
for a redemption price which may also include a premium. 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. The Warrants,
valued at $1,200,000, will be exercisable at the time they are registered and,
unless earlier exercised, will expire on September 30, 2008.
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1998 (amounts in thousands):
YEAR ENDING DECEMBER 31,
1999................................................................................................ 1,529
2000................................................................................................ 2,722
2001................................................................................................ 4,866
2002................................................................................................ 7,905
2003................................................................................................ 10,522
Thereafter.......................................................................................... 158,938
----------
Total long-term obligations..................................................................... $ 186,482
----------
----------
NOTE 11 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
YEAR ENDED DECEMBER EIGHT MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
--------- --------- ------------- ---------------
Domestic........................................ $ (855) $ 7,509 $ 5,637 $ (3,345)
Foreign......................................... 750 1,089 444 353
--------- --------- ------ -------
Total......................................... $ (105) $ 8,598 $ 6,081 $ (2,992)
--------- --------- ------ -------
--------- --------- ------ -------
F-18
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The provisions for income taxes (benefit) are as follows (amounts in
thousands):
YEAR ENDED DECEMBER EIGHT MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER 31,
1998 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
--------- --------- ------------- ---------------
Current
U.S. federal.................................. $ 269 $ 3,231 $ 3,835 $ 1,560
State and local............................... 194 968 1,275 699
Foreign....................................... 161 426 121 145
--------- --------- ------------- -------
Total current............................... 624 4,625 5,231 2,404
--------- --------- ------------- -------
Deferred
U.S. federal.................................. 70 (1,021) (1,932) (4,150)
State and local............................... 21 (279) (435) (816)
Foreign....................................... (3) 19 28 (106)
--------- --------- ------------- -------
Total deferred.............................. 88 (1,281) (2,339) (5,072)
--------- --------- ------------- -------
Total provision............................. $ 712 $ 3,344 $ 2,892 $ (2,668)
--------- --------- ------------- -------
--------- --------- ------------- -------
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, EIGHT MONTHS FOUR MONTHS
-------------------- ENDED AUGUST ENDED DECEMBER
31, 1998 31, 1998
1996 1997 (PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
--------- --------- ------------- ---------------
Income tax (benefit) at U.S. statutory rates.... $ (36) $ 2,923 $ 2,068 $ (1,017)
Increase (decrease) resulting from
Book benefit not provided for net operating
loss carryforwards.......................... 172 -- -- --
Amortization of assets and other expenses not
deductible for income tax purposes.......... 137 441 594 782
Decrease in deferred tax asset valuation
allowance................................... -- (488) -- (2,575)
State income taxes, net of federal benefit.... 157 482 550 (25)
Tax on earnings of subsidiary not consolidated
for tax purposes............................ 92 -- -- --
Lower tax rates on earnings of foreign
subsidiaries................................ (65) (116) (50) (36)
Other, net.................................... 255 102 (270) 203
--------- --------- ------ -------
Income tax (benefit) at effective rates..... $ 712 $ 3,344 $ 2,892 $ (2,668)
--------- --------- ------ -------
--------- --------- ------ -------
F-19
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1997 and 1998 (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
----------- -----------
Gross deferred tax liabilities
Intangible assets.................................................. $ 308 $ 18,320
Tax effect on earnings of subsidiary not consolidated for tax
purposes......................................................... 2,688 --
Property and equipment............................................. 688 4,531
Other.............................................................. 409 416
----------- -----------
Gross deferred tax liabilities................................... 4,093 23,267
----------- -----------
Gross deferred tax (assets)
Inventory.......................................................... (2,811) (2,396)
Loss carryforwards................................................. (865) (6,183)
Accrued expenses................................................... (697) (1,657)
Other.............................................................. (537) (341)
----------- -----------
Gross deferred tax (assets)...................................... (4,910) (10,577)
----------- -----------
Deferred tax assets valuation allowance.............................. 2,575 --
----------- -----------
Net deferred tax liability......................................... $ 1,758 $ 12,690
----------- -----------
----------- -----------
The balance sheet classification of the net deferred tax liabilities as of
December 31, 1997 and 1998 are as follows (amounts in thousands):
1997 1998
(PREDECESSOR) (SUCCESSOR)
------------- -----------
Noncurrent deferred tax liability.................................... $ 1,758 $ 16,990
Current deferred tax asset........................................... -- (4,300)
------ -----------
Net deferred tax liability......................................... $ 1,758 $ 12,690
------ -----------
------ -----------
Prior to 1997, the Company incurred losses and accordingly provided a
valuation allowance for its domestic deferred net tax assets. The deferred tax
asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount
of federal and state tax loss carryforwards utilized to reduce 1997 current
income taxes.
During the eight months ended August 31, 1998 and the four months ended
December 31, 1998, the Company incurred net operating losses for tax purposes of
approximated $1,528,000 and $486,000, respectively. The losses were caused by an
$8,880,000 tax deduction for stock options exercised, $3,632,000 of nonrecurring
charges and a $3,724,000 pre-tax extraordinary charge. The net operating loss
tax benefits for both periods were carried back to 1997 for federal income tax
purposes and carried forward for state income tax purposes. The 1998 net
operating losses resulted in $2,545,000 of taxes being refundable as of December
31, 1998 and are included in prepaid expenses and other current assets. Even
though the Company incurred tax losses during 1998, management believes that it
is more likely than not that the Company will generate taxable income sufficient
to realize the tax benefit associated with the future deductible deferred tax
assets and loss carryforwards prior to their expiration. As a result, the
Company reduced the valuation allowance by $2,575,000 during the four months
ended December 31, 1998.
F-20
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The Company has approximately $17,400,000 and $600,000 of total loss
carryforwards, which include net operating losses acquired in the Avtech
aquisition, available for federal and state income tax purposes, respectively.
In conjunction with the Avtech acquisition, the Company acquired federal loss
carryforwards of $13,700,000 that are subject to separate return limitation
rules, as defined in the Internal Revenue Code, and expire in 2018. The
remaining federal and state carryforwards expire in varying amounts through 2010
and 2018, respectively. The amount of federal loss carryforwards that may be
utilized in the future are subject to limitations because of the occurrence of
changes in control, as defined in the Internal Revenue Code.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined 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 gain (loss) of ($316,000), ($487,000),
$323,000 and $146,000 for the years ended December 31, 1996 and 1997, the eight
months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
At December 31, 1998, the Company had no open forward exchange contracts.
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
NOTE 13 - SUCCESSOR CAPITAL STRUCTURE
In connection with the DLJ Acquisition, all of the Company's old outstanding
shares which were tendered were cancelled and non-tendering shareholders were
paid out. The Company was authorized to issue 100 new common shares ($.01 par
value) all of which are issued and outstanding at December 31, 1998.
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS
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.
F-21
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
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.
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. 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 into
1,941,804 shares of common stock; (ii) the cashless exercise and conversion of
all 52,784 and 9,355 issued and outstanding preferred stock warrants and common
stock warrants, respectively, into a total of 16,585 shares of common stock;
(iii) the cashless exercise of 508,497 mandatorily redeemable common stock
warrants (the "Redeemable Warrants") into a total of 507,708 shares of common
stock; and (iv) the cancellation of 95,368 Redeemable Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the recapitalization 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
In April 1998, the Company sold 2,206,177 shares of common stock for $17.00
per share. Net proceeds from the offering of $34,815,000 were used to partially
repay borrowings outstanding under the Company's senior credit facility.
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO, together with
approximately $12,775,000 of proceeds from borrowings under a 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
F-22
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
$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.
MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
The table below summarizes Redeemable Warrant transactions during the years
ended December 31, 1996, and 1997 (amounts in thousands, except share data).
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
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. The Redeemable
Warrants' value was subsequently adjusted 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.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
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
F-23
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
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 19).
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 19). 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.
COMMON STOCK
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. Redeemable Warrants to purchase 70,893 common shares at an
exercise price of $14.11 per share remained after the recapitalization.
Concurrent with the consummation of the IPO, the mandatory redemption feature of
these warrants was terminated and, consequently, became non-redeemable warrants.
In December 1997, the holders of these warrants elected to exercise all of the
warrants on a cashless basis and convert the warrants into 16,130 common shares.
No non-redeemable warrants were outstanding as of December 31, 1997.
During 1998 in connection with the DLJ Acquisition all stock options became
100% vested and were either exercised or cancelled as of August 31, 1998. The
following table summarizes the status of the
F-24
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
Company's stock option plan at December 31, 1996, 1997, and 1998 and the
activity for the years ended December 31, 1996 and 1997, and the eight months
ended August 31, 1998:
1996 1997 1998
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- ---------- -----------
Options outstanding at beginning of
year........................................ 208,423 $ 0.529 355,001 $ 1.724 501,260 $ 6.089
Granted...................................... 147,031 3.413 163,662 15.574 75,000 16.85
Exercised.................................... -- -- -- -- (575,692) 7.496
Cancelled.................................... (453) 0.529 (17,403) 6.228 (568) 1.234
--------- --------- ----------
Options outstanding at end of year........... 355,001 1.724 501,260 6.089 -- --
--------- --------- ---------- -----------
--------- --------- ---------- -----------
Options exercisable at end of year........... 141,845 0.633 200,444 0.921 -- --
--------- --------- ---------- -----------
--------- --------- ---------- -----------
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 (through August 31, 1998)
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, $240,000 and $332,000 for the
years ended December 31, 1996 and 1997 and the eight months ended August 31,
1998, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS 123, the Company's net income (loss) would have been as follows
(amounts in thousands):
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------ ENDED AUGUST
1996 1997 31, 1998
(PREDECESSOR) (PREDECESSOR)
------------------------ -------------
Net income (loss)
As reported............................................................. $ (817) $ 3,176 $ 3,189
Pro forma............................................................... (822) 3,129 2,699
Weighted-average fair value of options granted
Compensatory stock options.............................................. 5.91 5.70 5.70
Non-compensatory stock options.......................................... 0.10 5.08 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%;
F-25
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
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 15 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to a license agreement with McDonnell Douglas
Corporation (now part of The Boeing Company) pursuant to which the Company may
request certain data in order to design and market modifications to aircraft
manufactured by McDonnell Douglas. The agreement provides that the Company will
pay McDonnell Douglas a royalty of five percent of the net sales price of all
modifications sold by the Company for which the Company has requested data from
McDonnell Douglas. The Company has requested data for a single modification,
which modification the Company believes is exempt from the obligation to pay
royalties under the agreement. In 1996, McDonnell Douglas made a demand for
$650,000 for royalties. The Company does not believe that it is obligated to
McDonnell Douglas in any amount. However, there can be no assurance that the
Company will not be required to pay royalties to McDonnell Douglas.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities. The
Company and two of its subsidiaries have confirmed that they are indemnified for
any liability in the action filed by American International Airways; and for the
further cost of defense of the action. A third subsidiary was named as a
defendant but has been dismissed from the case without prejudice.
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
F-26
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
without engaging in an auction or "active market check" and, therefore, agreed
to terms that were unfair and inadequate from the standpoint of the Company's
stockholders. On July 24, 1998, the plaintiffs amended the complaint by
repeating the allegations in the initial complaint and adding allegations that:
(i) the Company's Solicitation/Recommendation Statement 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 was 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.
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
F-27
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998
(amounts in thousands):
CAPITAL OPERATING
LEASES LEASES
----------- -----------
Year ending December 31,
1999....................................................................................... $ 230 $ 3,181
2000....................................................................................... 99 2,758
2001....................................................................................... 41 2,246
2002....................................................................................... 17 2,195
2003....................................................................................... 9 1,941
2004 and thereafter........................................................................ -- 4,811
----- -----------
Total minimum payments required............................................................ 396 $ 17,132
-----------
-----------
Less amount representing future interest cost.............................................. (29)
-----
Recorded obligation under capital leases................................................. $ 367
-----
-----
Total rental expense charged to operations for the years ended December 31,
1996 and 1997, the eight months ended August 31, 1998 and the four months ended
December 31, 1998 was $1,614,000, $2,065,000, $2,303,000 and $1,095,000
respectively.
F-28
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
The Company paid the following amounts in cash (amounts in thousands):
FOUR MONTHS
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED
---------------------------- ENDED AUGUST DECEMBER
1996 1997 31, 1998 31, 1998
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
---------------------------- ------------- -----------
Interest.................................... $ 2,983 $ 2,842 $ 2,227 $ 3,706
Income taxes................................ 132 300 4,825 1,328
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred as follows
(amounts in thousands):
EIGHT
YEAR ENDED DECEMBER MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER
1996 1997 1998 31, 1998
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
-------------------- ----------- -----------
Refinancing of Bridge Notes with proceeds from
Units offering................................... $ -- $ -- $ -- $ 100,000
Additional acquisition consideration.............. -- -- -- 3,000
Debt incurred for the acquisition of machinery and
equipment........................................ 414 182 116 48
Financing provided by sellers in connection with
acquisitions..................................... 3,492 -- -- --
Detail of acquisitions:
Fair value of assets acquired, net of cash
acquired...................................... $ 20,887 $ 26,178 $ 90,377 --
Liabilities assumed............................. (2,687) (2,581) (4,569) --
--------- --------- ----------- -----------
Cash paid for acquisition, net of cash
acquired.................................. $ 18,200 $ 23,597 $ 85,808 --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
F-29
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - 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 the following (amounts in thousands):
EIGHT
YEAR ENDED DECEMBER MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER
1996 1997 1998 31, 1998
--------- --------- ----------- -----------
(PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
Revenues
Gross revenues
United States................................ $ 64,383 $ 109,490 $ 89,619 $ 60,785
Western Europe............................... 10,882 12,240 7,940 4,510
--------- --------- ----------- -----------
Total gross revenues....................... 75,265 121,730 97,559 65,295
--------- --------- ----------- -----------
Less interarea transfers
United States................................ (1,496) (2,448) (1,744) (1,350)
Western Europe............................... (8,670) (10,379) (5,738) (3,589)
--------- --------- ----------- -----------
Total interarea transfers.................. (10,166) (12,827) (7,482) (4,939)
--------- --------- ----------- -----------
Net revenues
United States................................ 62,887 107,042 87,875 59,435
Western Europe............................... 2,212 1,861 2,202 921
--------- --------- ----------- -----------
Total net revenues......................... $ 65,099 $ 108,903 $ 90,077 $ 60,356
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Consolidated long-lived assets
United States.................................. $ 10,573 $ 13,230 $ 24,693 $ 26,455
Western Europe................................. 1,614 824 543 1,705
--------- --------- ----------- -----------
Total consolidated long-lived assets......... $ 12,187 $ 14,054 $ 25,236 $ 28,160
--------- --------- ----------- -----------
--------- --------- ----------- -----------
The Company allocates its revenues on the basis of the location in which the
sale originated. Revenues in Western Europe are primarily from Switzerland.
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. Long-lived assets
consists of the Company's property and equipment. Corporate long-lived assets
are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $6,484,000, $12,430,000,
$11,804,000 and $9,983,000 for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively. Export revenues are primarily derived from sales to customers
located in Western Europe, the Far East and Canada.
NOTE 18 - 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
F-30
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - EMPLOYEE BENEFIT PLANS (CONTINUED)
Company and the employees, are determined as a percentage of each covered
employees' salary. Company contributions and costs associated with the plan were
$151,000, $157,000, $102,000 and $51,000 for the years ended December 31, 1996
and 1997, the eight months ended August 31, 1998 and the four months ended
December 31, 1998, 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, $128,000 and $95,000 during the year ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998, respectively. No matching contributions were made to
the plan during the year ended December 31, 1996. The costs associated with
administering the plan were not significant for any period presented.
F-31
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - 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):
YEAR ENDED FOUR MONTHS
DECEMBER 31, EIGHT MONTHS ENDED
-------------------- ENDED AUGUST DECEMBER
1996 1997 31, 1998 31, 1998
--------- --------- ------------- -----------
(PREDECESSOR) (SUCCESSOR)
(PREDECESSOR)
DLJ
Transaction financing fees........................ $ -- $ -- $ -- $ 12,000
Credit facility outstanding borrowings............ -- -- -- 4,800
Credit facility interest expense.................. -- -- -- 282
Bridge notes interest expense..................... -- -- -- 1,041
Global Technology Partners, LLC
Promissory note receivable........................ -- -- -- 352
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period........................ 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:
DLJ -- The Company and its affiliates incurred fees payable to DLJ related
entities of approximately $12.0 million in connection with the DLJ Acquisition.
The Bridge Notes issued to finance the DLJ acquisition were also purchased by a
DLJ entity. In addition, DLJ is involved in making a market for the Notes and
may hold such Notes from time to time. The Company's credit facility is also
provided by a syndicate of lenders led by DLJ related entities.
F-32
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
Global Technology Partners, LLC ("GTP") -- Two members of the Company's
Board of Directors are also members of GTP. In December 1998, GTP purchased
approximately $704,000 of shares of common and preferred stock of Holdings. The
Company loaned half of the purchase price for such shares to GTP at an interest
rate equal to the interest rate on the longest maturity senior bank debt of the
Company in effect from time to time, plus 1.0%. The loans are repayable out of
the proceeds from the sale of such stock, are secured by such stock, and are
included in other long-term assets. Upon collection of the notes, funds will be
advanced to Holdings.
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 and 14). 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 14).
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 and 14). 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 14).
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
In conjunction with the Notes, Bridge Notes and credit facility described in
Note 2, 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 guarantee the Notes and
credit facility. The guarantor subsidiaries are wholly-owned subsidiaries of the
Company and the guarantees are 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-33
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (AMOUNTS IN THOUSANDS)
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
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-34
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 (SUCCESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- --------------- ------------
ASSETS
Current assets
Cash and cash equivalents........ $ 2,458 $ 762 $ 298 $ -- $ 3,518
Accounts receivable, net......... -- 28,917 1,524 -- 30,441
Inventories...................... -- 32,624 1,657 -- 34,281
Other current assets............. 7,066 894 237 -- 8,197
-------- ------------ ------------- --------------- ------------
Total current assets........... 9,524 63,197 3,716 -- 76,437
Property and equipment, net........ 272 26,170 1,718 -- 28,160
Other assets, principally
intangibles, net.................. 12,105 200,383 13,842 -- 226,330
Investments in subsidiaries........ 239,101 4,373 -- (243,474)(1) --
Intercompany receivables........... 45,710 693 3,567 (49,970)(2) --
-------- ------------ ------------- --------------- ------------
$306,712 $294,816 $22,843 $(293,444) $330,927
-------- ------------ ------------- --------------- ------------
-------- ------------ ------------- --------------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term obligations........... $ 892 $ 628 $ 292 $ -- $ 1,812
Other current liabilities........ 10,767 16,651 1,174 -- 28,592
-------- ------------ ------------- --------------- ------------
Total current liabilities...... 11,659 17,279 1,466 -- 30,404
-------- ------------ ------------- --------------- ------------
Long-term liabilities
Long-term obligations............ 184,822 131 -- -- 184,953
Intercompany payables............ (3,694) 53,388 276 (49,970)(2) --
Other long-term liabilities...... 16,278 658 713 -- 17,649
-------- ------------ ------------- --------------- ------------
Total long-term liabilities.... 197,406 54,177 989 (49,970) 202,602
-------- ------------ ------------- --------------- ------------
Stockholders' equity
Capital.......................... 100,200 214,823 15,440 (230,263)(1) 100,200
Retained earnings (deficit)...... (2,553) 8,537 4,674 (13,211)(1) (2,553)
Accumulated comprehensive income
(loss)......................... -- -- 274 -- 274
-------- ------------ ------------- --------------- ------------
Total stockholders' equity..... 97,647 223,360 20,388 (243,474) 97,921
-------- ------------ ------------- --------------- ------------
$306,712 $294,816 $22,843 $(293,444) $330,927
-------- ------------ ------------- --------------- ------------
-------- ------------ ------------- --------------- ------------
F-35
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
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)
------- ------------ ------------- -------------- ------------
------- ------------ ------------- -------------- ------------
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
------- ------------ ------------- -------------- -------------
------- ------------ ------------- -------------- -------------
F-36
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - 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
------- ------------ ------------- ------- -------------
------- ------------ ------------- ------- -------------
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
Revenues........................... $-- $58,904 $ 5,041 $(3,589) $60,356
Cost of sales...................... -- 42,691 3,637 (3,589) 42,739
------- ------------ ------------- ------- -------------
Gross profit....................... -- 16,213 1,404 -- 17,617
Selling, general and administrative
expenses.......................... 1,741 8,124 409 -- 10,274
Nonrecurring charges............... -- -- -- -- --
Amortization of intangible
assets............................ 102 2,868 178 -- 3,148
Interest expense (income).......... 6,754 92 6 -- 6,852
Intercompany charges............... (3,088) 3,025 63 -- --
Equity in earnings of
subsidiaries...................... (7,753) (506) -- 8,259(4) --
Other expenses (income)............ -- 132 203 -- 335
Provision for income taxes
(benefit)......................... 2,568 (5,275) 39 -- (2,668)
Extraordinary charge, net of tax... 2,229 -- -- -- 2,229
------- ------------ ------------- ------- -------------
Net income (loss).................. $(2,553) $ 7,753 $ 506 $(8,259) $(2,553)
------- ------------ ------------- ------- -------------
------- ------------ ------------- ------- -------------
F-37
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - 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-38
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - 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-39
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - 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..................... (2,222) 3,420 557 -- 1,755
Equity in earnings of
subsidiaries............... (6,824) (489) -- 7,313(4) --
Changes in working capital... 5,492 (7,393) (29) -- (1,930)
------------- ----------- ----- ----------- -----------
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-40
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
FOUR MONTHS ENDED DECEMBER 31, 1998 (SUCCESSOR)
---------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- --------------- ----------- -----------
Cash flows from operating
activities
Net income....................... $ (2,553) $ 7,753 $ 506 $ (8,259) $ (2,553)
Adjustments to net income
Non-cash adjustments to net
income....................... (2,647) 4,964 (274) -- 2,043
Equity in earnings of
subsidiaries................. (7,753) (506) -- 8,259(4) --
Changes in working capital..... 12,408 (10,272) (618) -- 1,518
------------- ----------- ----- ----------- -----------
Net cash provided by (used
for) operating
activities................. (545) 1,939 (386) -- 1,008
------------- ----------- ----- ----------- -----------
Cash flows from investing
activities
Acquisition of companies, net of
cash acquired.................. -- -- -- -- --
Capital expenditures and other... -- (1,746) (67) -- (1,813)
------------- ----------- ----- ----------- -----------
Net cash used for investing
activities................. -- (1,746) (67) -- (1,813)
------------- ----------- ----- ----------- -----------
Cash flows from financing
activities
Acquisition of Predecessor,
net............................ -- -- -- -- --
Net proceeds from sale of
equity......................... -- -- -- -- --
Net debt repaid with equity
offering proceeds.............. -- -- -- -- --
Debt financing for
acquisitions................... -- -- -- -- --
Principal payments on long-term
debt and leases................ (1) (447) (10) -- (458)
Line of credit borrowings
(repayments)................... (1,367) -- 264 -- (1,103)
Other, net....................... -- (36) -- -- (36)
------------- ----------- ----- ----------- -----------
Net cash provided by (used
for) financing
activities................. (1,368) (483) 254 -- (1,597)
------------- ----------- ----- ----------- -----------
Effect of foreign currency
translation on cash.............. -- -- 181 -- 181
------------- ----------- ----- ----------- -----------
Net increase (decrease) in cash and
equivalents...................... (1,913) (290) (18) -- (2,221)
Cash and equivalents at beginning
of period........................ 4,371 1,052 316 -- 5,739
------------- ----------- ----- ----------- -----------
Cash and equivalents at end of
period........................... $ 2,458 $ 762 $ 298 $ -- $ 3,518
------------- ----------- ----- ----------- -----------
------------- ----------- ----- ----------- -----------
NOTE 21 - SUBSEQUENT EVENTS
In January 1999, the Company acquired 100% of PATS, Inc.'s stock for a
purchase price of $41.5 million (including the assumption of debt) 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
F-41
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - SUBSEQUENT EVENTS (CONTINUED)
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 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.
NOTE 22 -- CONDENSED QUARTERLY DATA FOR 1997 AND 1998 (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
-------------------------------------------- -------------------------------------------------------------
(SUCCESSOR)
(PREDECESSOR)
(TWO MONTHS (ONE MONTH
ENDED ENDED
AUGUST 31, SEPTEMBER 30,
1998) 1998)
1ST 2ND 3RD 4TH 1ST 2ND 3RD 3RD 4TH
--------- --------- --------- ----------- --------- --------- ----------- ------------- -----------
Revenues........... $ 26,118 $ 28,130 $ 26,639 $ 28,016 $ 29,128 $ 29,854 $ 31,095 $ 16,012 $ 44,344
Gross profit....... 6,011 7,214 6,998 8,433 8,987 9,720 11,269 4,932 12,685
Income (loss)
before
extraordinary
item.............. 629 1,454 1,481 1,690 1,688 1,672 (171) (480) 156
Extraordinary loss
from debt
refinancing....... -- (2,078) -- -- -- -- -- (296) (1,933)
Net income
(loss)............ 629 (624) 1,481 1,690 1,688 1,672 (171) (776) (1,777)
F-42
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-43
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-44
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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
PATS, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of PATS, Inc. and
subsidiaries at June 30, 1997 and 1998 and the results of its operations and its
cash flows for the years then ended, 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
January 25, 1999
F-55
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.............................................................. 15
Recent Developments....................................................... 23
Use of Proceeds........................................................... 24
Capitalization............................................................ 25
Unaudited Pro Forma Consolidated Financial Data........................... 26
Selected Consolidated Financial Data...................................... 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 37
Business.................................................................. 44
Management................................................................ 60
Certain Relationships and Transactions.................................... 68
Description of Bank Credit Facility....................................... 71
Description of Notes...................................................... 73
The Initial Offering...................................................... 108
The Exchange Offer........................................................ 108
Certain Federal Income Tax Consequences................................... 114
Plan of Distribution...................................................... 115
Legal Matters............................................................. 115
Experts................................................................... 115
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 MARCH , 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.
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
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND CHARGED TO END OF
CLASSIFICATION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------- ------------ ----------- -------------- ----------- -----------
PREDECESSOR
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts............ $ 259 $ 68 $ 71(A) $ 19 $ 379
Reserve for excess, slow moving and
potentially obsolete material............ $ 1,154 $ 1,055 -- $ 116 $ 2,093
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts............ $ 379 $ 111 $ 174(B) $ 177 $ 487
Reserve for excess, slow moving and
potentially obsolete material............ $ 2,093 $ 1,374 $ 59(B) $ 162 $ 3,364
EIGHT MONTHS ENDED AUGUST 31, 1998
Allowance for doubtful accounts............ $ 487 $ 384 $ 32(B) $ 376 $ 527
Reserve for excess, slow moving and
potentially obsolete material............ $ 3,364 $ 760 $ 2,056(B) $ 311 $ 5,869
SUCCESSOR
FOUR MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts............ $ 527(B) $ 243 -- $ 189 $ 581
Reserve for excess, slow moving and
potentially obsolete material............ $ 5,869(B) $ 285 -- $ 452 $ 5,702
- --------------------------
(A) Comprised of the following:
Effect of foreign currency translation $ (4)
Recovery of amounts previously written off 20
Attributable to companies acquired 55
---------
$ 71
---------
---------
(B) Attributable to companies acquired. Reflects
historical amounts used to determine the fair
values of net assets 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. (successor by merger to DeCrane Acquisition Co.)
3.3.1 Certificate of Incorporation of Aerospace Display Systems, Inc. (formerly ADS Acquisition Inc.)
3.3.2 Bylaws of Aerospace Display Systems, Inc.,
3.4.1 Articles of Incorporation of Audio International, Inc.
3.4.2 Amended & Restated Bylaws of Audio International, Inc.
3.5.1 Articles of Incorporation of Avtech Corporation
3.5.2 Bylaws of Avtech Corporation
3.6.1 Articles of Incorporation of Cory Components, Inc.
3.6.2 Bylaws of Cory Components, Inc.
3.7.1 Certificate of Incorporation of Dettmers Industries, Inc. (formerly DAHX Acquisition, Inc.)
3.7.2 Bylaws of Dettmers Industries, Inc.
3.8.1 Restated Articles of Incorporation of Elsinore Aerospace Services, Inc.
3.8.2 Bylaws of Elsinore Aerospace Services Inc.
3.9.1 Certificate of Incorporation of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)
3.9.2 Bylaws of Elsinore Engineering, Inc. (formerly EE Acquisition, Inc.)
3.10.1 Articles of Incorporation of Hollingsead International, Inc.
3.10.2 Bylaws of Hollingsead International Inc.
3.11.1 Articles of Incorporation of Tri-Star Electronics International, Inc.
3.11.2 Bylaws of Tri-Star Electronics International, Inc.
3.12.1 Articles of Incorporation of PATS, Inc.
3.12.2 Bylaws of PATS, Inc.
3.12.3 Amendment to Articles of PATS, Inc.
3.12.4 Amendment to Bylaws of PATS, Inc.
3.13.1 Articles of Incorporation of Flight Refueling, Inc.
3.13.2 Bylaws of Flight Refueling, Inc.
3.14.1 Articles of Incorporation of Patrick Aircraft Tank Systems, Inc.
3.14.2 Bylaws of Patrick Aircraft Tank Systems, Inc.
3.15.1 Articles of Incorporation of PATS Aircraft and Engineering Corporation
3.15.2 Bylaws of PATS Aircraft and Engineering Corporation
3.16.1 Articles of Incorporation of PATS Support, Inc.
3.16.2 Bylaws of PATS Support, Inc.
4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank & Trust Company
4.1.1 Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other
guarantors under the Indenture, and State Street Bank & Trust Company
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
4.2 A/B Exchange Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the
subsidiary guarantors, and DLJSC
4.3 [reserved]
4.4 [reserved]
4.5 Form of DeCrane 12% Senior Notes due 2008
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.
10.10.1 First Amendment to Credit Agreement dated January 22, 1999
10.11 Lease between Botzler-Emery Associates Guilford Ten Limited Partnership and PATS, Inc.
10.12 Lease among Continental Development Corporation, Tri-Star Electronics International, 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 Lease between Sussex County, MD and PATS, Inc.
10.15 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0002
10.15.1 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0004
10.15.2 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 1998 General Terms Agreement between the Boeing Company and Tri-Star Electronics International,
Inc. dated July 1, 1998, number BCA-6-5632-0032
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
10.17.1 Special business provisions between the Boeing Company and Tri-Star Electronics International,
Inc. dated July 1, 1998, number STD-6-5632-0097
10.18 General Terms Agreement between Boeing Company and PATS, Inc. dated February 17, 1998
10.18.1 Special business provisions between the Boeing Company and PATS, Inc. dated February 17, 1998
10.18.2 Letter Agreement dated January 15, 1999 between The Boeing Company and DeCrane Aircraft
Holdings, Inc.
12.1 DeCrane Aircraft Holdings, Inc. Earnings to Fixed Charges Ratio
12.2 [reserved]
21.1 List of Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Spolin & Silverman LLP (included in Exhibit 5.1)*
24.1 Power of Attorney
27 Financial Data Schedule
99.1 Form of Letter of Transmittal to Exchange Agent
99.2 Form of Notice of Guaranteed Delivery
99.3 Statement of Eligibility and Qualification of State Street Bank & Trust Company, as trustee,
under the Indenture listed as Exhibit 4.1, on Form T-1.*
- ------------------------
* To be filed by Amendment.